Financial Review

Steal This Memo

…Tech hit again. Betting on resistance. Tariff consultation period expires. Emerging markets continue retreat. ISM pops. Wages are flat, so invent new numbers. Bitcoin kicked. Jones banned.

Financial Review by Sinclair Noe for 09-06-2018

DOW + 58 = 26,033
SPX – 7 = 2881
NAS – 65 = 7929
RUT – 12 = 1715
10 Y – .02 = 2.88%
OIL – .83 = 67.89
GOLD + 3.20 = 1200.50


Once again, the Dow pulled out a modest gain while the tech heavy Nasdaq dropped. Chip-related stocks got pummeled for their worst day in more than two months after market outlooks from a few key players proved to be weaker than previously forecast. The PHLX Semiconductor Index SOX fell 2.7% for its worst one-day percentage drop since June 25. Micron Technology dropped 9.9% to close at $44.65 after the company, at a Citigroup conference, said prices of flash memory chips used in USB drives and smaller devices, decreased in the third quarter. Shares of Micron are now 30% off their high of $64.66 set in late May. Shares of chip-making equipment companies were also savaged after KLA-Tencor dropped 9.7% after a forecast that a rebound in chip shipments for the second half of 2018 would likely not be as strong as expected as recently as six weeks ago. Tech shares are up more than 16 percent this year, outperforming the broader market. However, they are down more than 2 percent this week. Sometimes the pendulum swings too far – meaning a pullback is to be expected.


Fallout from the scrutiny of social media companies also continued to batter tech stocks. On Wednesday, executives from Facebook and Twitter testified before skeptical U.S. lawmakers regarding their measures to combat foreign efforts to influence U.S. politics. The same day, the U.S. Justice Department said it was looking into concerns that social media platforms were “intentionally stifling the free exchange of ideas.”


An opinion piece in the New York Times by an anonymous senior administration official, claiming to be part of a “resistance” working from within to thwart Trump’s “worst inclinations”, has set off a wild guessing game inside and outside the White House on the author’s identity. The mole hunt has moved to the interwebs, with online betting at The only clue offered by the Times was that the author was “a senior official in the Trump administration”. That description quickly drove its own set of speculation: how high up, exactly, qualifies as senior? Does administration official mean the person works inside or outside the White House? The paper would not say.


Today marks the end of a consultation period on the imposition of a new round of US tariffs on China. The US has been deciding whether to place new tariffs on as much as $200 billion worth of Chinese goods coming to the US. The tariffs, which function as taxes on imports, could be set at a level of 10% or 25% depending on the recommendation of the United States trade representative. The new tariffs, affecting roughly 40% of all Chinese exports to the US, would mark the biggest escalation of the trade conflict so far and would be almost guaranteed to lead to retaliatory tariffs from the Chinese government. The next round of tariffs could happen as early as tomorrow, or maybe someone could steal the memo from Trump’s desk.


Beijing has already threatened to impose tariffs on $60 billion worth of US goods in response, and on Thursday morning it reiterated this stance with the Ministry of Commerce spokesman telling reporters that China “will have to retaliate” if the US levies more tariffs. Chinese retaliation would most likely push the Trump administration to consider moving toward the president’s ultimate threat: tariffs on all goods coming in from China, or roughly $500 billion of Chinese goods imported by the US in 2017. Chinese imports from the US are a comparatively small $130 billion – so China would have to resort to other ways to hurt US trade beyond tit-for-tat tariffs. The most obvious move would be to devalue their currency, but there are several other options.


Trump asserts the tariffs will ultimately help defend the US against what trade officials found to be intellectual property theft and business practices that are perceived as unfair. Bringing back jobs by reducing the trade deficit. The trouble is moving production can be time-consuming, expensive, and isn’t always an option for small-to-medium companies.


On a more positive note, talks between the United States and Canada to renegotiate the North American Free Trade Agreement continued. A few stubborn issues stood in the way of a deal, including Canada’s dairy quota, protection for media companies, and how to solve future trade disputes.


World shares fell for a fifth straight day as investors braced for another escalation in a trade war between the United States and China, while emerging-market currencies paused near 15-month lows. If a tight labor market and the threat of a trade war are going to hurt the US economy, we haven’t seen it yet. ADP reports the U.S. created 163,000 private-sector jobs in August. Also, today the Institute for Supply Management released its August Non-manufacturing survey; the NMI registered 58.5%, which is up 2.8 percentage points from July. The Commerce Department reports factory orders fell 0.8% in July and orders for durable goods fell 1.7%.


In July, the economy added 157,000 new jobs. Tomorrow, the Bureau of Labor Stats will report on the labor market for August – most estimates are calling for 200,000 new jobs for the month. The August report is notorious for undercounting, probably due to people taking vacation time in August. The unemployment rate has tumbled to 3.9% from as high as 10% eight years ago as the economy has righted itself after the Great Recession of 2007-2009. Some 19.3 million jobs have been created since 2010 and layoffs are at their lowest level in nearly 50 years. The 10-year Treasury note remains stuck below 3%, a sign that investors still aren’t worried about inflation despite a tight labor market – also a reminder that wages remain stagnant. Hourly pay for the average American worker has climbed 2.7% in the past 12 months, well short of the 3% to 4% gains that typically prevail when the unemployment rate is so low; and when you consider inflation – wages are actually declining.


Flat wage growth continues to dog Trump’s claims that his economic program is unleashing widespread prosperity. So, the administration on Wednesday released a report challenging the federal government’s own statistics to make the case that wages are rising faster than the official scorekeeping reflects. Rather than dropping 0.2 percent over the past year when adjusting for inflation, as Bureau of Labor Statistics show, Trump economists say average worker wages have climbed 1.4 percent.  The argument from the Council of Economic Advisers doesn’t exactly amount to a charge of “fake stats.” The CEA makes some convincing points in the 32-page report about the need to update the tools for measuring changes in worker pay. The CEA report calls for several adjustments to how the federal government tracks wage growth. They include taking into account the effect of lower-paid workers replacing those aging out of the workforce; adopting the Federal Reserve’s preferred inflation measure; and including bonuses and benefits in calculating compensation. Even under their assumptions, real wage growth has weakened since late 2015, which is remarkable given how much further unemployment has fallen since then. And even if they tweak the numbers, it doesn’t answer the fundamental question, which is why is wage growth slow now relative to earlier periods of low unemployment.


For your consideration – new research from the Federal Reserve shows US companies encouraged by tax-code changes to bring home hundreds of billions of dollars in profits held abroad are so far returning that money to shareholders rather than plowing it into expansions, innovation or other forms of investment. Funds repatriated in 2018:Q1 have been associated with a dramatic increase in share buybacks. Good for stocks, not so much for wages.


Bitcoin investors are getting their digital butts kicked lately. Hard. Bitcoin prices have plunged more than 20% in the past two days. Ethereum, Litecoin, Ripple and other cryptocurrencies have suffered similarly large drops. The reason for the latest pullback? A Business Insider report that investment banking giant Goldman Sachs may be dropping plans to launch a crypto trading desk. Stories first surfaced about a possible Goldman Sachs push into bitcoin and other cryptocurrencies last December, shortly after the two big futures trading companies — the CBOE and CME — set up exchanges for bitcoin contracts. Goldman Sachs confirmed in May that it was thinking of using its own money to start trading bitcoin – and that would have been a good time to short Bitcoin.


Andrew Left is a well-known short-seller. Left has sued Tesla and its CEO, saying Elon Musk engineered his since-abandoned plan to take Tesla private to “burn” short sellers hoping the electric car company’s stock price would fall.


Twitter has permanently banned conspiracy theorist Alex Jones and his website Infowars from its platform. Last month, Twitter banned Jones and Infowars for seven days, citing tweets that it said violated the company’s rules against abusive behavior, which state that a user may not engage in targeted harassment of someone or incite other people to do so. The ban came weeks after Apple, Alphabet’s YouTube, and Facebook took down podcasts and channels from Jones, citing community standards.


NFL football kicks off a new season tonight. The commercials might be as interesting as the game. Nike will unveil a commercial with Colin Kaepernick. Trump tweeted: “Nike is getting absolutely killed with anger and boycotts.” Actually Nike shares were up 0.6% today and they are up 28% year to date.

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