Financial Review

Turkey Melt

…Stocks slide into the end of earnings season. Turkey melts down. 2008 – lasting damage. Student loan defaults grow. Tesla not quite secure. Wells Fargo, again. Def Con’s Vegas weekend.

Financial Review by Sinclair Noe for 08-13-2018

DOW – 125 = 25,187
SPX – 11 = 2821
NAS – 19 = 7819
RUT – 11 = 1675
10 Y + .02 = 2.88%
OIL + .18 = 67.38
GOLD – 18.10 = 1194.10

The Dow and the S&P 500 index are now down for 4 consecutive trading sessions. Markets have almost worked through earnings reporting season, and prices made a good run at the previous highs from February but were unable to break out. The question is whether prices will make another run at the old highs. The S&P seems to have strong support right around 2800 – or 2803 to be more precise.


Blockbuster earnings growth has offset rising concern on Wall Street about Trump’s trade wars and crises in emerging markets, such as Turkey. Fat profits at S&P 500 companies are on track to spike by nearly 25% during the second quarter. That would tie the first quarter for the fastest growth since 2010, according to FactSet. Ten of the 11 S&P 500 sectors increased profits by double-digits during the second quarter, led by surging growth from energy companies thanks to vastly higher oil prices. The earnings results have been better than anticipated: 79% of S&P 500 companies have beaten Wall Street’s expectations. That would be the highest percentage since FactSet started tracking the stat in 2008, taking out the first quarter’s record. The success has been driven in part by the corporate tax cut, which lowered the rate from 35% to 21%. A big chunk of those tax savings have gone to the bottom line and to stock buybacks, which boost per-share earnings. Stock buybacks could exceed $1 trillion this year for the first time ever. Companies aren’t just raking in monster profits because they’re paying Uncle Sam less. Sales, often a better measure of overall health, are also jumping, as the economy grew at the fastest pace since 2014. S&P 500 revenue is on track to rise by nearly 10% in the second quarter, the most since 2011. Home Depot is the first of the big retailers announcing earnings this week when it reports tomorrow morning.


Emerging-market assets were under severe pressure as Turkey’s currency basically crashed. Turkey’s lira was trading at fresh all-time low against the U.S. dollar. Turkey’s central bank pledged to provide “all the liquidity the banks need.” It also said banks would be able to borrow currency deposits from the central bank at a one-month maturity and one-week maturities. Turkey’s reluctance to raise interest rates stood out. Turkish president Erdogan insisted that the Turkish economy was fundamentally sound and attacked Trump for imposing sanctions and doubling tariffs on Turkey’s steel and aluminum imports last week over the house arrest of an American pastor, Andrew Brunson, on disputed terrorism charges.


Erdogan insisted that his country would survive an economic siege, but his words failed to reassure financial markets alarmed at the possible collapse of the strategically-vital emerging market country. The Argentine peso hit a record low, the South African rand was at its weakest in two years, and there was also downward pressure on the Indian rupee and the Indonesian ringgit. Anxiety over a possible debt default resulted in a sharp rise in the cost of insuring Turkish bonds. Turkey has about $300 billion in dollar-denominated corporate debt. Currency speculators have started to assess the potential damage to Europe and to identify other emerging market countries that have also taken advantage of low global interest rates to accumulate foreign currency debts during the post-financial crisis period. Angela Merkel, Germany’s chancellor, voiced growing concern in European capitals that Turkey’s problems could spill over into the European Union, either through losses to Spanish and Italian banks exposed to bad loans or from a politically-unpopular rise in migration.


On Wall Street, financial stocks bore the brunt of Turkey contagion fears, with shares of Citigroup, Bank of America, Wells Fargo and JPMorgan Chase closing down between 0.8 percent and 2.2 percent. There isn’t really a big fear that Turkey could crash US markets. Turkey is not a big trade partner, even though it is a member of NATO – still, conflagrations start with a small spark.


The New York Fed’s survey of consumer expectations — based on a panel of 1,300 household heads across the United States — found declines in one-year expectations on earnings growth, household spending, stock prices and house prices.


America never made up the growth it lost in the 2008 global financial crisis and the recession it triggered. A decade later, U.S. households are still counting the cost. According to research from the Federal Reserve Bank of San Francisco, gross domestic product remains well below what its 2007 trend would have implied and it’s unlikely the economy will ever make up that lost ground. The hit will cost the average American $70,000 in lifetime income. They arrive at the lifetime income loss by taking per-capita GDP in 2007 and discounting at an annual 5 percent rate to calculate its present value.


Outstanding education debt in the U.S. has tripled over the last decade and now exceeds $1.5 trillion, posing a greater burden to Americans than auto or credit card debt. For many, the payments are proving unmanageable. By 2023, nearly 40 percent of borrowers are expected to default on their student loans. That’s when a person has not made a payment toward their education debt in roughly a year, triggering it being sent to a third-party collection agency. More than 1 million student loan borrowers each year go into default.


Tesla CEO Elon Musk said he met July 31 with Saudi Arabia’s sovereign wealth fund and they convinced him he could secure funding to take the electric car-maker private, but that he was still talking to the fund and other investors as he seeks to nail down financing. Saudi Arabia’s sovereign wealth fund, Public Investment Fund, has built a 5% stake in the electric-car maker and is looking to become a significant investor .., maybe.  Musk’s latest disclosure comes six days after he surprised investors by announcing on Twitter that he was considering taking Tesla private at a price of $420 per share and that funding was “secured.” Since then, no investors have stepped forward publicly as being involved with the plan, and Musk’s tweet is under investigation by the Securities and Exchange Commission.


Shares of Bayer dropped over 10% today following a California jury verdict on Friday that ordered its Monsanto subsidiary to pay $289 million in damages after a lawsuit alleged its Roundup weedkiller caused cancer.


Here’s more proof Wells Fargo still hasn’t cleaned up its culture: It is under investigation for misusing federal tax credits for low-income housing projects. Wells Fargo is being investigated by the Department of Justice for allegedly colluding with affordable housing developers nationwide to drive down the prices of low-income tax credits – potentially defrauding hundreds of millions of dollars from the federal program. Among the banks, Wells Fargo is the largest buyer of the tax credits. The San Francisco-based bank said last year that it had invested $9 billion into the program over the previous five years. Banks benefit by buying the tax credits through tax write-offs and credit under the Community Reinvestment Act. The Justice department is looking into whether Wells Fargo offered developers more favorable loan terms or would fund other deals in exchange for making low bids on the tax credits. Wells Fargo’s actions may have defrauded hundreds of millions of dollars from the federal tax program. And a number of the people who worked on these deals are still working at Wells Fargo.


Def Con is an annual conference for hackers, this year’s conference was held in Las Vegas over the weekend. The conference is a terrifying reminder that the technology that we rely on to maintain a somewhat functioning society is not as secure as we think. Here are a couple of examples: a consultant for a cybersecurity firm was able to hack into different body camera models that surveillance companies are marketing to U.S. law enforcement. The consultant/hacker was able to remotely download, alter, and then re-upload footage onto the cameras without leaving a trace. He also devised a way to livestream footage from the cameras, potentially allowing a criminal to track a cop’s location and predict upcoming law enforcement actions. He further found that he could infect some of the cameras with malware, which could then spread to other databases and systems in a police department when an officer syncs the device with a computer connected to the network.


This is the second year that Def Con organizers have filled a conference room with the same types of voting machines that will likely be deployed for the midterms so that hackers can try their hand at election tampering. Participants ultimately managed to upload their own software to the machines and manipulate the vote tallies. In addition, organizers had around 40 children between the ages of 6 and 17 attempt to infiltrate replicas of the election board websites for several swing states. The kids exploited vulnerabilities that allowed them to tamper with vote tabulations and change the names of candidates. An 11-year-old reportedly hacked into a mock-up of the Florida secretary of state’s website and changed the voting results within 10 minutes.

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