The Value of Everything
Financial Review by Sinclair Noe
DOW – 5 = 17,745
SPX + .06 = 2108
NAS + 17 = 5128
10 YR YLD – .01 = 2.27%
OIL – .27 = 48.35
GOLD – 8.40 = 1089.30
SILV – .08 = 14.83
Gross domestic product rose at a 2.3% annual rate from April to June, missing expectations for 2.6% growth. First quarter GDP was revised to show 0.6 percent growth after previous reports showed a 0.2 percent downturn. The latest reading on GDP was propelled by higher consumer spending on big-ticket items such as new cars and trucks and the strongest housing market in years. Personal spending accounted for two percent of the 2.3% headline increase.
Builders increased spending on new home construction at a 6.6% clip in the spring, especially for townhouses, condos and apartment units. That follows 10% gains in the prior two quarters. US exports, meanwhile, snapped back with a 5.3% increase after a 6% drop in the first quarter. Imports rose at a slower 3.5% pace. The improved trade figures also gave the economy a small boost.
Business investment was weak again. Outlays on equipment declined 4.1% and the value of inventories fell slightly to $110 billion from $112.8 billion. Spending on structures such as oil platforms fell 1.6%, largely because of the drop in oil prices. The story on the economy remains consistent: strong consumption, weak investment.
Inflation as measured by the PCE price index increased at a 2.2% annual rate after falling by 1.9% in the first quarter, a decline tied mostly to plunging gasoline costs. Excluding food and energy, core PCE rose to a 1.8% annual pace from 1% in the first three months of the year. The PCE is the Fed’s preferred measure of inflation and it is really close to their inflation target. The personal saving rate was 4.8 percent for the quarter, the same as the average of 2014; this would indicate that people are indeed spending the money they save on lower prices at the gas pump.
Gross domestic product is supposed to be a measure of everything a nation produces. As you might imagine, that is a difficult task. How do you go about placing a value on everything? GDP includes the value of electricity produced but it does not subtract for the air pollution from the coal fired plant; it includes the price of divorce lawyers but places no value on a healthy marriage. In other words, it is imprecise. And so it is constantly subject to revision. The mixing and matching of what drives GDP growth has changed to reflect the economy, with greater emphasis on services, consumption, and housing. Spending on intellectual property products grew at an annual rate of 5.5% in the second quarter, continuing a nice string of advances which offers some hope for improved productivity growth in future quarters. A couple of years ago, intellectual property wasn’t even counted.
The second-quarter report is the first to include new methodology meant to make GDP more accurate. Over the past several years GDP has slightly underestimated growth in the first quarter and sharply overestimated growth in the third quarter. The problems stemmed mostly from difficulties in measuring spending on the military as well as consumer services such as health care. The new report also incorporates changes in how certain taxes and social benefits are categorized. Based on the new calculations, the economy expanded at average 2% rate each year from 2012 to 2014 instead of 2.3% as reported under the old method of calculating GDP. So, if you thought the recovery wasn’t quite as robust as the numbers, you were unfortunately correct.
The GDP report was decent, not great, but good enough. It is totally consistent with the Fed’s assessment of the economy. Yesterday, the Federal Reserve FOMC left interest rates unchanged, but they left the door open for a possible interest rate hike when central bank policymakers next meet in September – if the economy and job growth continue to improve. Fed officials said they felt the economy had overcome a first-quarter slowdown and was “expanding moderately” and job gains have been “solid”. Today’s GDP report is in-line with that view.
The Fed will also watch the next couple of jobs reports to see if they are in-line with their assessment of the economy. Today, a report showed new applications for unemployment benefits rose by 12,000 to 267,000 in the week ended July 25. Jobless claims have been below 300,000 since May. That’s the longest run in 15 years. Next week, we’ll see the jobs report for July; based upon first time claims, the jobs report should be “solid”. And that in turn would point to a September rate hike by the Fed.
The average rate for a 30-year fixed-rate mortgage dropped to 3.98% in the week that ended July 30, falling to the lowest level in almost two months. This would seem to be a good time for many homeowners to refinance, but not everybody can, because many homeowners are still underwater. There are programs to help, such as the Home Affordable Modification Program, or HAMP, which aims to make mortgages more affordable by changing terms, such as interest rates and loan duration. But there is a problem. Mortgage servicers reject 72% of struggling borrowers from HAMP. The Treasury Department requires mortgage servicers to explain why they reject borrowers, but a new report says the servicers aren’t giving a clear picture for the rejection, and that officials have found that servicers have “wrongfully denied” borrowers from entering HAMP.
Chinese stocks tumbled in the last hour of trading – with the Shanghai composite falling more than 2 percent-on reports that banks were investigating their exposure to the stock market. This year’s slump in China’s property market could hit the country’s banks, according to ratings agency Standard & Poor’s, in the latest warning to the world’s second largest economy.
Saudi Arabia, is planning to pull back from record-high levels of production at the end of the summer. The reduction could begin as soon as September and would amount to about 200,000 to 300,000 barrels a day.
Earnings season continues: Royal Dutch Shell warned that lower crude prices could continue for several years. Shell announced lower earnings, and plans to cut 6,500 jobs and pull back on capital spending.
Linn Energy reported a $379 million net loss and a 46% decline in revenue. Share price dropped 26% today.
Procter & Gamble posted a better-than-expected profit of $521 million, or 18 cents a share, but the consumer-products giant missed on revenue and provided a downbeat outlook for its fiscal 2016 earnings.
T-Mobile posted better-than-expected second-quarter revenue of $8.2 billion, and said it added 2.1 million subscribers, and raised its full-year subscriber outlook.
Time Warner Cable missed Street estimates with a second-quarter profit of $463 million, or $1.62 a share. The cable company did report a growth in subscribers.
LinkedIn revealed second-quarter results that easily topped Wall Street’s estimates on both lines, along with an upbeat full-year outlook.
Higher sales of Amgen’s blockbuster rheumatoid arthritis drug Enbrel and some newer drugs boosted second-quarter profit 7 percent. Amgen beat Wall Street estimates and raised full year profit forecasts.
Samsung Electronics is warning of “mounting challenges” ahead as the company’s once-highflying mobile unit again dragged on its quarterly results. With poor Galaxy S6 sales and a dramatic loss of Chinese market share, operating profit dropped 4% to $5.9 billion.
Looking to gain a better foothold in the mobile messaging market, Yahoo is launching Livetext, an app that makes video calling almost as private as texting. Users will be able to hold video chats in which text messages/emojis appear on the screen, but no audio is present. The app will be released today for Apple and Android devices.
After recently passing hedge funds in terms of total assets, ETFs are setting fresh sales record. In the past 12 months investors traded $18.2 trillion worth of ETF shares, a 17% increase from the 12 months prior and more than triple what it was 10 years ago. For perspective: The amount of dollars exchanging hands through ETFs is now more than the U.S. GDP, which stands at $17.4 trillion.
Meanwhile, the Export-Import Bank will stay shuttered for the rest of the summer after the House passed a highway funding bill that excluded a measure to save the lender. As a result, several corporations – the latest Boeing – are considering moving work overseas given the federal credit agency’s uncertain future. Ex-Im provided $27.4 billion in financing for U.S. exports in fiscal year 2014.
The Senate today passed legislation funding the nation’s highways, bridges, and roads for another three months – one day before construction across the U.S. would have come screeching to a halt. It is the 34th short-term patch passed by Congress since 2009. Remember the government shutdown of 2013; it didn’t last long, but it was a mess; it actually cost more to shut the government down than to keep it running. After that fiasco, lawmakers agreed to lift spending curbs for 2 years. That agreement expires October 1, when Congress will again be subject to the caps known as sequester. That may sound like plenty of time to fix the problem but remember, we’re talking about Congress; summer recess just started; they won’t even be back in Washington for a few weeks, and then they’ll take another break for Labor Day. So, they will try to pass a stop-gap spending resolution to buy more time in September. Still, you can’t rule out a partial government shutdown, again.