Financial Review


…Stocks drop again. FAANG stocks are all bearish. US-China-G20 = low expectations. NAFTA no done yet. Iran defies sanctions. Homebuilder confidence drops. Nissan Chairman Ghosn gone. Lessons from HQ2. The word.

Financial Review by Sinclair Noe for 11-19-2018

DOW – 395 = 25,017
SPX – 45 = 2690
NAS – 219 = 7028
RUT – 30 = 1496
10 Y – .02 = 3.06
OIL + .71 = 57.17
GOLD + 2.80 = 1224.90


The Dow dropped 1.5%; the S&P 500 dropped 1.6%, and the Nasdaq Composite dropped 3%. Trading has turned rocky since the S&P 500 finished the third quarter with its biggest gain since 2013. The broad index is down 6.1 percent since the end of September. Support is back around 2640 and again at 2603.  Apple cut production orders for all three iPhones it launched in September in response to lower-than-expected demand. Facebook, Apple, Amazon, Alphabet, and Netflix have fallen steadily over the last 6 weeks, each losing 20% or more from recent highs. Wall Street defines a bear market as a fall of 20 percent or more. Facebook in particular has been hard hit during this round of selling, falling to a new low for the year after a raft of negative publicity surrounding its handling of foreign influence on the 2016 election. Both Facebook and Netflix have lost more than 30% from recent highs. Collectively, the five stocks have lost nearly $1 trillion in value since hitting their respective 52-week highs.


Nine years into the U.S. stock rally, investors are grappling with two forces. Many feel the best days of this economic cycle are past, especially with windfalls from 2017’s tax overhaul set to fade. Though few economists foresee a recession soon, analysts and portfolio managers say the fall pullback offers a reminder of the ever-present risk that markets will fall sharply as rising interest rates and slowing growth hit corporate profits. Since Apple’s share price peaked at a bit more than $232 on Oct. 3, the stock has plummeted by nearly 20 percent, lopping more than $200 billion off the company’s market value.


Third quarter earnings were outstanding both on earnings and revenue growth, the percentage of companies beating expectations, and the magnitude of those beats. The pairing of rosy earnings announcements and stock market declines can be explained by several big name companies issuing cautious guidance going into the fourth quarter. The market knows that earnings growth has peaked.


The biggest economic event for the rest of this year (and perhaps next) takes place on Nov. 30 and Dec. 1 when Trump is scheduled to sit down for a pair of meetings with Chinese Premier Xi Jinping with the threat of a spiraling trade war with China hanging over a U.S. economy that may already be running a bit short on momentum heading into next year. Do NOT expect a formal and final deal to come out of the G20 meeting in Buenos Aires.


And while everyone is waiting for a deal with China, don’t forget USMCA, also known as NAFTA 2.0. Trump needs Democrats to complete the deal Democrats say they want to see stronger protections against pollution and climate change, improved labor standards in Mexico and certainty that the U.S. will regain jobs lost to Mexico. And they want assurances the deal can be enforced. … Meanwhile, a group of 40 Republicans is protesting new protections for LGBT workers that Canada insisted on, potentially imperiling some GOP support. If he’s blocked in Congress, Trump will be facing a major setback on an issue where he’s already been claiming credit for delivering on a campaign promise. He’ll be left with the unattractive choices of leaving NAFTA in place, heading back to the negotiating table, or pulling out of the deal entirely.


Iran will continue to export oil despite U.S. sanctions, which are part of a psychological war doomed to failure, Iranian President Hassan Rouhani. By reimposing sanctions on OPEC’s third biggest crude producer, Washington wants to force Tehran to drop its ballistic missile programs, further curb its nuclear work and limit its support for proxy militias from Syria to Lebanon and Yemen. Rouhani said Washington lacked the necessary international support for its sanctions, and noted that it had granted temporary waivers to eight major buyers of Iranian oil. The European Union, France, Germany, Britain, Russia and China, participants with the United States in the 2015 deal that lifted sanctions on Iran in exchange for curbs on its nuclear program, have been trying to find ways to circumvent the U.S. limitations. In particular, the EU has been trying to establish a Special Purpose Vehicle (SPV) for non-dollar trade with Iran. The SPV was conceived as a clearing house that could be used to help match Iranian oil and gas exports against purchases of EU goods, circumventing the U.S. sanctions, which are based on the global use of the dollar for oil trade. The EU wanted to have the SPV set up by this month, but no country has offered to host it.


The National Association of Home Builders’ monthly confidence index plunged eight points to 60 in November. NAHB, the building industry’s Washington lobby, noted in a press release that the reading of 60 is still “positive,” but that “customers are taking a pause.” The eight-point plunge is only reminiscent of the nine-point drop just after the 9/11 attacks and one other instance, a 10-point drop, in early 2014. The overall reading is the lowest since mid-2016. Labor is still expensive, lots are still scarce, lumber is at the mercy of tariff politics, and now, mortgage rates are rising and customers are holding back. In November, the sub-gauge of current conditions fell seven points to 67, the tracker of expected future conditions plunged 10 points to 65, and the gauge of buyer traffic was down eight points, to 45. Any reading over 50 signals improvement. While the pace of housing market activity has decelerated, there are no signs of threatening excesses such as inventory overhangs and a surge in delinquencies. All the headwinds that builders have been complaining about may already be baked into big-company stocks. Shares of D.R.Horton -0.03%   are down 32% in the year to date, while KB Home +2.53%   shares have lost 41% in that time.


Nissan chairman Carlos Ghosn was arrested in Japan on suspicion of under-reporting $44.6 million in pay. Also arrested was Greg Kelly, a representative director at Nissan, on suspicion of conspiracy with Ghosn. The company said it began investigating months ago, acting on a tip from a whistleblower. Even as authorities in Japan arrested the pair of executives, Nissan moved to fire Ghosn.


After a yearlong and very public deliberation over the location of its second headquarters, Amazon this week disappointed some policymakers when it announced that it would split HQ2 into two locations, one in New York City and the other in the Washington, D.C., metro area. In choosing New York and D.C., Amazon opted for two cities that have led the economic expansion since the end of the last recession in 2009, far outpacing the rest of the nation in job growth. But what’s the economic future for a Hartford or Akron or Tulsa or the countless smaller towns and rural areas that didn’t get so much as a serious look from Amazon? We’re living in a world where a small number of superstar companies choose to locate in a handful of superstar cities where they have the best chance of recruiting superstar employees.


A new research paper from the Brooking Institute examines how policy contributes to regional divides and how it could help reduce them. They argue for heavy investment in digital skills, even in areas without a large existing high-tech sector. They seek new channels to ensure that businesses in struggling areas have access to capital, including small-business lending from banks and venture capital for start-ups. Parts of rural America lack fast broadband internet, a big disadvantage that the authors want to see addressed. They urge heavy federal investment in 10 or so “growth pole” midsize cities that are close to struggling smaller towns and can serve as economic drivers. And finally, they suggest more federal support for people who want to move to greater economic opportunity — a countermeasure for one of the more surprising trends of the last generation, a decline in Americans’ mobility in pursuit of better jobs.


Each year the Oxford English Dictionary identifies a “Word of the Year”. These are words that aren’t necessarily new, but have picked up steam over the course of the year and are trending in both search activity on the Oxford site, as well as on social media and the internet at large. Oxford’s process of adding new words is based on a huge database that scrolls the internet and pulls what people are saying. In this way, the word of the year reflects the general mood of the nation. The word of 2018 is “toxic”, which had a 45% search increase this year. Arguably, this is a far more fascinating word than 2017’s winner “youthquake,” chiefly because “toxic” reflects how single words can expand and change in meaning over time. And also because I still don’t know what a youthquake is. According to Oxford’s research, we’re using “toxic” to describe everything from chemicals and gas to masculinity and relationships. We’ve embraced the word as a kind of blanket descriptor for anything deeply but often invisibly harmful.


OED’s shortlist of finalists for top words of the year include words that have meanings ranging from semi-dark, like “orbiting”, to downright distressing, like “gaslighting” and “incel.” 2018 hasn’t been the merriest year for us as a society, as these words reveal, but they show that at least we’re not ignoring or hiding from the challenges. We’ve brought them into the light of conversation.

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