Financial Review

Sisyphean

Despite concerns about Syria, trade wars and earnings season, stocks started higher and then fell back. FBI raids Michael Cohen’s office. CBO forecasts massive debt explosion. IMF and labor force participation. Mr. Zuckerberg goes to Washington. Green Apple.

Financial Review by Sinclair Noe for 04-09-2018

DOW + 46 = 23,979
SPX + 8 = 2613
NAS + 35 = 6950
RUT + 1 = 1514
10 Y + .01 = 2.79%
OIL + 1.23 = 63.29
GOLD + 2.30 = 1336.70

 

Last week finished with a disappointing jobs report, and this week started with ongoing concerns about a possible trade war and geopolitical concerns and earnings season – but stocks started the morning strong and moved higher – like Sisyphus rolling the boulder up the hill …, until the final hour of trade, when stock prices came rolling back down the hill. At one point, the Dow was up about 440 points
Trump says there will be a “big price to pay” for Syrian President Bashar al-Assad’s suspected use of chemical weapons in the rebel-controlled town of Douma outside Damascus, which killed dozens, including children. We don’t really know what that price is. No word on possible retaliation. No word on possible military action but maybe something in the next 24 to 48 hours. Exactly what, we do not know. The United Nations Security Council held an emergency meeting.

 

Meanwhile, a possible trade war with China looms. Trump predicted China will be first to blink, without indicating where his assessment sprang from. The S&P 500 Index has slumped more than 9 percent from this year’s peak in January, while the Shanghai Composite Index has lost 12 percent on concern that tensions between America and China could devolve into a full-blown trade war. Yields on U.S. Treasuries have also declined from this year’s highs as investors shifted into haven assets. Stocks rallied today as fears of a trade war subsided and investors looked ahead to the start of the first-quarter earnings season for companies. Earnings season kicks off tomorrow with big banks reporting. Members of the S&P 500 are forecast to say that earnings per share jumped 15 percent on average in the first quarter from a year earlier. The selloff of the past two months has left the S&P 500 trading at about 16 times projected earnings, down from 18.5 in January and the lowest since mid-2016.

 

And then, this afternoon… The FBI raided the offices of Trump’s personal attorney Michael Cohen. The raid came after federal prosecutors in New York City obtained a search warrant following a referral from special counsel Robert Mueller. FBI agents seized emails, tax documents and business records – including some that reportedly dealt with payments Cohen made to Stormy Daniels. Cohen is an executive vice president and general counsel of the Trump Organization.

 

The Congressional Budget Office forecast a rising tide of red ink in the coming years, saying that trillion-dollar deficits will return in 2020. The CBO said the budget deficit would be $804 billion for the current fiscal year, which ends Sept. 30, well above the $665 billion shortfall the government notched at the end of fiscal 2017. In 2019, the agency said, the shortfall will total $981 billion. Beginning in 2020, however, the CBO said deficits would exceed $1 trillion a year. As a result, the CBO estimated the cumulative deficit over the next decade will be $1.6 trillion larger than previously projected. By 2028, the national debt would total between 96 percent to 105 percent of GDP. The coming shortfalls will follow the $1.5 trillion tax cut Trump signed in late December, as well as the $1.3 trillion spending bill enacted in March. The Congressional Budget Office forecast that the new tax law will generate an average of 0.7 percent growth over the decade and create 1.1 million jobs. It also predicted the two-year federal spending deal would increase GDP by 0.3 percent this year and 0.6 percent in 2019. However, larger budget deficits would crowd out private investment in later years, dampening economic growth. In other words, enjoy it now because it won’t last long.

 

The timing of this is really concerning because we’re not coming out of a recession. We’re quite a few years out of a recession, and we have very high deficits. That means the Federal Reserve is still trying to hike interest rates and starting to sell off its bloated balance sheet. Meanwhile, five former White House economists warned Monday against addressing the deficit by cutting entitlement programs such as Social Security:  Martin Neil Baily, Jason Furman, Alan Krueger, Laura D’Andrea Tyson and Janet Yellen argued that the funding gap has largely been driven by lower revenues and unfunded wars – not an increase in spending.

 

New research from the International Monetary Fund shows that the robots are taking jobs away from more and more people. The IMF report did find that aging and the drag from the global financial crisis were still the biggest causes of the decline in participation. Labor force participation refers to the number of working age people who are actually employed or trying to find a job. In the U.S., the labor force participation rate has dropped from about 67% at the turn of the century to just under 63% now, though it has stabilized the last three years.  The IMF found that within the U.S., there was a broad-based decline in participation, especially in rural areas, and that the metropolitan areas where participation dropped the most were strongly associated with automation and offshoring. Declines were most pronounced in the Southeast and parts of the Midwest and West. The IMF paper also points out that the impact from automation is smaller in urban areas than rural ones, as cities have more diverse labor markets and therefore more opportunities for displaced workers to find other employment. The IMF projects median trend participation rate will fall by 5.5 percentage points over the next 30 years.

 

Facebook CEO Mark Zuckerberg is sorry for allowing third-party apps to grab the data of its users without their permission and for being “too slow to spot and respond to Russian interference” during the U.S. election, according to his prepared remarks published by the House Energy and Commerce Committee. The testimony’s release, ahead of the first of two hearings this week, came as Zuckerberg and some of his top lobbyists and aides made the rounds on Capitol Hill, huddling with lawmakers who planned to grill him Tuesday and Wednesday. Based on lawmakers’ comments in the days leading up to the hearing, Zuckerberg can expect a tough line of questioning, and he may find his company threatened with new regulations.

 

Facebook is also facing government investigations in the United States and Europe. Starting next month, Europe’s General Data Protection Regulation takes effect. Passed in 2016, the rule requires any company that collects personal data about a citizen of the European Union to get that person’s explicit and informed consent. It also requires companies to let people revoke their consent and to request all data the company has collected about them. The Federal Trade Commission is investigating alleged violations of a 2011 consent decree over privacy policy at Facebook that could lead to record fines against the company. The 87 million users who might have had their data shared with Cambridge Analytica were supposed to get a detailed message on their news feeds today. Meanwhile, Facebook is suspending another data analytics firm over similar allegations. According to reporting by CNBC, Cubeyou collected data from Facebook users through personality quizzes “for non-profit academic research” developed with Cambridge University — then sold the data to advertisers. Fixing the problems will be expensive. Zuckerberg says the costs of security upgrades will impact profitability.

 

The Department of Justice has reportedly decided to approve Bayer’s $66 billion takeover of Monsanto, removing the last major regulatory obstacle to the completion of the biggest deal in the seeds and crop-chemicals industry. In its review of the Bayer-Monsanto merger, the Justice Department is looking at horizontal antitrust issues, or competition in the same market, as well as vertical competition, or issues along supply chains. Bayer, which is based in Germany, has previously agreed to sell seed-and-agrochemical assets to BASF for $7 billion. BASF is also in talks to buy Bayer’s vegetable seed business.

 

Payments company Verifone Systems says an investor group led by Francisco Partners will acquire the company in a deal valued at about $3.4 billion. The group, which also includes British Columbia Investment Management, will pay $23.04 in cash for each Verifone shares, a 54 percent premium to the stock’s closing price today.

 

The Consumer Financial Protection Bureau is seeking a record fine against Wells Fargo & Co that could exceed several hundred million dollars for auto insurance and mortgage lending abuses. The CFPB is readying sanctions alongside the Office of the Comptroller of the Currency (OCC), Wells Fargo’s day-to-day regulator. The agencies are ready to sanction Wells Fargo for layering extra insurance on drivers and collecting commissions on those policies. Both agencies have also been investigating the bank for wrongly levying fees on mortgage borrowers. The new penalty could climb as high as $1 billion, dwarfing the $100 million the CFPB fined Wells Fargo in September 2016 to settle its phony accounts scandal. That 2016 fine had been the CFPB’s largest ever.

 

Apple announced today that it had achieved its goal of powering all of the company’s facilities with renewable energy, a milestone that includes all of its data centers, offices and retail stores in 43 countries. Major U.S. corporations such as Apple, Wal-Mart and Alphabet have become some of the country’s biggest buyers of renewable forms of energy, driving substantial growth in the wind and solar industries. Alphabet’s Google last year purchased enough renewable energy to cover all of its electricity consumption worldwide. Renewable energy projects that provide power to Apple facilities range from large wind farms in the United States to clusters of hundreds of rooftop solar systems in Japan and Singapore.

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