…Stocks down. Watch FANGS. Factory production down. Empire state up. Jobless claims down. AZ loses jobs. Trump’s apprentice thing. Sanctions on. The ACA secret. BOE unchanged but divided. Kroger whacked. Wells Fargo steps in it, again.
Financial Rreview by Sinclair Noe for 06-15-2017
DOW – 14 = 21,359
SPX – 5 = 2432
NAS – 29 = 6165
RUT – 7 = 1410
10 Y + .02 = 2.16%
OIL – .47 = 44.26
GOLD – 6.40 = 1254.70
The Dow could not hang on to record highs and the S&P 500 and Nasdaq Composite continued to slip. A selloff in technology stocks that began last Friday has clipped 4.1 percent off the S&P 500 information technology index as investors worry about stretched valuations in 2017’s top-performing sector. During that time, Alphabet has lost 5.8 percent, Amazon is down 5.2 percent and Facebook is off 4 percent. Apple has declined more than 7 percent in the past five days. Valuations of the mega-tech stocks have moved to fairly lofty levels and there is reasonable concern that valuations have grown too large relative to earnings forecasts. The question is whether this is just a healthy pullback or the beginning of something more ominous. You have to decide for yourself, but it certainly means you should be paying closer attention to any holdings in these big tech names.
Factory production slipped 0.4 percent in May, as manufacturers cranked out fewer cars, computers and semiconductors, a sign that economic growth remains sluggish. The drop follows a big 1.1 percent gain the previous month, so we might be looking at a little statistical noise. Overall industrial production, which includes mining and utilities, was unchanged in May. Mining activity posted a large gain for the second straight month, rising 1.6 percent. Much of that increase has been driven by greater oil and gas drilling. Utility production rose 0.4 percent. Americans are buying fewer cars, after sales reached record levels last year. They have now fallen for five straight months. Automakers responded by slicing output 2 percent in May.
The Empire State manufacturing index climbed to 19.8 in June after falling to minus-1 in May. Readings above zero show that factories are expanding. The Empire State index only measures sentiment in New York, but economists track it because it provides an early read on factory output nationwide. It has risen seven of the last eight months.
The number of Americans applying for unemployment benefits fell for a second straight week. The Labor Department said claims for jobless benefits last week dropped by 8,000, to a seasonally adjusted 237,000. The less-volatile four-week average rose by 1,000 to 243,000. Overall, 1.94 million people were collecting unemployment checks, down 10.2 percent from a year ago. Applications for unemployment benefits have come in below 300,000, a historically low figure, for 119 straight weeks, the longest such stretch since 1970. And while it is an impressive streak, it also reminds us that fewer people are eligible for unemployment benefits.
The national jobs report is issued the first Friday of each month and each state then reports on non-farm payrolls around the middle of the month. Today, Arizona reported the statewide unemployment rate slightly increased from 5.0% in April to 5.1% in May; still better than 5.3% a year ago, but not as strong as the 4.3% national rate. Arizona lost 14,700 Nonfarm jobs in May. The private sector lost 5,500 jobs, and government cut 9,200 jobs. Arizona Nonfarm employment grew by 1.8% (48,200 jobs) over the year in May.
President Trump today signed an executive order to expand federally funded apprenticeship programs. The order takes $100 million away from other federally funded job training programs to fund the new apprenticeships. And while apprentice programs seem like a good way to close the skills gap, some economists say the skills gap is not the problem, or at least no more of a problem today than in years past. Instead they point to a slowdown in startup businesses and new technology that has allowed employers to conduct more thorough research on an applicant before hiring. The proportion of middle-skill jobs in the economy (jobs that might benefit from an apprentice program) has declined since the 1980s, while relative job growth has been concentrated at either the low end of the spectrum, like retail, or the high end, like software development. In other words, jobs that don’t need extensive training or jobs that need more training than an apprenticeship.
The Senate voted 98-2 approving legislation to impose new sanctions on Russia, and to force President Donald Trump to get Congress’ approval before easing any existing sanctions on Russia. The measure is intended to punish Russia for meddling in the 2016 U.S. election, annexation of Ukraine’s Crimea region and support for Syria’s government in the six-year-long civil war. The bill also includes new sanctions on Iran over its ballistic missile program and other activities not related to the international nuclear agreement reached with the United States and other world powers. The bill now goes to the House of Representatives.
The Washington Post reported late Wednesday that the special counsel investigating Russian influence in the presidential campaign is now examining whether President Trump tried to obstruct justice. Allegations of obstruction arose last month when he fired FBI Director James Comey.
Meanwhile, the Senate is continuing work on legislation to repeal the Affordable Care Act. If you are not familiar with the Senate version of the repeal, you are not alone. Senate republicans are keeping it a secret. In theory, the bill is open to any of the 52 republican senators, but few seem to know about any of the details. Democrats have been locked out of the process, along with the rest of the public. Tom Price, the secretary of health and human services, said that he, too, had not seen the Senate bill. The legislation will be considered in the Senate under an expedited procedure that precludes a Democratic filibuster and allows passage by a simple majority. Sunshine is always the best disinfectant.
The Bank of England met today and left interest rates unchanged at a record low of 0.25 percent, but a surprisingly large number of the members of its Monetary Policy Committee, three out of eight, opted for a quarter-point increase. The main concern appears to be inflation, which at 2.9 percent is running hot; but any attempts to curb inflation by hiking rates also runs the risk of slowing the economy, which is already sluggish.
The Bank of Japan concludes a two-day board meeting Friday that isn’t expected to bring any change in policy. The focus will be on Governor Kuroda’s press conference and any clues he gives about possible adjustments to his monetary program and an eventual exit from stimulus.
Yesterday, the Federal Reserve raised interest rates again, and said more increases are on the way, on the belief that the recent slowdown in inflation is transitory. Don’t tell Kroger. Grocery chain Kroger took its biggest one-day loss since 1999. The company cut its annual profit outlook as it deals with growing competition from discount chain Aldi and from Lidl, a German chain opening its first locations in the US. Kroger’s stock plunged $5.72, or 18.9 percent, to $24.56. Kroger said lower food prices were hurting its profits, sparking a sell-off among its competitors, including Whole Foods and even Wal-Mart. And while wheat prices have been moving higher on weather related news, most other commodities are significantly lower. Look at oil, now trading below $45 a barrel. Lower oil prices ripple through the economy, putting a lid on inflation. And the lid, or resistance level, for oil seems to be around $55 a barrel; that’s the price that spurs US shale producers to ramp up production.
Meanwhile, bond traders do not seem to share the Fed’s enthusiasm for economic growth. The spread between the yields on two-year and 10-year Treasuries fell to 80 basis points today. The spread is currently within a few hundredths of a percentage point of being the tightest it has been since 2007. A flattening yield curve points to slower economic growth.
Wells Fargo has stepped in it again. The bank has been dealing with a scandal involving opening up over 2 million bogus accounts without customer consent. Now Wells Fargo faces a new round of lawsuits accusing the bank of modifying mortgages without customers’ consent. Any change to a payment plan for a person in bankruptcy is subject to approval by the bankruptcy court and the other parties involved. The changes are part of a trial loan modification process from Wells Fargo and typically resulted in lower monthly loan payments, which would seem to benefit borrowers, particularly those in bankruptcy. But deep in the details was this fact: Wells Fargo’s changes would extend the terms of borrowers’ loans by decades, meaning they would have monthly payments for far longer and would ultimately owe the bank much more. They put borrowers in bankruptcy at risk of defaulting on the commitments they have made to the courts, and could make them vulnerable to foreclosure in the future. According to court documents, Wells Fargo has been putting through unrequested changes to borrowers’ loans since 2015. Wells Fargo stood to profit from the new loan terms it set forth, and, under programs designed to encourage loan modifications for troubled borrowers, the bank receives as much as $1,600 from government programs for every such loan it adjusts. This is not the first time Wells Fargo has been accused of wrongdoing related to payment change notices on mortgages it filed with the bankruptcy courts. Under a settlement with the Justice Department in November 2015, the bank agreed to pay $81.6 million to borrowers in bankruptcy whom it had failed to notify on time when their monthly payments shifted to reflect different real estate taxes or insurance costs. Maybe you are starting to sense a pattern of bad behavior. They just reach into your pocket and take your money because they can. And because nobody stops them.