…Earnings dominate trading. Amazon with a blowout. Microsoft beats. Intel wins with cloud chips. Starbucks struggles. Tariffs still a concern. Wells Fargo, again, GDP report tomorrow. AZ teachers strike.
Financial Review by Sinclair Noe for 04-26-2018
DOW + 238 = 24,322
SPX + 27 = 2666
NAS + 114 = 7118
RUT + 7 = 1557
10 Y – .05 = 2.98%
OIL + .02 = 68.21
GOLD – 6.30 = 1317.30
Earnings continued to dominate trading today.
Amazon made $1.6 billion in profit during the first three months of 2018, more than double the same period a year earlier. The estimate among analysts was that Amazon’s profit would shrink from the prior year. There has been a tendency for Amazon to re-invest in their own business and cutting into profit. Amazon did invest in costly fulfillment centers and original programming and they still posted blowout profits. Amazon’s sales for the quarter hit $51 billion, up 43% year over year, fueled in part by strong growth in its cloud computing business, Amazon Web Services. The division saw sales jump nearly 50%, reaching $5.4 billion.
Amazon CEO Jeff Bezos revealed in a shareholder letter last week that there are now more than 100 million subscribers for Prime, a $99 annual membership program that offers shipping perks and video streaming. Amazon Web Services, the company’s cloud computing business, now has a $20 billion annual revenue run rate. And Amazon continues to take bold, if somewhat controversial, steps to innovate in retail. It recently opened a convenience store without checkout lines and launched a new service that delivers packages to the trunks of cars for free. Amazon.com forecast second-quarter profit that topped analysts’ forecasts. Shares are up 7% in after-hours trade.
Microsoft topped Wall Street forecasts for quarterly profit as they signed up more businesses to its Azure cloud computing services and Office 365 productivity suite. Microsoft’s cloud product Azure, recorded revenue growth of 93 percent in the third quarter ended March 31. Azure’s growth has propelled Microsoft to the No. 2 position in the $15.6 billion cloud computing market with a 14 percent share, behind Amazon AWS’s 32 percent. Overall, Microsoft’s revenue rose 16 percent to $26.82 billion, ahead of expectations of $25.77 billion. Net income rose to $7.42 billion, or 95 cents per share, from $5.49 billion or 70 cents per share, in the year-ago quarter. Analysts had expected earnings of 85 cents per share. Microsoft up 3.7% in after-hours.
Intel said 2018 is looking better than expected thanks to strong demand for the chips that power cloud computing. In the first quarter,Intel’s sales climbed 9 percent to $16.1 billion, Intel said. Profit was $4.5 billion, or 93 cents a share, compared with $3 billion, or 61 cents, in the same period a year earlier. Analysts on average were projecting adjusted profit of 71 cents on sales of $15.1 billion. Intel up almost 6% in after-hours.
Starbucks reported $6 billion in sales from January to March, beating analysts’ expectations of $5.9 billion. This time last year, the company saw $5.3 billion in sales. It also reported that comparable US store sales grew a modest 2% in the second quarter. Starbucks added 1.6 million members to the Starbucks Rewards loyalty program in the United States, up 12% from last year. The report did not wow investors. Starbucks shares were down nearly 3% after market close and before a conference call with analysts. The earnings results come two weeks after two men were arrested at Starbucks for trespassing. Video of the arrest went viral, sparking protests and calls for boycotts. Any fallout from those protests happened after the current reporting period, but by all accounts, management at Starbucks won praise for its decision last week to close its 8,000 company-owned stores in the United States for one afternoon on May 29 to provide racial bias training to about 175,000 workers.
So far, first quarter earnings have been very strong. The fly in the ointment? Tariffs on steel and aluminum from China are leading to higher costs for major U.S. manufacturers and causing concerns at other companies. The topic has arisen on a fifth of conference calls for S&P 500 companies reporting quarterly results so far this month, as of Wednesday, according to a Reuters analysis of transcripts. Executives at Harley-Davidson, Ford Motor and Whirlpool were among those warning investors about higher materials costs stemming from the U.S. tariffs on steel and aluminum. Goldman Sachs and Fifth Third Bancorp said their banking clients were also concerned about protectionism and trade tensions. Corporate executives and investors are worried the row over tariffs, particularly with China, will escalate into a full-blown trade war. The 2018 first quarter marked the first reporting period for companies since Trump in March imposed the 25 percent duty on imports of steel and 10 percent on aluminum. Not all companies that discussed tariffs on calls said they expected to be hurt by them. Some said they hedged against volatile metals prices or that such costs were a small part of their overall businesses. But a consistent theme is that raw material costs have risen substantially over the past few months.
Wells Fargo has problems, lots and lots of problems. We know about the problem with opening millions of bogus accounts. We know about the problems with charging unnecessary fees on mortgages. We know about the problems with putting auto loan customers into auto insurance without permission. The bank has been accused of other predatory behavior, including ripping off mom-and-pop shops on credit card fees and retaliating against workers who made ethics complaints. Last week, federal regulators fined Wells Fargo $1 billion for various customer abuses. Wells Fargo may be in even more trouble. In a little-noticed recent regulatory filing, Wells Fargo said its board is probing whether the bank made “inappropriate referrals or recommendations” to 401(k) plan participants. Specifically, the review is looking into “rollovers” of 401(k) plans into individual retirement accounts. That means yet another part of Wells Fargo is under scrutiny for potentially ripping off customers. The filing published last month said Wells Fargo’s board is conducting the investigation “in response to inquiries from federal government agencies.” The review is in its preliminary stages. Wells Fargo did not detail which agencies urged the bank to dig into the issue.
The Wall Street Journal reports the Labor Department is investigating whether Wells Fargo has been pushing 401(k) plan participants into more expensive individual retirement accounts at the bank. The government agency is also looking into whether Wells Fargo’s retirement plan services unit pressed account holders to buy in-house funds to generate more revenue.
About 50,000 red-shirted teachers and their supporters marched to the Arizona Capitol this morning to demand more state spending on education. They gathered at Chase Field for a two-mile walk to the Capitol. More than 1,000 Arizona public schools in nearly 110 school districts and charter schools were closed. About 840,000 Arizona district and charter school students are impacted by school closures, which makes this the nation’s largest walkout in recent history.
The decision to strike comes even after Arizona’s Republican governor, Doug Ducey, proposed to give teachers a 20% raise. The proposal, which would still have left the state’s educators among the worst paid in the US, was rejected by the teachers’ union and the Arizona Parent Teachers Association after it was revealed that the plan would be paid with cuts to other state programs. Essentially robbing Peter to pay for Paul. Since 2008 the state has cut $1.5tn from the school budget and salaries for teachers rank 50th in the nation. The unions have instead proposed a 2.5% tax on financial and legal services that they estimate would generate $2.5bn a year. The union hopes that that money could be spent on restoring full state funding for educational programs as well as reversing cuts to special education, arts and dual language programs. Schools in their notices to parents announcing school closures have said they are unaware of how long the walkout would last, but no resolution announced today. Organizers announced they will return to the Capitol at 10 a.m. Friday to rally but will not march. So, it looks like classes are cancelled for tomorrow, at the least.
Tomorrow morning, we get a report on first quarter Gross Domestic Product. For the third year in a row, the government’s report card for the U.S. economy in the first three months of 2018 is expected to show an average or below-average grade. The Atlanta Federal Reserve’s GDPNow tool predicts gross domestic product will slow to 2% from 2.9% in the fourth quarter. Other forecasters see an even weaker reading. That’s the trend: a weak first quarter, then growth for the remainder of the year. Here’s what to watch in the GDP report on Friday morning. Consumer spending, the largest contributor to the U.S. economy, likely rose around 1%. That would be well below the 4% increase in the fourth quarter that was the largest gain in three years. Investment in new homes probably fell early in the year and that will also depress GDP. Residential investment had jumped almost 13% in fourth quarter.
Builders aren’t exactly slowing down, but higher mortgage rates have muddied the equation. Some potential buyers have been put off. A wider deficit in the fourth quarter was another leash on GDP. The trade gap may have reduced growth by 0.5 to 1.0 percentage points. Businesses appear to have spent less on equipment in the first quarter. That’s the bad news. But outlays on new plants and other major structures probably held steady and companies expanded production and added to inventories in anticipation of higher sales in the months ahead.
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