Financial Review

The 420 Break

…Stocks dip ahead of a big earnings week. Wells Fargo’s $1 billion fine. Payday lenders skate. AZ teachers strike. Students walk out of class for gun reform. The 420 break.

Financial Review by Sinclair Noe for 04-20-2018

DOW – 201 = 24,462
SPX – 22 = 2670
NAS – 91 = 7146
RUT – 9 = 1564
10 Y + .04 = 2.95%
OIL – .03 = 68.26
GOLD – 10.10 = 1336.20

 

Despite today’s declines, the 3 major stock indices gained about a half a percent for the week. The 10-year Treasury yield reached its highest level since January 2014 as a bond selloff continued for a second day, driving the yield curve steeper after two weeks of flattening. Meanwhile, the two-year yield hit 2.46 percent, its highest level since Sept. 8, 2008.

 

Procter & Gamble fell 2.9 percent on top of a 4.2 percent drop the day before when it said shrinking retailer inventories and higher costs squeezed its margins. Philip Morris also had a second day of declines after getting crushed due to weak shipment volumes in its quarterly report.

 

Apple fell 4.1 percent, making it the biggest drag on the major indexes after Morgan Stanley estimated weak demand for its latest iPhones, a day after Taiwan Semiconductor raised fears of softer smartphone sales. The decline in Apple offset a 4 percent gain in General Electric, which reported quarterly earnings and revenue that beat analyst expectations and reaffirmed its outlook for the rest of 2018. Honeywell also posted stronger-than-expected earnings. Its stock rose 1.6 percent.

 

Baker Hughes reported adjusted earnings that topped expectations, but revenue that was slightly under forecasts. The stock rose 0.9%. Schlumberger fell 1.5%. The oil giant topped earnings estimates, but said it expects the sector to see supply challenges this year.

 

Next week will be the busiest week of the earnings season, with more than a third of the S&P 500 set to report. Some of the companies scheduled to release their results include tech giants Alphabet, Intel and Microsoft.

 

The Consumer Financial Protection Bureau (CFPB) and the Office of the Comptroller of Currency (OCC) announced a combined fine of $1 billion against Wells Fargo. The consent orders from the two agencies described how the bank unfairly disregarded its advertised process of locking-in interest rates for mortgages, as well as unfairly foisting insurance on customers taking out auto loans.

 

If a closing of a mortgage dragged on due to Wells Fargo and not the customer, the bank still charged customers to keep the rates locked — despite this being contrary to policy. In the case of the car loans, the bank forced unnecessary insurance on hundreds of thousands of borrowers who already had insurance taken out on their vehicles. When customers pointed this out, the bank often failed to fix the error and refund the payments. Remarkably, this has not resulted in various state insurance departments going after Wells Fargo. Wells Fargo said the penalties reduce first quarter income by $800 million – which makes me wonder if they are writing off part of the fine on their taxes. The OCC fine will go into the Treasury, and the CFPB’s fines go to its Civil Penalty Fund. This fund compensates victims who have not been paid by the offending companies.

 

The fine against Wells Fargo is the only enforcement action against financial companies by the Consumer Financial Protection Bureau since Mick Mulvaney took over as director. The CFPB is not enforcing regulations against predatory payday lenders – they taken it a step further – dismissing cases and investigations that were already underway, for no stated reason. CFPB said it is dropping sanctions against NDG Financial Corp, a group of 21 businesses that the agency had accused of running “a cross-border online payday lending scheme” in Canada and the United States. The scheme primarily involved making loans to U.S. consumers in violation of state usury laws and then using unfair, deceptive, and abusive practices to collect on the loans. The agency dismissed charges in that case, with no explanation to the courts. The CFPB also dropped separate cases against payday lenders in January and March, with no explanation offered. Mulvaney also promised to roll back regulation, known as the Payday, Vehicle Title, and Certain High-Cost Installment, which requires lenders to check whether a borrower can repay the loan before making it – essentially saying the payday lenders need to “know their client”. The regulation is due to go in effect in August. Any deregulation is not soon enough for the payday lenders – they sued Mulvaney to block it before it goes into effect.

 

The U.S. Department of Commerce may have issued a corporate death sentence to Chinese telecom equipment maker ZTE by banning American firms from selling to it for 7 years. The company condemned the ban today, but the U.S. is unlikely to reverse its decision. The timing of the announcement — right before the 2nd anniversary of an important speech on cybersecurity and technology made by Chinese President Xi Jinping — only serves to strengthen the point he’s been making about the need to reduce reliance on foreign, and especially American, technologies. New research from Federal Reserve Bank of New York economists shows U.S. tariffs on steel imports are likely to cost the American economy jobs. The research comes a day after the Fed Beige Book said businesses reported rising steel prices due to the new tariffs.

 

Arizona teachers have voted to walk off the job to demand increased school funding, marking a key step toward a first-ever statewide strike. Following a vote, the grassroots group and the state’s largest teacher membership group said that teachers will walkout April 26, that’s next Thursday. According to the Arizona Education Association, around 78 percent of the 57,000 teachers voted in favor of the walkout.

 

Arizona governor Doug Ducey had proposed a raise for teachers – 9% this year and boosting wages by 20% by 2020. Many teachers kept up the pressure at schools and on social media, saying the plan failed to address much-needed funding for classrooms and support staff.  And the proposal was vague on where the money would come from. Legislative budget analysts this week predicted a $265 million deficit in 2020 if the governor’s plan is approved. Ducey’s proposal drew initial support from the business community and some school organizations. The Arizona PTA pulled its support for the proposal, saying its analysis showed the finances were not realistic. According to the teachers’ analysis of the plan, the funding for their salaries wouldn’t be part of a plan of larger investment in schools and will come at the expense of paying to improve the state’s already-depleted education infrastructure and its underfunded learning programs.

 

Teachers themselves could face consequences in this right-to-work state, where unions do not collectively bargain with school districts and representation is not mandatory. The Arizona Education Association has warned its 20,000 members about a 1971 Arizona attorney general opinion saying a statewide strike would be illegal under common law and participants could lose their teaching credentials. That seems like a hollow threat. But there will be big concerns for parents across the state if there is not a resolution in the next week.

 

Today, students across the country walked out of their classrooms in protest, calling for gun reform.  This follows on the heels of the March for Life protests in March, which followed on the heels of the Parkland Florida massacre of 17 students. There has been some legislative change in Florida, but nationally – nothing has changed. Congress has passed no significant gun reforms — and it still doesn’t look likely to do so, even as kids take to the streets and walk out of their schools. This is typical. The federal government did nothing after 6- and 7-year-olds were killed at Sandy Hook Elementary School in Newtown, Connecticut, where a gunman killed 20 children, six adults, and himself in 2012. Nothing changed after the massacre at a concert in Las Vegas. Nothing changed after the shooting in Orlando, or Aurora. It’s going to happen again. There will be another mass shooting in America. Because nothing has changed. Today’s National School Walkout marks the 19th anniversary of the massacre at Columbine.

 

Today is April 20th, or 4-20. And Senate Minority Leader Chuck Schumer is introducing a bill that would deschedule marijuana. Descheduling would remove cannabis from the strict regulatory standards set by the Controlled Substances Act, the blueprint for US drug policy. That would not fully legalize marijuana across the US, but it could allow states to carry out marijuana reform — from decriminalization to medical legalization to outright legalization — without the threat of federal interference. The bill is not expected to pass.

 

April 20 marks the unofficial high holiday of stoner culture, when cannabis enthusiasts around the world celebrate smoking pot. This has been a huge year for marijuana legalization, and there are more places to legally light up on 4/20 than ever. The origins of the term 420 (pronounced “four-twenty”) are a bit hazy. Urban myths swirled for years that 420 was California state penal code for marijuana use, or numbers from a Bob Dylan song multiplied. The best evidence points to a group of California high schoolers, who in the early 1970s would meet up after school every day at 4:20pm to get high. The term was then picked up by Grateful Dead followers and spread globally. What was once a secret code in stoner circles is now so mainstream corporate brands get in on it. This year, Lyft is offering riders in states where marijuana is legal a $4.20 discount. Marijuana is legal in some form in 46 US states, though the majority only allow use for medical purposes. Eight states have legalized recreational use. On Jan. 1, California opened the world’s largest legal market for recreational marijuana, which is estimated to reach $5.1 billion this year (researchers have compared the growth rate of the legal weed market to broadband internet in the early 2000s).

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