Financial Review

Storm Warning

…Trade concerns. Ford Active elsewhere. GDP and unemployment rate fact check. Consumer borrowing ticks up. California will go 100% green. Florence warning.

Financial Review by Sinclair Noe for 09-10-2018

DOW – 59 = 25857
SPX + 5 = 2877
NAS + 21 = 7924
RUT + 4 = 1717
10 Y un = 2.94%
OIL – .22 = 67.53
GOLD – .80 = 1196.40


The S&P 500 and the Nasdaq each snapped a four-day losing streak. Last week was the S&P’s first negative week of the past four, and it represented the biggest weekly percentage drop since June. The Nasdaq suffered its biggest weekly drop since March. The Dow Industrial Average slipped while the Dow Jones Transportation Average rallied to a new record high at 11,554. The gainers were led by shares of truckers J.B. Hunt Transport Services up 3.0%, and Landstar System up 2.9%, followed by air carrier American Airlines up 2.0%.


It looks like stocks are still trying to find direction, and there really isn’t much you can read into today’s trading. Meanwhile, US Treasuries are coming off their worst week since July 23. Boston Fed President Eric Rosengren says the gradual pace of rate increases would limit the danger of overtightening monetary policy. Atlanta Fed President Raphael Bostic said the Fed should pause its hiking cycle when it reaches the neutral rate, the theoretical level of interest rates where monetary policy is neither stimulative nor retarding.


One area of concern for both stocks and bonds  is tariffs and the potential impact on several different sectors, including tech and autos. Over the weekend, Trump published a tweet urging Apple to shift production out of China to the US. Apple said tariffs against China would impact a “wide range” of its products. We will know more about those products on Wednesday when Apple has a big event at their campus headquarters in California to unveil all their latest gadgets.


Also yesterday, Trump tweeted: “Ford has abruptly killed a plan to sell a Chinese-made small vehicle in the US because of the prospect of higher US Tariffs.” CNBC.  This is just the beginning. This car can now be BUILT IN THE USA. and Ford will pay no tariffs!”


No. That is wrong. Ford replied with a tweet, saying: “It would not be profitable to build the Focus Active in the US given an expected annual sales volume of fewer than 50,000 units and its competitive segment. Ford is proud to employ more US hourly workers and build more vehicles in the US than any other automaker.”


Ford on Aug. 31 canceled plans to import the Focus Active crossover from China to the United States because of costs from the escalating trade war. Tariffs imposed by Trump on Chinese products and the threat of more had a direct impact on the Aug. 31 decision, according to Ford officials. The United States already has imposed tariffs on steel and aluminum from China and, as of July, put a 25 percent tax on autos imported from China. Ford was pretty clear in its statement: Focus production will not shift in part or in whole back to the US. Ford will continue to make the Focus and they will sell it in other parts of the world – just not in the US.


Growth in Chinese exports weakened to just under 10% in August, down from more than 12% the previous month. The performance is significantly below China’s average for the year so far. The situation is likely to worsen in the coming months as the trade war between China and the United States escalates. Trump said Friday he’s prepared to impose another huge wave of tariffs on $267 billion of Chinese products. On top of tariffs already in place or in the works, such a move would apply new taxes to the entire $505 billion of goods the United States imported from China last year. The weakness in Chinese trade is so far coming mainly from slowing growth in exports to big trading partners like the European Union and Japan. Exports to the United States actually rose to a record high during August, helped by the fall in the Chinese currency against the US dollar and the rush by companies to ship goods before the next round of tariffs kicks in.


This morning Trump fired off a series of tweets boasting about the state of the economy, writing: “The GDP Rate (4.2%) is higher than the Unemployment Rate (3.9%) for the first time in over 100 years!” Again, no. That is wrong. The Washington Post’s Philip Bump did some fact checking: “Out of the 282 full quarters since 1948, the rate of change in the GDP has topped the unemployment rate 64 times, or more than a quarter of the time. So 64 times in the past 70 years. Not quite the same as once in a century.”


Les Moonves, the top executive at CBS since 2006, resigned on Sunday. The New Yorker publised a new wave of allegations against him of sexual assault and harassment. CBS Corp  said it will pay $120 million to Moonves if an internal investigation into allegations of harassment fails to provide grounds for his dismissal. CBS said in a regulatory filing that it and Moonves in addition would donate $20 million to organizations supporting the #MeToo movement. However, Moonves could end up with nothing if the result of the investigation went against him. CBS shares dropped 1.5%.


A new report from the Government Accountability Office, a government watchdog, concludes that Equifax left information vulnerable on several fronts that led to hackers getting access to the sensitive personal information of millions of Americans. The GAO report describes in detail how hackers exploited significant vulnerabilities to gain access to the sensitive personal information of more than 145 million Americans.


The Federal Reserve reports consumer borrowing picked up in July. Total consumer credit rose $16.6 billion in July to a seasonally adjusted $3.91 trillion. That’s an annual growth rate of 5.1%. Revolving credit, such as credit cards, rose only slightly in July. Borrowing on credit cards rose by 1.5%, reversing a 1.4% drop in June. Nonrevolving credit, typically auto and student loans, jumped 6.4% in July after a 4% gain in the prior month. That is the largest increase in eight months. The report does not include mortgage debt. Consumer credit had big gains around the holidays and in May, but overall has been on a slight downward trend. This raises some concern about whether spending will continue to power growth in coming quarters. In the April-June quarter, consumer spending jumped 3.8%, due, in part, to the Trump tax cuts. Stronger wage growth, seen in the August job report, might help bolster spending. Banks are tightening standards on credit cards to borrowers with low credit scores.


California Gov. Jerry Brown today signed an aggressive new law for the nation’s biggest state to mandate carbon-free electricity by 2045. Brown went further by also issuing an executive order for the entire state, and not just its electric industry, to become carbon neutral by 2045 and net greenhouse gas negative thereafter. Brown admitted there are huge steps ahead needed to help achieve these goals, including his call to set up a regional electric grid for the West.


Tesla rallied 8.5% after Chief Executive Elon Musk announced a management shake-up late Friday. That move came after the car maker’s stock slumped in Friday’s session as more executives departed and Musk appeared to smoke marijuana during an interview. But the real story may be the steep decline in the value of Tesla’s bonds. $1.8 billion of Tesla bonds due in August 2025 plunged to a record low on Friday. The bonds traded for just 84 cents on the dollar, down from 98 cents a year ago. The yield, which moves opposite price, almost doubled over that span to 8.6%.


Nike shares rose 2.2% after data showed that the company’s online sales grew 31% following its decision to craft its “Just Do It” campaign around ex–NFL player Colin Kaepernick. Nike was also the best Dow performer of the day.


Science Applications International said it would buy Engility Holdings in a stock deal valued at $2.5 billion, including the repayment of $900 million in debt. Shares of Science Applications sank 9.1% while Engility edged down 0.1%.


United Rentals said it would buy BlueLine Rental in a cash deal valued at $2.1 billion. Shares of United rose 5.1%.


Snap fell 1.9% after the company said its chief strategy officer would be the latest executive to leave the company.


Shares in Alibaba Group slid 3.7% following news that tycoon Jack Ma plans to step down as executive chairman of the Chinese e-commerce giant in a year.


Hurricane Florence is likely to impact the southeastern and mid-Atlantic United States as a major storm — potentially thrashing coastal areas stretching from South Carolina to northern Virginia with punishing winds, heavy rain, and life-threatening storm surge. More than a million people are being ordered to evacuate ahead of the storm. Currently, Florence is sustaining 140 mph winds, making it a Category 4 storm. But forecasters warn that it may continue to intensify as it approaches the coast, possibly even making landfall Thursday or Friday in North Carolina as a powerful Category 4 storm or a Category 5, with 155 mph winds. Plans for coastal evacuations are underway. The entire South Carolina coast will be ordered to evacuate. It’s looking like the Carolinas won’t be able to escape impacts from the storm, but the exact forecast remains uncertain. Since forecasters are generally better at predicting the path of a storm than its intensity, Florence could easily weaken or get even stronger in the next few days.Heavy rains and flooding are going to cause even more danger.

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