Financial Review

Solid Monday Trading

…Wall Street rallies. New home sales slide. Waiting on Powell’s Fed testimony. Buffett’s pearls of wisdom. Fitbit not fit. GE has fallen.

Financial Review by Sinclair Noe for 02-26-2018

DOW + 399 = 25,709
SPX + 32 = 2779
NAS + 84 = 7421
RUT + 10 = 1559
10 Y – .01 = 2.86
OIL + .46 = 64.01
GOLD + 4.60 = 1333.80


Today was just a solid start to the week. Most major indices were in positive territory from the opening bell and then added to gains. The yield on the 10-year Treasury note drifted lower.


The Commerce Department reported that new home sales slowed to a seasonally adjusted annual rate of 593,000 in January. January’s selling pace was 7.8% lower than in December, although that month was revised upward. It was 1% lower than January 2017, as well. At the current sales pace, it would take 6.1 months to exhaust available supply, a sign of a well-stocked market. The median sales price in January was $323,000, about 2.4% higher than in January 2017, but almost precisely matching the full-year average in 2017.


A measure of the economy calculated at the Chicago Federal Reserve ticked lower in January from December owed largely to a factory slowdown. The Chicago Fed’s index of national economic activity eased to a positive 0.12 last month from a downwardly revised positive 0.14 in December. The index has moved in a narrow band over recent months. October’s reading of an upwardly revised positive 0.91 was the highest in 12 years.


The new Federal Reserve chairman, Jerome Powell, will deliver the Fed’s semiannual monetary policy report to Congress in testimony before the House Financial Services Committee on Tuesday and the Senate Banking Committee on Thursday. In a nutshell, based on already-released material, the Fed’s outlook is for strong real growth, at a rate exceeding the economy’s perceived long-run potential of about 2%, and inflation rising to the Fed’s 2% target. Financial conditions remain supportive, financial system vulnerabilities are “moderate,” and labor-market conditions have tightened. Monetary policy remains “accommodative,” according to the Fed, arguing for continued, well-telegraphed, small and incremental increases in the Fed’s benchmark rate and a similarly gradual reduction in its balance sheet of Treasury and mortgage-backed securities. The Fed staff raised its estimates for economic growth in January, based on recently enacted tax cuts and “very upbeat business sentiment.” And that was before Congress agreed to a two-year budget providing for a $300 billion increase in federal outlays over the next two years.


Powell will face questions on how the Fed will respond to increased fiscal stimulus at a time when the economy is operating at or near full employment. Financial markets will scrutinize Powell’s responses on growth and inflation and the possibility of more rate hikes or the pace of the Fed’s balance sheet reduction. If Powell’s testimony bores you to tears, it will be a huge success.


The stakes are actually quite high. The Fed’s mandate is monetary stability and maximum employment. But the economy is almost always operating far below its capacity, while consumer price inflation has consistently undershot the target. The members of the Fed’s policy committee can’t agree on a strategy that accomplishes either task consistently. The inflation rate hasn’t been above 3% for any appreciable length of time since 1992. For decades, the Fed’s strategy has been largely based in a supposed trade-off between full employment and inflation. Here’s the theory: If the economy grows too fast, any excess supply of essential resources, such as labor, commodities and services, will begin to run out. The scarcity makes prices rise, and inflation overheats. But the Fed doesn’t know the exact point where inflation overheats. There may be no inflationary acceleration at all until the unemployment rate gets below 4% or so, at which point inflationary pressures suddenly spike. Part of the cause of inflation, or lack thereof, is psychological – it’s because people expect inflation, or they don’t. If expectations become “unanchored,” there is little the Fed could do quickly to reverse it. Once people lose faith in an institution, it’s very difficult to restore it. Pay no attention to the man behind the curtain.


The Supreme Court today declined a White House request to review a federal judge’s ruling that forces the Trump administration to continue the DACA program that protects young immigrants brought to the US by their parents from deportation. The decision leaves in place for now a program instituted by President Obama in 2012 that Trump has tried to end.  In January, in deciding a case brought by four states and the University of California system, a federal district court judge in San Francisco ruled that the administration’s decision had been “arbitrary” and “capricious.” On Feb. 13, a federal district court judge in Brooklyn issued a similar ruling, finding the administration’s justifications for ending the program insufficient. As the administration appeals that first ruling, the nationwide injunctions on the order remain in place, the Department of Homeland Security will continue to accept renewal applications beyond the March 5 deadline the administration had imposed. The administration does not have to accept new applications or allow current Dreamers—who number almost 700,000—back into the country if they leave.


In a brief order, the Supreme Court justices said the appeal was “denied without prejudice,” indicating they will maintain an open mind on the underlying legal issue still being considered by the San Francisco-based 9th U.S. Circuit Court of Appeals. The justices also said they expect the lower court to “proceed expeditiously to decide this case.”


Warren Buffett on Saturday released his annual letter to Berkshire Hathaway shareholders—an event that many investors circle on their calendars. His annual investor letters, which he’s been producing for more than 50 years, are pored over for clues to Berkshire Hathaway’s plans, but also, and possible pearls of wisdom from Buffett—and his right-hand man, Berkshire Vice Chairman Charlie Munger.  This year’s letter, coming in at 17 pages, is notably shorter than past missives. It truncates much of the usual discussion on Berkshire’s non-insurance businesses. Here are a few of Buffett’s 2018 pearls.


Buffett writes: “Our aversion to leverage has dampened our returns over the years. But Charlie and I sleep well. Both of us believe it is insane to risk what you have and need in order to obtain what you don’t need.”


Regarding liquidity, he writes: “We have intentionally constructed Berkshire in a manner that will allow it to comfortably withstand economic discontinuities, including such extremes as extended market closures.”


And Buffett remains bullish, writing: “… we simply believe that if the businesses of the investees are successful (as we believe most will be) our investments will be successful as well. Sometimes the payoffs to us will be modest; occasionally the cash register will ring loudly. And sometimes I will make expensive mistakes. Overall—and over time—we should get decent results. In America, equity investors have the wind at their back.”


Buffett is a stock picker, but he’s adamant most investors are better off sticking with passive, low-cost, index-tracking products. In a section where he again bashes Wall Street and hedge funds, he reminds: “Performance comes, performance goes. Fees never falter.”


And he added: “Though markets are generally rational, they occasionally do crazy things. Seizing the opportunities then offered does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon such as alpha and beta. What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period—or even to look foolish—is also essential.”


In an interview with CNBC this morning, Warren Buffett said Berkshire Hathaway, had bought more Apple shares than any other stock over the past year. He also praised Apple’s ability to retain customers in its iPhone ecosystem. Berkshire Hathaway disclosed on Feb. 14 that it had increased its stake in Apple by 23 percent, making it the company’s largest common stock investment. Also, Bloomberg, citing unnamed sources, reported Apple was planning this year to launch its largest-ever iPhone, along with two other smartphones. Apple closed just a few cents off its all-time high.  Buffett told investors that, should the company fail to find any market bargains, it will likely return cash to shareholders.


Shares of Fitbit dropped as much as 15 percent in after-hours trading after a disappointing quarterly report. The wearable technology company lost 2 cents per share on revenue of $571 million in the fourth quarter; missing estimates on both the top and bottom lines.


General Electric stock briefly fell below $14 as investors reacted to news late Friday that the U.S. Justice Department could take action in connection with alleged subprime mortgage violations. That update, which was made in a filing with the SEC, also provided details about the expected restatement of its 2016 and 2017 financial results. Based on this information, some suspect it will be very difficult for GE to reach its 2018 forecast.


Georgia’s lieutenant governor attacked Delta Air Lines for dropping a partnership with the National Rifle Association, pledging to block any legislation that includes tax benefits for the airline. Delta, which is headquartered in Atlanta, ended a discount program for NRA members on Saturday.

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