Financial Review

Sure, Why Not?

…Stocks higher. Oil higher. Dollar higher. Bond yields higher. PPI barely budges. Cohen selling access? California mandates solar. Earnings rolling in.

Financial Review by Sinclair Noe for 05-09-2018

DOW + 182 = 24,542
SPX + 25 = 2697
NAS + 73 = 7339
RUT + 9 = 1596
10 Y + .04 = 3.00%
OIL + 2.19 = 71.25
GOLD – 2.00 = 1313.20


Stocks pushed higher. Energy shares were the leaders as oil prices continued moving higher following Trump’s decision to quit a nuclear deal and resume sanctions against Iran. Also affecting oil markets was data from the Energy Information Administration, which showed that crude-oil stockpiles fell more than expected in the latest week. Energy shares jumped 2.4%, by far the biggest outperformer among the S&P 500 sectors. While crude oil prices have rallied over the past 12 months, energy stocks have basically gone nowhere. Among oil companies on the rise today: Exxon Mobil added 2.6%, Chevron climbed 2.2%, Halliburton up 1.6%, and Schlumberger gained almost 2%. Financials, material, industrials and technology shares rose more than 1%. And a funny thing about the oil rally, it is happening as the dollar continues to rally. Usually, a stronger dollar would push down the price of imported oil. Over the last four weeks, though, the US Dollar Index has seen a pretty sizable bounce of over 3%, but rather than stop the rally in its tracks, crude oil has been unfazed, gaining an additional 10%+. Meanwhile, telecoms and utilities were the only laggards in today’s market, down about 1%. The jump in oil coincided with a rise in Treasury yields, as rising energy prices can lift inflation expectations, which are bearish for bonds.


Trump’s move to withdraw the United States from the Iran nuclear deal and restore sanctions on Tehran threatens to reopen a long-dormant dispute with Europe and inflame trade tensions.  Britain, France and Germany, as well as Iran – said they would try to preserve the deal without the United States. The last time America and Europe went head-to-head over Iranian sanctions, Europe pushed back and the United States was forced to back down. Twenty years ago, when the Clinton administration threatened sanctions against European companies, the EU passed so-called blocking statutes that prohibited European companies from complying with U.S. sanctions, giving them cover to continue with business as usual. For now, the European Union is desperately trying to hold the Iran nuclear accord together as they insist the deal with Iran is not dead, just down a member. Meanwhile, Trump has turned his attention to securing a peace agreement with North Korea, which just released three detained Americans.


The producer-price index rose 0.1% in April, below forecasts. The 12-month rate of wholesale inflation slipped to 2.6% from 3%. The core PPI was also up 0.1%. The yearly rate of core inflation slipped to 2.5% from 2.9%. The wholesale costs of most services were largely unchanged while prices for food and gas both fell. Notably, prices for scrap carbon steel rose 6%, a likely byproduct of recently announced tariffs on foreign steel. Steel prices rose in early 2018 in anticipation of the White House move. The cost of raw materials and partly finished goods, meanwhile, both increased in April, but they were essentially unchanged on a yearly basis. There are a few big caveats, though. Oil prices have been rising again and pending U.S. tariffs on Chinese goods could raise the cost of imported goods. So, inflation could drift a bit higher. Inflation has risen steadily over the past few years, and in March it reached the Federal Reserve’s 2% target using another price measure favored by the central bank. That’s stirring up debate inside the Fed on whether it should raise interest rates more aggressively. It’s a fairly consensus view now that yields are heading higher. Whether that indicates a bear market in bonds is less certain. Perhaps the more relevant question is whether we are headed for a yield inversion. The yield on the 10-year Treasury note closed above 3%, while the yield on the 2-year note is 2.53%, the highest since August 2008. So, while the yield curve has been flattening, an actual inversion is not imminent.


The lawyer for porn star Stormy Daniels claims Trump’s attorney Michael Cohen “appears to be selling access to the president of the United States.” Michael Avenatti, Daniels’ lawyer, also said that Trump and Cohen should immediately release bank statements that could shed light on a series of payments made to Cohen’s shell company, Essential Consultants LLC made by AT&T, Novartis, Korea Aerospace Industries and Columbus Nova, a New York-based investment firm linked to businessman Viktor Vekselberg, who has ties to the Kremlin. An estimated $4.4 million or more has been identified as flowing through Cohen’s shell company, Essential Consultants, which was created in October 2016, a month before Trump’s election. AT&T and Novartis have confirmed payments to Essential Consultants. Korea Aerospace, which reportedly paid $150,000 to Cohen’s company, partnered with Lockheed Martin to build the T-50A trainer jet in hopes of securing a U.S. Air Force contract worth roughly $16 billion. The companies are widely expected to win the lucrative contract for the delivery of 350 aircraft.


California regulators unanimously approved a plan that will require most new homes in the state have rooftop solar panels that turn sunlight into electricity starting in 2020. With the move, California now becomes the first state in the nation to mandate solar-energy installations on most single-family homes as well as multi-family residential buildings up to three stories, including condos and apartment complexes. The solar mandate is expected to add on average about $9,500 to the cost of new houses but the initial cost will be offset by the solar system’s long-term energy savings. The approved standards still allow new home construction to continue with some natural gas but it looks to reduce gas need over time and facilitate a shift to high-efficiency electric appliances, such as heat pump water heaters. Under the change, new homes are expected to cut energy use by more than 50 percent by having solar photovoltaic systems on rooftops. For residential homeowners, the commission estimates that the standards will add about $40 to an average monthly payment over a 30-year period but essentially save consumers $80 on monthly heating, cooling and lighting bills.


Dow component Walt Disney fell 1.8% even after its earnings out late Tuesday beat forecasts. Its results were boosted by performance at its movie-studio arm after the huge success of “Black Panther.”


Walmart fell 3% after announcing it was taking control of India’s largest e-commerce company, Flipkart Group, for $16 billion, in a move to fight off Amazon’s dominance in online retail. While Flipkart is currently the market leader, Amazon’s relatively new India site is quickly closing the gap. Although a handful of internet start-ups in India have achieved multibillion-dollar valuations on paper, this is the first time than any of them have cashed out in a big way. Although India’s population is rapidly coming online, the number of people with enough income to shop online is still tiny. In announcing the deal, Walmart warned its shareholders that the purchase would reduce its net income by at least $750 million this year and by more than double that amount next year.


In other earnings news: TripAdvisor soared 22%. The online travel-booking service late Tuesday released results that topped Wall Street estimates. Groupon jumped 3.6% after reporting an adjusted profit and revenue that fell less than expected. Electronic Arts climbed 6.6%, boosted by positive analyst commentary following its quarterly results. Shares of Monster Beverage dropped 7% a day after it posted earnings below forecasts. Shares of Papa John’s fell 3.7%. The pizza chain late Tuesday reported a decline in quarterly sales. Shares of ADT dropped 8.8%, a day after the home-security company reported its first-quarter results. Coty slumped 9.5% after it reported adjusted third-quarter earnings that topped expectations, along with better-than-expected revenue. Mylan rose 4.2%. It reported first-quarter earnings that came in below analyst forecasts. Separately, the FDA reports Mylan’s EpiPen products are in shortage due to manufacturing delays.


After the closing bell: Twenty-First Century Fox reported quarterly revenue beat analysts’ estimate as the company received higher fees from cable and satellite distributors. Fox shares moved slightly higher in after-hours. Last year, Fox agreed to sell the bulk of its film and TV assets to Walt Disney in a $52 billion deal. However, on Monday it was reported that Comcast is preparing an all-cash rival offer for the assets, with the U.S. cable company also notifying regulators of plans to bid for Fox target Sky.


After the closing bell, Roku, the streaming service, beat on earnings and issued better-than-expected second-quarter guidance. Roku stock closed up 8.9% during regular trading.


Apple plans to begin selling subscriptions to certain video services directly via its TV app, rather than asking users to subscribe to them through apps individually downloaded from the App Store. This would simplify the process and bolster Apple’s TV app on Apple TV, iPhones and iPads, making it a central place for people to find, watch, and buy content. It would also be another way for Apple to keep boosting its services business, which it expects to generate $50 billion a year in revenue by 2021. Right now, the TV app aggregates content from other providers, allowing people to locate shows from a wide array of apps and channels like ABC, NBA League Pass and HBO, rather than having to hop between different apps. But then Apple sends customers outside its app to buy access to those channels or watch shows. With the pending change, subscription purchasing would move to the TV app. Apple could eventually move the streaming to its own app, instead of sending users to third parties. Look for the feature to roll out next year.

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