Take the Overs
…..Clinton emails hit trading. 3Q GDP 2.9%. October was a little bad for stocks and bonds but great for M&A. Google Fiber on pause. Exxon just lost 4.6 barrels of in-ground reserves. Earnings pull out of a long decline.
Financial Review by Sinclair Noe for 10-28-2016
DOW – 8 = 18,161
SPX – 6 = 2126
NAS – 25 = 5190
10 Y un = 1.85%
OIL – 1.03 = 48.69
The Federal Bureau of Investigation is reopening its inquiry into Hillary Clinton’s use of private e-mail while secretary of state, a politically explosive development less than two weeks before the presidential election. Stocks erased gains on the news. FBI Director James Comey sent a letter to a Congressional committee saying, “In connection with an unrelated case, the FBI has learned of the existence of emails that appear to be pertinent to the investigation,” and so he is reopening the investigation. Comey gave lawmakers no indication in his letter about the importance of the new information. We have learned that the FBI found new emails which were not found on private email server in Clinton residence. The newly discovered emails under FBI investigation were found on separate device in unrelated probe. Apparently the device in question belonged to Clinton aide Huma Abedin and her husband Anthony Weiner, and was part of an FBI investigation into Weiner’s sexting problems. The Clinton campaign has asked the FBI to provide more details about the discovery. Hillary Clinton has not made a public comment on the issue. At this point we do not know any more specifics – so, let the wild speculation begin. And if you are wondering if Election 2016 can get any more sleazy, I don’t know but I would take the “overs”.
The U.S. economy grew at its fastest pace in two years in the third quarter as a surge in exports and a rebound in inventory investment offset a slowdown in consumer spending. Gross domestic product increased at a 2.9 percent annual rate after rising at a 1.4 percent pace in the second quarter. That was the strongest growth rate since the third quarter of 2014 and beat economists’ expectations for a 2.5 percent expansion pace.
Business investment improved last quarter, though spending on equipment remained weak. Business spending on equipment slipped at a 2.7 percent rate, dropping for a fourth straight quarter, but businesses increased spending to restock after running down inventories in the second quarter. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 2.1 percent rate. Labor costs rose 0.6 percent in the third quarter after a similar gain in the second quarter, leaving the year-on-year rate of increase at 2.3 percent. The standout number in the GDP report was a 10 percent surge in exports, which can be linked to soybean exports and is not something that carries over to the fourth quarter. This reading of 2.9 percent GDP is the first estimate and subject to a couple of revisions but it certainly bolsters the case for a Federal Reserve rate increase in December.
The University of Michigan said Friday that its final index of consumer sentiment fell to 87.2 from 91.2 in September. The drop in sentiment suggests that consumer spending may continue to moderate.
October has a reputation as being a nasty month in the stock market, and even though we didn’t see a market crash this month, it wasn’t pretty. For the month: the Dow lost 147 points or 0.8%, the S&P lost 42 points or 1.9%, and the Nasdaq dropped 122 points or 2.2%.
Bonds worldwide have lost 2.9 percent in October; the worst monthly performance since 2013 and the days of the Taper Tantrum. The yield on the US 10 year Treasury note went form 1.61% to 1.85% in October. There’s potential for more turbulence ahead. Next week brings interest-rate decisions from the Bank of Japan, the Fed and the Bank of England. Then on Nov. 8, Americans go to the polls to choose a new president.
The eve of a presidential election is typically a time when companies put merger plans on hold and wait for clarity on matters like antitrust policy. Not this year. U.S. companies have struck a total of $249 billion in merger agreements this month, surpassing the previous record of $240 billion in July 2015. More on the way? New reports suggest CenturyLink is eyeing a $30 billion merger with L3 Communications. Also GE is discussing an oil & gas combination with Baker Hughes for roughly the same amount; this might take the form of a partnership rather than an acquisition.
Amazon reported earnings that missed estimates. While the 29% sales growth is impressive, shares fell 5% today, wiping out about $20 billion in market cap.
Alphabet beat on the top and bottom lines. The parent company of Google beat earnings estimates by 5% – a notable figure given the size and coverage of the stock – and still posted 20% revenue growth. Earlier in the week, Google Fiber said it was delaying fiber-to-home service in eight cities, including Dallas, Los Angeles, and Phoenix, to focus on the 12 urban markets where it is already working. The CEO of Access, the unit that includes Google Fiber, stepped down, and 9% of its 1,500 employees will be laid off. It looked like the end of the road for Google Fiber. Maybe not. Fiber faces challenges; it is a big investment in infrastructure, it is still a developing market, and there is competition from slower internet providers, but Google Fiber is profitable; it just won’t be fast to return a big profit. Deploying a municipal fiber network can take at least five to seven years. For a Silicon Valley company accustomed to growth measured in months, the slow pace likely pushed Google Fiber’s capital expenditures far beyond what newly cost-conscious parent company Alphabet would countenance. The company is now returning to its original plan: proving that gigabit-speed residential internet is feasible and profitable in just a few major cities, and then expand from there.
Exxon‘s profit keeps shrinking because of lower oil prices, and the company is responding by sharply cutting investment in future production. Exxon Mobil said third-quarter income fell 38 percent to $2.65 billion. Still, it was the company’s best quarter this year. The profit was higher than analysts expected, although revenue was sharply below forecasts. Exxon Mobil’s dividend payments continue to exceed profits, which means the company is borrowing and selling assets to finance its payments to shareholders. At the same time, cuts in capital spending are hurting the company’s ability to maintain production.
Perhaps more important than the third quarter numbers, Exxon acknowledged that it faced what could be the biggest accounting revision of reserves in its history. Exxon Mobil might have to concede that 3.6 billion barrels of oil-sand reserves and one billion barrels of other North American reserves are currently not profitable to produce.
The way Exxon Mobil accounts for the value of assets still in the ground has made the company a target of inquiries by the Securities and Exchange Commission, as well as the New York attorney general, Eric Schneiderman. Exxon Mobil has been criticized for being slow to take into account the impact of anticipated future government actions to curb climate change, which may force energy companies to leave at least some fossil fuels untapped in the ground. Other oil and gas companies, including Chevron and Royal Dutch Shell, have lowered valuations by more than $50 billion since oil prices plunged from over $100 a barrel in 2014 to the current price of around $50 a barrel. In contrast, Exxon Mobil resisted write-downs, saying that it conservatively valued its assets on a long-term basis and that price volatility was normal in commodity markets.
Chevron returned to profit, reporting a huge quarterly earnings beat as the company continued to cut costs. The oil company reported third-quarter earnings of $1.3 billion, or 68 cents a share, on revenues of $30 billion. That profit was down 37 percent from a year ago, when Chevron reported earnings of $2 billion, or $1.09 a share, on revenue of $34 billion.
Anheuser Busch InBev lowered its revenue forecast. The world’s largest brewer had a rough quarter thanks to weakness in its Brazil business and lowered its revenue growth per hectoliter to be in line with inflation after previously suggesting it would outpace inflation.
Mastercard reported net income for the quarter came in at $1.2 billion, or $1.08 per share, compared with $977 million, or 86 cents during the same period a year ago. Revenue hit $2.9 billion, compared with $2.5 billion. Mastercard beat earnings and revenue estimates. Mastercard said purchase volume was up 5% in the quarter.
Amgen beat estimates on both the top and bottom lines, with the biotech giant raising its full-year forecast. Amgen’s results were being helped by sales of newer medicines.
Prescription drug distributor McKesson plunged 22 percent, to a three-year low after its revenue fell about $1.5 billion short of estimates. The company cut its annual outlook because of changes in drug prices.
Mylan’s price hikes on EpiPens have added millions to Department of Defense spending since 2008 as the agency covered more prescriptions for the lifesaving allergy injections at near-retail prices. That may change. Both the Pentagon and Mylan told Reuters that discussions are underway that could extend a military discount to EpiPens filled at retail pharmacies through the use of rebates.
Investors expect the third quarter to mark the end of a year-long earnings recession as more companies beat expectations. Profits at S&P 500 companies are expected to rise 2.6 percent, helped largely by financial companies, according to Thomson Reuters. However, energy companies are expected to take the biggest hit. FactSet reports that blended earnings rate is 1.6%, which is above the year-over-year blended decline of -0.5% at the end of last week and the year-over-year estimated decline of -2.2% at the end of the third quarter. Blended earnings refers to companies that have already reported plus estimates of companies yet to report.