Financial Review

Slipping into September

…Trade concerns weigh. Manufacturing sings. Avoiding a shutdown. Tax Reform 2.0 on hold. Emerging markets wobble. Amazon $1T. Nike does it. Kyl replaces McCain.
Financial Review by Sinclair Noe for 09-04-2018


DOW – 12 = 25,952
SPX – 4 = 2896
NAS – 18 = 8091
RUT – 7 = 1733
10 Y + .05 = 2.90%
OIL – .43 = 69.37
GOLD – 9.80 1192.10

Fears about trade have at times weighed on stocks since mid-February when the Trump administration announced tariffs on steel and aluminum. But the Standard & Poor’s 500-stock index is up nearly 9 percent this year, and much of those gains have come in the past two months. The trade conflict between the United States and China may be on the verge of a sharp escalation. Trump wanted to go ahead soon with tariffs on $200 billion of Chinese products, adding to those already imposed on $50 billion of goods. Richard Trumka, president of the AFL-CIO, which collectively represents 12.5 million workers, said over the weekend that a new North American Free Trade Agreement won’t work if it doesn’t include Canada. Canada might be excluded from ongoing NAFTA negotiations – or maybe that is just part of the negotiations. Though last week’s NAFTA negotiations sparked a rally in stocks, investors might not want to draw too much from the talks. Mexico and Canada are predisposed to compromise, given their huge dependence on the United States market. And the European Union, which typically takes a hard line in trade negotiations, has not agreed to anything yet. While China relies on the United States market, its leaders can offset the impact of $250 billion in tariffs, by measures like stimulating their economy and bolstering exports by letting China’s currency slide. China could also step up its retaliation against the United States, which may hurt American companies.


And while trade is a concern for investors, it is also a concern for purchasing managers, but still the Institute for Supply Management’s August Manufacturing PMI climbed 3.2 percentage points to a reading of 61.3%. Any reading above 50 indicates expansion in the manufacturing side of the economy. So, trade wars may be a concern but businesses just keep humming along.


Also today, the Commerce Department reports Construction spending increased  0.1% in July, led by the public sector. Outlays in July were 5.8% higher than a year ago. All of the strength in July came from public works, which rose 0.7% during the month. Spending on private construction ticked down 0.1% for the month. Residential construction increased 0.6% compared to the prior month, and was 6.6% higher than a year ago.


September promises to be a busy month for politicians. For Congressional Republicans the game plan is simple and straight forward – avoid a government shutdown. But with Trump in the Oval Office, that’s easier said than done.  For months, GOP leaders have been laying the groundwork to avoid a shutdown on Sept. 30, the end of the fiscal year and just five weeks before Election Day. Speaker Paul Ryan, Senate Majority Leader Mitch McConnell, House Majority Leader Kevin McCarthy and even Vice President Mike Pence are already quietly lobbying Trump to postpone a shutdown fight over his border wall with Mexico until after the election. Some White House officials are confident that Trump will sign spending bills keeping the government open. A smaller subset of immigration hard-liners inside the White House, however, are encouraging Trump to fight on the border wall issue now, while Republicans still control Congress. These officials think the House majority is already gone — and they have encouraged Trump to hold the line for his border wall and secure a win while he can.


Tax Reform 2.0 is on hold. House Republicans had planned to use a second phase of tax cuts to force Democrats into a difficult vote ahead of mid-term elections. Now, party leaders may drop the effort, fearing it could backfire by antagonizing voters in some hotly-contested Congressional districts. The proposal would make the individual changes in last year’s overhaul permanent — including the $10,000 annual cap for state and local tax deductions, one of the law’s most disputed provisions. That would put Republican lawmakers in high-tax states like New York, New Jersey and California in the tricky position of either supporting the cap or voting against tax cuts backed by their party. Largely because of the SALT cap dilemma, House Republicans are hitting the pause button on Tax Reform 2.0 legislation, as they take some time to weigh the political benefits and risks of a vote on the bill in the coming weeks, and assess if they have enough support to pass it.


Facebook and Twitter will dispatch top executives to Capitol Hill this week to try to assuage lawmakers who fear that Russian propaganda and political censorship continue to plague the world’s most popular social media sites. The back-to-back House and Senate hearings scheduled for Wednesday illustrate the new political reality for Silicon Valley, as Democrats and Republicans alike increasingly seem willing to regulate the industry for the way it moderates content online — and eager to subject its once-untouchable executives to intense public scrutiny. The political gauntlet begins in the Senate, where the Intelligence Committee will host Sheryl Sandberg, the chief operating officer of Facebook, and Jack Dorsey, the chief executive of Twitter. They’ll testify — their first time ever on Capitol Hill — at a hearing on foreign governments that spread misinformation over social media.


The loss of investor confidence in the Turkish lira, which has surrendered more than 40 percent of its value this year, is only a preview of debt problems that could engulf countries such as Brazil, South Africa, Russia and Indonesia, some economists say. For now, few experts think that a broader crisis is imminent, though Argentina last week asked the International Monetary Fund to accelerate a planned $50 billion rescue as the peso crashed to a historic low. But the danger of a financial contagion that could hit Americans by crushing U.S. exports and sending the stock market plunging should be taken more seriously in light of a massive increase in global debt since the 2008 downturn. Last week, Moody’s cut its credit ratings on 20 Turkish financial institutions. The ratings agency cited “a substantial increase in the risk” that banks would struggle to finance normal operations.


Consider that US stocks are coming off record, or near-record, highs in August. The Dow and the S&P 500 finished August up 2.1 percent and 3 percent, with their best performances for the month since 2014. The Nasdaq Composite clinched its best August since 2000, ending the month up over 5.7 percent. That was then and this is now September, and September is historically the worst month of the year for stocks. The Dow, S&P 500, and Nasdaq did post September gains last year for the first time in four years. And when the market is up in August, September is usually a good month. So, I don’t think we can read too much into the seasonality play. Still, global-fund managers are holding higher-than-average levels of cash in their portfolios. Shares of utilities and real-estate firms, considered bond-like because of their dividend payouts, have started to rebound over the past couple of months. And firms including Morgan Stanley and RBC Capital Markets have recommended unloading technology stocks, the best-performing S&P 500 sector in 2018. J.P. Morgan Chase’s head quant, Marko Kolanovic is calling for a financial meltdown or sorts, including: a liquidity crisis, severe stock sell-offs sparked by lightning-fast computerized trading, unprecedented actions by central banks to shore up asset prices, and social unrest not seen in the U.S. in half a century. The timing is a bit soft but possibly by this time next year.


Maybe it is just coincidence but today became the second company to reach $1 trillion in market capitalization. Although the stock closed below the magic number, it’s remarkable how quickly it joined the trillion-dollar club. It took Apple 38 years, while Amazon did it in just 21. Amazon’s stock is up more than 600% over the past five years.


Nike unveiled a new advertising campaign featuring Colin Kaepernick, a former NFL quarterback who inspired a series of nationwide protests against police brutality and social injustice but courted controversy by kneeling during the playing of the national anthem. So, in response, some people are posting videos showing how they are destroying their Nike apparel and declaring a moral boycott over shoes they’ve already purchased. And since this is all happening on the interwebs – more people are mocking them for doing so.


Arizona Gov. Doug Ducey has appointed former Senator Jon Kyl to fill the seat left open by John McCain’s death. Kyl, who served three terms in the Senate, spoke at a service honoring McCain in the Arizona State Capitol last week; he has also been shepherding Brett Kavanaugh, Trump’s Supreme Court appointee, through the Senate. At a news conference in Phoenix, Ducey said, “It’s not the time for newcomers and now is not the time for on-the-job training.” Kyl indicated he would consider staying in the senate seat until 2020, when a special election will be held to fill McCain’s unexpired term. But he made clear that he will not seek to run again. That would leave the seat open and potentially trigger a fiercely competitive primary. With Republicans holding only a 50-49 majority in the Senate, and a vote on Kavanaugh looming, the governor thought it was vital to appoint somebody who could immediately step in and represent the state’s interests.


Kavanaugh’s hearing before the Senate Judiciary Committee began with a bang this morning, as Democrats moved to adjourn to consider newly released documents and protesters screamed in support. The strong opposition to Kavanaugh reflected the political stakes for both parties just two months before congressional elections.


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