The Beatings Continue
…Stocks down for the day, up for the week. Oil drops for 10th straight session. Producer prices pop. Court blocks Keystone XL. Changes in asylum. Fighting reporters. Waiting on election results.
Financial Review by Sinclair Noe for 11-09-2018
DOW – 201 = 25,989
SPX – 25 = 2781
NAS – 123 = 7406
RUT – 28 = 1549
10 Y – .05 = 3.19%
OIL – .82 = 59.85
GOLD – 14.10 = 1210.40
The Dow rallied by nearly 3% this week — its best performance since March — while the S&P 500 gained more than 2%. The Nasdaq was up less than 1%.
Producer prices rose more than forecast in October for the biggest jump in six years on broad gains in costs for goods and services. The producer-price index rose 0.6 percent from September and climbed 2.9 percent from a year earlier. Excluding food and energy costs, the core PPI readings were also up more than forecast, rising 2.6 percent from October 2017 and 0.5 percent from the prior month. The PPI report also showed the cost of goods climbed 0.6 percent, the biggest gain since May. Services prices increased 0.7 percent, the most since January 2016. About three-fourths of the increase reflected higher margins for wholesalers and retailers. Energy goods prices jumped 2.7 percent from the prior month, while food costs rose 1 percent. This big of a jump in prices at the wholesale level would indicate that the trade wars with China and various allies is starting to impact the supply chain and the effect is now just beginning to be felt in pricing.
Peter Navarro, Trump’s main China advisor, delivered a speech this morning where he accused Wall Street of “shuttle diplomacy” with Beijing, while predictably blasting his archnemesis, China. Navarro also blasted Goldman Sachs and “globalist billionaires”.
Crude oil prices have been a notable exception to higher prices at the wholesale level. Crude oil prices have been dropping for 10 consecutive sessions, marking its 10th consecutive decline and matching the longest skid for the contract since a similar stretch from July 18-July 31 1984.
Crude-oil prices settled in bear-market territory on Thursday, defined as a drop of at least 20% from a recent peak. There was concern that Iranian sanctions would hurt inventories, but it now appears the bigger issue might be demand and the vitality of economies around the globe. Oil producers warn more investment is needed to maintain production at levels that would ensure reasonable prices. This is in tune with OPEC’s warnings that the oil industry needs to step up its exploration efforts as global oil demand is set to continue rising, albeit more slowly than previously forecast. One of the biggest impediments to stronger demand is the trade wars. The trade war saw US crude oil shipments to China stop completely in October, and China slapped a 10% tariff on LNG in September. Even sanctions do not mean that Iran’s oil exports will drop to zero. The U.S. is set to grant waivers to eight countries, allowing them to continue to import some level of oil from Iran, on the condition that they ratchet down their purchases in the months ahead. The full list of the countries will be released on Monday, but they will surely include China, India, South Korea and Japan, which are four of Iran’s top buyers.
The oil market is simply too tight to zero out Iranian supply. Notwithstanding the latest plunge in oil prices, the market is still tight. The U.S. and OPEC are adding supplies at a torrid pace, but it is unclear if this can keep up. The U.S. could see production growth slow in 2019, and in the case of OPEC, the additional production comes at the expense of spare capacity. Although there are concerns of weakening oil demand in 2019 the underlying fear is that an abrupt shut off of Iranian supply would cause a spike in prices and leave oil consuming economies scrambling to buy oil elsewhere.
A federal judge in Montana has blocked the construction of a controversial oil pipeline from Canada to the US. The judge said the Trump administration had “discarded” facts when it approved the Keystone XL Pipeline in 2017. It had been rejected two years earlier, mainly on environmental grounds. The privately financed pipeline is projected to stretch 1,179-miles from the oil sands of Canada’s Alberta province, through Montana and South Dakota, to rejoin an existing pipeline to Texas. But it has been the subject of protests for more than a decade, both from environmentalists and Native American groups, who say it will cut through their sovereign lands. In the ruling, the judge said construction could not go ahead until a more thorough review of the impact on the climate, cultural resources and wildlife was conducted. He also accused the state department of having “discarded prior factual findings related to climate change to support its course reversal”.
This morning, Trump signed a proclamation that denies asylum to immigrants who enter the U.S. illegally, rather through a port of entry – a move aimed at a caravan of Central American migrants moving toward the U.S.-Mexico border. The American Civil Liberties Union is seeking a court injunction to block Trump’s new restrictions on asylum, arguing in a lawsuit filed today that the policy violates federal immigration law.
Shares of General Electric dropped over 5% today to settle at $8.59. The stock decline has the stock closing at its lowest levels since March 2009, and brings its losses over the past month to about 40%, battered by its latest earnings miss and ratings downgrades from all three main credit-rating firms.
Several tech companies reported earnings and outlooks that disappointed investors as well, including gaming giant Activision Blizzard, online retailer and bitcoin investor Overstock and reviews site Yelp. Activision and Overstock were each down about 15% while Yelp plummeted nearly 30%. Shares of Chinese online retail giant Alibaba fell 3% despite the fact that the company is gearing up for Singles’ Day — an annual shopping extravaganza for Chinese consumers — on Sunday. (Singles’ Day is always 11/11 — a day of four ones.)
Next week, several retailers including Walmart and Macy’s are due to report results and investors will be keen to hear what they say about labor. Retailers and restaurants tend to have large employee bases and are expected to be among companies most likely to feel the biggest impacts of higher wages. Wage pressures could increasingly be an issue as earnings-per-share growth for S&P 500 companies is expected to slow to about 9 percent next year following 2018’s tax-fueled earnings gains, estimated at 24 percent.
Wage inflation is one of the key risks to S&P 500 profit margins. In the recent U.S. jobs report for October, wages recorded their largest annual gain in 9-1/2 years. A separate report showed the Employment Cost Index, the broadest measure of labor costs, increased 0.8 percent in the third quarter after a 0.6 percent rise in the second quarter, putting the year-on-year rate of increase at 2.8 percent. A record 7.14 million open jobs are unfilled, and employers have been forced to boost wages to attract employees.
Yesterday, the White House revoked the press credentials of CNN reporter Jim Acosta. Today, Trump hinted he could revoke more journalists’ White House credentials, as he called one reporter a “loser” and accused another of asking a “stupid question.” It was actually a pretty good question – Trump was asked if he wanted newly appointed Acting Attorney General Matthew Whitaker to “rein in” special counsel Robert Mueller. Trump fired Sessions and replaced him with a willing toady because he wants to stop the Mueller investigation. Trump has admitted this desire in public countless times, and now he has put someone in place who has promised to do what his president wishes. There is no mystery to this appointment. Thousands of demonstrators took to the streets in cities and towns across the country Thursday evening to show support for special counsel Robert Mueller’s investigation. Trump defended Whitaker as a “very well respected man in the law enforcement community” but claimed he does not know him and has never met him. Trump also rejected the notion that Whitaker is ineligible to serve as attorney general, a position held by some legal experts who say the Justice Department leader must be confirmed by the Senate.
With votes still being counted, an estimated 113 million Americans cast ballots in the midterms on Tuesday. That’s 30 million more people who participated in the 2014 midterms, representing the highest raw vote total for a non-presidential election in U.S. history and the highest overall voter participation rate in a midterm election in a half century. Some dozen house races, as well as Senate seats in Florida and Arizona were still too close to call on Friday, with a Florida recount expected. In Arizona, Congresswoman Kyrsten Sinema took a 9,000 vote lead as more ballots are counted. Now, with about half a million votes left to count, Republicans are nervous that the votes left to be counted will favor Sinema. So, a nervous Arizona Republican Party is suing to change the procedure by which the state counts mail-in ballots.
Democrats could expand their House majority to as many as 35 new seats once all the votes are counted, which could take weeks in some cases. Democrats earned more than 51.4 million votes in competitive House races nationwide, or 52 percent, compared to 47.2 million votes cast, or 48 percent, for Republicans. After heavy spending by both sides of the issue, gun control proponents picked up seats in House midterm races as gun rights advocates lost ground. Based on House voting records tracked by the National Rifle Association, more than two dozen gun rights proponents won’t be returning to Congress.
Veterans Day used to be celebrated by stock and bond markets alike, starting as far back as 1938. Veterans Day—intended to pay homage to U.S. military servicewomen and men—is Sunday, November 11, and will be officially celebrated as a Monday holiday. As a result, bond markets will be closed on the federal holiday. So, this coming Monday you can trade stocks, ETFs, commodities, currencies, and much more – but not Treasury notes.