The Rent is Too High
Another record high close for the Dow. Housing rebounds but the rent is too high. We spend more on drugs than groceries. IMF cuts forecast for global growth. Offshore oil (not what you think). Earnings reports from: Wells Fargo, Goldman, IBM, Microsoft, and more.
Financial Review by Sinclair Noe for 07-19-2016
DOW + 25 = 18,559
SPX – 3 = 2163
NAS – 19 = 5036
10 Y – .03 = 1.55%
OIL – .67 = 44.57
GOLD + 3.20 = 1332.70
Another record high for the Dow Industrial Average, although it is looking like the rally is running out of steam. After a 3 week, 8% run for the S&P 500 index, today there was a pullback in the broader market.
Housing starts jumped in June but from downwardly-revised levels earlier in the year, pointing to a market for newly-constructed homes that continues to grind forward slowly and steadily. Starts were up 4.8% to a seasonally adjusted annual pace of 1.19 million. Permits, which foreshadow starts in the future, rose 1.5% to an annualized 1.15 million.
The value of owning a home in the U.S. has never been greater. The share of Americans’ total personal income coming from rental profit rose to a record 4.4% in the first quarter of 2016. That’s at an all-time high in figures dating back to 1947, and is up from just 0.7 percent thirty years ago. According to the Commerce Department, rental income includes landlords’ profits. It also includes how much owner-occupants would make if they rented out their house or apartment, after accounting for expenses including mortgage interest and property taxes or insurance. Two economic trends are at play here. First, historically low mortgage rates have cut down the expenses that would eat into landlords’ profit. At the same time, tight supply has pushed rental prices up at more than double the rate of other goods and services. The cost for renting a home grew by 3.5 percent in the year through June. The share of Americans renting their home is now nearing 50-year highs, creating a shortfall in available rentals. Investors have been able to capitalize on this shortfall by taking higher rents. And as rental prices rise, it makes it harder for renters to save for a down payment.
Year-to-date in June, rent inflation amounted to 3.8%, below the post-recession June average of 4.0%, and down from 4.5% over the same period in 2014 and 4.7% in 2015. In Phoenix, for the past 12 months ending in June, rent inflation ran at a 7.1% pace. When incomes stagnate as housing costs soar, and as people can’t pay those soaring rents, something has to give.
Last week, the Commerce Department released the monthly wholesale trade numbers for May. The report doesn’t usually get much attention but on closer inspection, there was some interesting news. Merchant wholesales were $435 billion for the month; breaking it out by sector: “Groceries” ($51.5 billion), “Electrical” ($45.0 billion),”Petroleum” ($43.4 billion), and Automotive ($36 billion). The biggest sector, at 12.2% was “Drugs” ($54.3 billion). More than we spend on food or gas or electricity. Are Americans really consuming that much more in pharmaceutical products? Hardly: According to the Producer Price Index, prices charged by manufacturers of pharmaceutical products jumped 9.8% in May from a year ago. Americans use plenty of drugs, but not that much. The amount of drugs purchased is relatively constant, we just pay more. The drug companies get away with jacking up the prices, because they can.
The U.K’s vote to leave the European Union has pushed the International Monetary Fund to cut its world growth forecast for this year and next. In its World Economic Outlook, published today, the IMF forecast global growth at 3.1 percent in 2016; that’s 0.1 percentage points down on its April forecast, and 0.6 percentage points down on its forecast from July 2015. The IMF also cut its forecast for 2017 growth to 3.4 percent — having predicted expansion of 3.5 percent back in April. The U.S. is seen growing by 2.2 percent this year, down from the 2.4 percent forecast in April. This was due to disappointing first-quarter growth rather than the Brexit vote.
Turkey is being reviewed for a downgrade at Moody’s. The credit-rating agency has placed Turkey’s Baa3 rating on review for downgrade after Friday’s attempted coup. Moody’s says that even though the coup failed, its occurrence was a “reflection of broader political challenges, as associated credit risks remain elevated.” Meanwhile, Turkish stocks extended losses, down 10.6% in 2 days as Erdogan extended a purge to police, military, judiciary, and now educators – more than 20,000 in all.
Crude oil and refined products are once again begin stored on tankers floating at sea, a sign that the two-year oil glut is far from over. The IEA estimates that about 95 million barrels of oil are sitting in floating storage, the highest level since 2009. It’s a logistics problem. The onshore storage facilities are full, so there is no place to unload. Add in the US dollar is at a 4-month high, and we see crude oil back below $45 a barrel.
Wells Fargo has struck a $400 million deal to buy a new European headquarters in the heart of London’s financial district in a much-needed boost for the city post-Brexit. The world’s biggest bank by capitalization will move into the 11-story building in the autumn of 2017.
Netflix is getting crushed after its disappointing quarter. The video-streaming service earned $0.09 a share as revenue climbed by 31% year-over-year to $2.1 billion. The good news stopped there, however, as the company said it added just 160,000 US subscribers, well shy of its guidance of 500,000. Netflix also gained just 1.52 million international subscribers, missing its 2 million subscriber guidance.
IBM beat on the top and bottom lines. “Big Blue” earned $2.95 a share, outpacing the $2.89 that Wall Street analysts were expecting. Revenue fell 3% year-over-year to $20.24 billion, but that was ahead of the $20.03 billion that was anticipated. Revenue has now fallen in 17 straight quarters. Cloud revenue remained a bright spot, however, surging 30% to $3.4 billion.
Goldman Sachs’ quarterly profit soared 78%, handily beating expectations, as the Wall Street bank earned more from bond trading and debt underwriting; also because last year’s results included a $1.45 billion fine. Revenue dropped 13%; and so Goldman is trying to cut costs by $700 million; that is another way of saying layoffs.
Johnson & Johnson raised its 2016 sales and earnings forecast and reported quarterly results that beat Wall Street estimates, helped by strength in its prescription drugs business.
Lockheed Martin, the Pentagon’s No. 1 weapons supplier, reported better-than-expected quarterly revenue and lifted its 2016 revenue and profit forecasts for the second time, thanks in part to increased deliveries of its F-35 fighter jets. Lockheed is often seen as a bellwether for the U.S. defense sector. Northrop Grumman and Raytheon are due to report quarterly results next week.
After the closing bell, Microsoft reported higher quarterly adjusted revenue, $22.6 billion, up from $22.18 billion a year earlier. The company posted net income of $3.12 billion, or 39 cents per share, compared with a loss of $3.2 billion, or 40 cents per share, a year earlier. Azure, Microsoft’s major cloud offering, saw revenue grow 102 percent in the quarter. Microsoft’s earnings report marks its first since the announcement of its agreement to buy LinkedIn, which did not impact this report but will show up in the next quarterly report. Microsoft was up about 4% in after-hours trade.
Monsanto rejected a sweetened $125-per-share offer from Bayer, but said it was open to continue talks with the German chemicals group as well as other parties. The German company disclosed last Thursday that it increased its bid by $3 per share, making the $125-per-share offer the largest all-cash bid on record. It also offered a $1.5 billion reverse anti-trust breakup fee.