Financial Review

Solid 23K

….Record highs for Dow, S&P and Nasdaq. Senate closer to reconciliation. Mnuchin Rule is shot. Bipartisan ACA fix is killed. Earnings season. Rio Tinto fraud. Beige Book remains moderate and modest.

Financial Review by Sinclair Noe for 10-18-2017

 

DOW + 160 = 23,157
SPX + 1 = 2561
NAS + 0.56 = 6624
RUT + 7 = 1505
10 Y + .04 = 2.34%
OIL + .03 = 52.07
GOLD – 4.30 = 1281.50

 

Yesterday the Dow Industrials topped 23,000 for the first time only to close just below the milestone. Today, the Dow sprinted past 23,000 without looking back. Yesterday we told you IBM posted better than expected earnings and revenue (even though it was the 22nd consecutive quarter where revenue declined) but they did report growth where it counts, with revenue increasing 11% in cloud computing and software-as-a-service offerings; good enough for a 9% pop – its biggest one-day gain in almost 9 years – which, in turn, lifted the Dow. Also record highs for the S&P 500 and Nasdaq. The Dow logged its fourth straight daily rise, as well as its 13th gain of the past 16 trading days. The S&P gained for a fourth straight day as well as its 14th positive session of the past 17. The Dow has now notched 51 record high closes this year, the most all-time high finishes in a single year since 2013.

 

Senate Republicans appear to have enough votes to pass a budget measure to use a procedure known as reconciliation to move tax legislation through the Senate with a simple majority, rather than the 60 votes normally required. Reconciliation is a parliamentary procedure that allows for the expedited passage of budget-related legislation that alters revenue, spending and the federal debt limit. It is a vital technicality to moving forward on tax cuts. The Senate is expected to vote on a budget bill this week.

 

Treasury Secretary Steven Mnuchin told Politico the stock market will see a “significant” drop if tax reform is not passed.  Mnuchin said, “There is no question that the rally in the stock market has baked into it reasonably high expectations of us getting tax cuts and tax reform done.” So, if tax cuts don’t get done, don’t blame Mnuchin – blame Congress. Remember when the Trump administration first proposed its 9-page blueprint for tax reform. They claimed that it would not benefit the very wealthy. For almost a year now, Treasury Secretary Steven Mnuchin has pledged that wealthy Americans would receive no tax cut whatsoever. It became known as the Mnuchin Rule – no tax cuts for the wealthy, that’s the rule. Then he softened the pledge to say that avoiding tax cuts for the rich was a goal, not a commitment. So, it should be no surprise that today Mnuchin just gave up on his promise, admitting “it’s very hard not to give tax cuts to the wealthy with tax cuts to the middle class.” Which goes down as the stupidest thing of the day, in a day filled with stupidity. It really is simple – if you promise no tax cuts for the wealthy, you don’t cut their taxes – simple, you just don’t lie.

 

Yesterday, Senators Lamar Alexander and Patty Murray announced a bipartisan deal to stabilize Obamacare by restoring subsidies to health insurers. The agreement would shore up Obamacare by reviving billions of dollars of federal subsidies to insurers for two years to help lower-income Americans obtain medical coverage. Alexander said that Trump had “completely engineered” the bipartisan proposal. On Tuesday, Trump said the White House was involved in the negotiations and that the agreement was “a very good solution” for a short-term approach, but today he said he could “never support bailing out” insurance companies.

 

Trump’s decision to end key Obamacare payments is already reverberating throughout the health insurance market. Blue Cross Blue Shield of North Carolina announced its final Obamacare exchange premium increases for 2018 on Wednesday, and it pinned a significant amount of the increase on Trump. BCBS said it was forced to increase premiums due to lost funding from Obamacare’s cost-sharing reduction (CSR) payments. There is a slice of people in the market, roughly 10% according to BCBS NC, who do not receive the tax credit and will therefore bear the brunt of the increase caused by the lost CSRs. The announcement comes just a few days after a similar announcement from the Department of Insurance in Pennsylvania. According to the department, the average Obamacare premiums in the state would increase 30.6% in 2018, up from 7.6% if the CSRs continued.

 

American Express reported quarterly earnings and revenue that beat analysts’ expectations and raised its forecast for the year. The company also announced that Stephen Squeri will succeed Kenneth Chenault as CEO, effective February 1, 2018.


Northern Trust
 also posted quarterly results, beating top and bottom-line estimates. The company’s stock rose 3.8 percent and was among the best performers in the S&P 500.

 

United Airlines said its third-quarter net income fell by a third to $669 million from the year-ago period, partly due to $185 million in pretax losses caused by canceled flights during the Atlantic hurricane season.

 

EBay forecast current-quarter adjusted profit that was largely below analysts’ estimates as the company continues to ramp up spending to tweak its e-commerce platforms.

 

One of the world’s biggest mining companies and two of its former top executives are in trouble for allegedly overstating the value of a mine in Africa by billions of dollars. The Securities and Exchange Commission claims that Rio Tinto realized the mine was worth significantly less within a year of purchasing it, but did not share that information with investors until 2013. In a filing with a district court in New York, the SEC accused the company and the two former senior executives of fraud.

 

Ford is recalling 1.3 million F-series pickup trucks, the best-selling vehicle in America, for a door latch problem that could allow the door to open while the truck is moving. The affected models include some of the model year 2015, 2016 and 2017 F-150’s, as well as some 2017 Super Duty pickups.

 

Two weeks before a Federal Reserve FOMC policy meeting, the Fed publishes the Beige Book, a collection of reports and observations from Fed districts around the country. The latest snapshot of the economy shows modest to moderate growth and few signs of inflation. Hurricanes Harvey and Irma hit during the survey period and will have a negative effect on third-quarter economic growth, the Fed has said, although it expects the impact to be temporary. “Despite widespread labor tightness, the majority of districts reported only modest to moderate wage pressures.” Shortages were particularly acute in construction, transportation, skilled manufacturing, and some healthcare and service positions. “These shortages were also restraining business growth,” the Fed said. However, this did not feed through into higher wages and there also was little change overall in selling prices despite several districts reporting increased manufacturing input costs.

 

Once every 5 years, the Chinese Communist Party gets together and today was the day. Chinese President Xi Jinping laid out a confident vision for a more prosperous nation and its role in the world. The speech was heavy on aspiration and short on specific plans. On the economy, Xi said China would relax market access for foreign investment, expand access to its services sector and deepen market-oriented reform of its exchange rate and financial system, while at the same time strengthening state firms.

 

Homebuilding fell to a one-year low in September as Hurricanes Harvey and Irma disrupted the construction of single-family homes in the South, suggesting housing probably remained a drag on economic growth in the third quarter. Housing starts decreased 4.7 percent to a seasonally adjusted annual rate of 1.127 million units. That was the lowest level since September 2016 and marked the third monthly decline in starts. Building permits fell 4.5 percent.

 

Inequality and economic insecurity have been rising for American workers — and the situation is only getting worse as they age into retirement. The Organization for Economic Co-operation and Development released a study that found the gap between wealthy and low income seniors is wider in the United States than it is in all but two of its 35 member nations — Mexico and Chile. Although previous generations of retired Americans have seen rising levels of economic security, that trend appears to be coming to an end. Lower wages and the decline of pensions for middle-class workers are combining to create a class of older people with very thin financial cushions.

 

Tomorrow marks the 30th anniversary of Black Monday – the Crash of 1987.  On that day, the Dow lost 508 points, a fall of nearly 23%. At today’s market heights, a percentage fall of that magnitude would knock more than 5,200 points off the DJIA. The crash was blamed on a number of factors, but at heart, it was the growing complexity of the market that seemed to overwhelm participants and set the stage for the calamity. Computerized trading, then in its infancy, combined with new hedging strategies that used relatively newfangled stock-index futures contracts were all part of the picture. The market is much more complex now – not necessarily a good thing. The major exchanges now have automatic trading curbs in place – meaning a 23% one-day crash shouldn’t happen, at least in theory.

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