Financial Review

S**t for Brains

….Record highs on Wall Street. CPI up. Hints of inflation. Fed on course. Retail was strong. JPM and WFC report strong earnings. NYC sues big oil. Facebook changes algorithms. Another new low for Trump.

Financial Review by Sinclair Noe for 01-12-2018


DOW + 228 = 25,803
SPX + 18 = 2786
NAS + 49 = 7261
RUT + 5 = 1591
10 Y + 2 = 2.55%
OIL + .60 = 64.40
GOLD + 16.40 = 1339.30


Record highs for the Dow, S&P, Nasdaq and Russell 2000. Go figure. Markets will be closed on Monday in observance of Martin Luther King, Jr. Day.


The consumer price index rose 0.1% in December. If gas and food are stripped out, the so-called core rate of inflation rose a much sharper 0.3%, the highest reading in almost a year. The 12-month rate of inflation as measured by the CPI slipped to 2.1% from 2.2%. The more closely followed core rate edged up 1.8% from 1.7%, but it’s been stuck in that range for eight months in a row. The increase in the cost of living last month was tied largely to increasing rents and home prices. Also contributing: Higher prices for prescription drugs, new cars and trucks and motor vehicle insurance. Food prices rose 0.2%, but that increase was more than offset by a 1.2% drop in energy prices. The lower energy prices are likely to reverse in the January report, as heating fuel prices have jumped and crude oil broke through $64 a barrel. Adjusted for inflation, hourly wages rose 0.2% to mark the first increase since July. Over the past year “real” wages have only risen 0.4%.


The Federal Reserve has been divided over the outlook for inflation, but nothing in today’s report would likely negate the outlook for 3 rate hikes in 2018. The dollar briefly trimmed losses against a basket of currencies after the CPI data, but later slumped to a four-month low on expectations that the European Central Bank would wind down its bond buying program this year. Prices for US Treasuries fell, with the yield on the interest-rate sensitive two-year note topping 2%, the highest since September 2008. The two-year note provides investors with more income than dividends on the S&P 500 Index. Bond traders are betting the Fed will gradually raise rates in 2018, meaning the two-year yield may have more room to climb. Fed funds futures are now pricing in an 80% probability of a rate hike at the Fed’s March FOMC meeting.


Sales at US retailers rose 0.4% in December, a fourth straight monthly gain. The increase was a notch below the MarketWatch forecast of 0.5%, but sales for November and October were both revised higher. Excluding automobiles and gasoline, retail sales also rose 0.4% last month. Holiday sales rose to $691.9 billion in November and December, marking a 5.5 percent increase from the year before, according to the National Retail Federation.


In the past, earnings reporting season kicked off with Alcoa, the aluminum company was one of the 30 stocks in the Dow Industrial Average; with the ticker symbol AA, the company held the alphabetic status. Now, earnings season just sort of happens, but make no mistake, we are now in earnings reporting season with a couple of big reports from big banks: JPMorgan and Wells Fargo.


JPMorgan Chase’s financial results came in slightly stronger than expected, despite a big one-time hit from the new tax law, and they indicate that the bank and its peers could grow even more profitable in the years ahead. JPMorgan’s profits were impressive. The bank raked in more than $24 billion in profits for the full year, consistent with its 2016 results. It also crossed a big annual revenue milestone — re-entering the 12-figure club for the first time since 2010. It reported $104 billion for 2017 on an adjusted basis. Adjusted earnings per share came in at $1.76 vs. estimates of $1.69. Consumer banking is playing an ever-smaller role in the makeup of JPMorgan; investment banking and trading are far larger units.


The new federal tax bill saved Wells Fargo more than $3 billion in the fourth quarter of last year, but the bank also set aside more than $3 billion in the quarter to pay for lawsuits and litigation related to a series of problems and bad practices. Despite expected legal costs, the bank saw revenue and profits climb in 2017, the first full year since the unauthorized-accounts scandal broke and a year during which additional — including the mortgage and auto insurance matters — came to light. For the fourth quarter, the bank reported net income of $6.15 billion on revenue of $22.1 billion, both up about 2% from the same quarter the previous year. For the full year, net income reached $22.2 billion or $4.10 per share, an increase of 1% over 2016.


The New York City government is suing the world’s five largest publicly traded oil companies, seeking to hold them responsible for present and future damage to the city from climate change. In addition to the litigation, officials said they expect to divest up to $5 billion in investments from as many as 190 companies with fossil fuel ties, even as they promised to maintain their fiduciary duty to New York’s pensioners. The suit against BP, Chevron, Conoco-Phillips, ExxonMobil and Royal Dutch Shell, claims the companies together produced 11 percent of all of global-warming gases through the oil and gas products they have sold over the years. It also charges that the companies and the industry they are part of have known for some time about the consequences but sought to obscure them. Several prior cases challenging individual companies based on a public-nuisance theory have failed — including at the Supreme Court, which ruled in 2011 that climate action by the Environmental Protection Agency in effect removed the ability to use the courts as a remedy.


Facebook has more than two billion users each month. The company has been criticized for algorithms that may have prioritized misleading news and misinformation in people’s feeds, influencing the 2016 American presidential election as well as political discourse in many countries. So, CEO Mark Zuckerberg has just announced the company would change the filter for the News Feed to prioritize what friends and family share, while reducing the amount of non-advertising content from publishers and brands. The idea is to make the social media platform more social. The company wants people to aimlessly scroll and surf Facebook less and instead wallow for a while in a meaningful interaction or two. Whether this makes people feel less bad about hanging out on Facebook, or makes Facebook less of a tool for propaganda or misinformation, remains to be seen. The effects of Facebook’s strategy change are hard to know for certain; this is not the first time Facebook has made changes to its New Feed but this is a major change. More changes may be coming, too, that will have Facebook play a more direct role in determining what are legitimate news sources in its digital hangouts. That’s something news organizations in particular have pushed Facebook and Google to do, but those tech companies have been reluctant to dictate what is trustworthy news and what’s hogwash. It’s possible Facebook will no longer try to walk the fine line between neutral tech platform and editorial discretion. There’s a direct relationship between the quantity of time people spend surfing Facebook and revenue. In the short term, the move is costing Facebook, wiping out about $23 billion in market cap today. In the longer term, this may be the fix that makes Facebook a better company. Time will tell.


Rep. Martha McSally announced today that she is running for the Senate. McSally joins a Republican field vying for the nomination for retiring Sen. Jeff Flake’s seat that also includes former sheriff Joe Arpaio, and former state senator Kelli Ward.


By now, you have heard about Trump’s comments yesterday as he met with several senators. I will not repeat the quote because it would technically be an FCC violation, although I’m pretty sure you’ve heard it by now. And it is a public admission of sorts that he is incapable of being a president for all Americans, the logic of his argument elevating not just white immigrants over brown ones, but white citizens over the people of color they share this country with. Trump denied the words, but they were confirmed by both senators Dick Durbin and Lindsey Graham who were part of a group of senators who presented a bi-partisan proposal on immigration and DACA. The proposal included $2.8 billion for border security, including $1.6 billion for a wall or fence, technical surveillance and agent training, and $1.2 billion for other border priorities. Immigration slots under a visa lottery program would be used instead for people in the US who’ve lost their temporary protected status because of recent actions by the administration, or for people from low-immigration countries. The blow-up over immigration creates a complicated mix for lawmakers, who have only 4 days of work next week due to Monday’s Martin Luther King holiday. That’s 4 days to put a deal together to avoid a government shutdown on January 19th. Most voters don’t expect politicians to be saints. But they don’t like open expressions of racial prejudice. They do take note when their president needs to cancel a trip to London for fear of sparking massive demonstrations, as Trump did Thursday night. They may not care that their president is unpopular overseas, even though Americans do a lot of business overseas, and this doesn’t help to sell America’s image or our products. The White House worked intensely this week to showcase Trump as serious, on top of his brief, leader of a strong economy, not at all worrisome. With a single, vulgar remark from Trump, all that work went down the hole, right down the bleeping hole.


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