Turnaround and Turmoil
…Rexit. Qualcomm-Broadcom toast. CPI mild. UK v. Russia. Tech slips. Home prices higher. VW goes electric.
Financial Review by Sinclair Noe for 03-13-2018
DOW – 171 = 25,007
SPX – 17 = 2765
NAS – 77 = 7511
RUT – 9 = 1592
10 Y – .02 = 2.85%
OIL – .51 = 60.85
GOLD + 3.30 = 1326.90
Three major stories today, not necessarily in chronological order: Secretary of State Rex Tillerson was fired; the Qualcomm-Broadcom deal is toast; and inflation is back but not a big problem.
Trump fired Secretary of State Rex Tillerson this morning in a tweet. Trump said he is nominating CIA director Mike Pompeo as Tillerson’s replacement, which requires confirmation by the Senate. Trump has tapped Gina Haspel to head the CIA. Haspel, the current deputy director, is a career agency employee who once ran a CIA ” black site” facility in Thailand where detainees were subjected to torture including waterboarding. Tillerson is the second Cabinet official to resign, following former Health and Human Services Secretary Tom Price, who was ousted over a travel expense scandal, but Tillerson joins a long line of people who have resigned or been fired from the administration. The departure of a secretary of state is also notable; no one has left that position during a first presidential term since Ronald Reagan was office. That wasn’t the only firing in the White House; Trump’s personal assistant, John McEntee, was fired last night and escorted out of the White House amid a Secret Service investigation into alleged financial crimes. McEntee was quickly hired by the Trump presidential campaign. And just a reminder, it was just 8 days ago that Economic Advisor Gary Cohn resigned. A White House official said the president wanted to have a new team in place in advance of upcoming talks with North Korea and ongoing trade negotiations. The White House initially said Tillerson had been told he would be dismissed on Friday, March 9. Within the hour, the State Department issued a statement insisting that Tillerson “had every intention of remaining” and “did not speak to the President this morning and is unaware of the reason” for the dismissal. Steve Goldstein was an aide to Tillerson who made that announcement – he has also been fired. Apparently Tillerson learned of the firing the same way as everyone else, when he read the tweet this morning.
The Dollar Index fell hard on the news of Tillerson’s departure, dropping to 89.23. A break below last week’s low of 88.91 could set up a retest of the February lows. Treasury prices moved higher with yields on the 10-year note dropping to 2.85%.
The House Intelligence Committee declared their investigation of Russian interference in our elections and their contacts with and collaboration with the Trump campaign over, done, solved. The Trump administration declared case closed. They might not want to get too far over their skis on this one because both the Senate and Bob Mueller are still investigating. Whether the House Intelligence Committee ultimately proves to be prescient or incompetent, we will know in the fullness of time. For now it can only be said they are premature.
Meanwhile, British Prime Minister Theresa May’s Cabinet met this morning to discuss how to strike back at Russia over the poisoning of a former spy on British soil. Yesterday, May announced that a Russian double agent and his daughter had been poisoned more than a week ago with a “military grade” nerve agent developed by Russia, and warned of retaliatory measures. Theresa May’s strong language on Monday, calling the attack an “unlawful use of force,” suggests that she may invoke NATO’s Article 4 clause. This is less dramatic than the Article 5 mutual defense clause, which was used after the September 11 attacks, but it allows for consultations between allies if one member feels their security is threatened. Secretary of State Tillerson’s firing came a day after Tillerson contradicted the White House about the recent poisoning of a British spy, saying it “clearly” came from Russia – he called it “egregious act” that would trigger an American response – though the White House itself stopped short of assigning blame, while vowing to stand by its “closest ally” the U.K. The crisis with Russia comes as Britain is finding itself cut off from traditional allies. It is withdrawing from the EU and, alongside other countries, could be on the brink of a trade war with the US should Trump push ahead with steel tariffs.
Trump took the highly unusual move of issuing an executive order to block a $117 billion acquisition of Qualcomm by rival chipmaker Broadcom, which is based in Singapore. The pair of chip manufacturers has been in M&A fight over the attempted acquisition for some time. The president cited national security concerns over the business deal. Trump acted on a recommendation by the Committee on Foreign Investment in the US, which reviews acquisitions of American firms by foreign investors. The decision was unveiled just hours after Broadcom CEO Hock Tan, met with officials at the Pentagon in a last-ditch effort to salvage what would have been the biggest technology deal in history. Broadcom didn’t have an agreement to buy San Diego-based Qualcomm. It was fighting to win support from Qualcomm shareholders to gain control of its rival’s board and move forward with its offer. Before waiting for an actual deal, CFIUS opened an investigation to review the risks to national security. Trump’s order came as Broadcom was in the process of moving its headquarters from Singapore to the US. Qualcomm’s shares fell as much as 5.9 percent, weighing down the Nasdaq 100 Index.
The tech sector has been on a great run lately. The S&P is up 3 percent, but technology is up more than three times as much, 10 percent this quarter. It’s not just semiconductors, which as a group are up 14 percent. Anything associated with social media, cloud computing or cyber security has also risen in the mid-teens in the last several weeks. Technology is now roughly 26 percent of the market capitalization of the S&P 500. That has attracted enormous amounts of short-term momentum money that will be quick to pile in but also quick to pile out, particularly around the end of a quarter.
Consumer prices continued to firm in February, indicating inflation is creeping up toward the Federal Reserve’s target without the kind of breakout that would warrant a faster pace of interest-rate hikes. Both the main consumer price index and the core gauge, which excludes food and energy, rose 0.2 percent from January. The CPI was up 2.2 percent in the 12 months through February, compared with 2.1 percent in January, while the core index increased 1.8 percent from a year earlier for a third month. The data indicate inflation is gradually picking up without any big acceleration. That’s in line with policy makers’ outlook for price gains steadily approaching their goal and officials’ projection for three quarter-point interest-rate hikes this year, including one anticipated at the Fed’s meeting next week.
CoreLogic reports home prices nationwide, including distressed sales, increased year over year by 6.6 percent in January 2018 compared with January 2017 and increased month over month by 0.5 percent in January 2018 compared with December. Entry-level homes have been in tight supply, leading to 9% price growth compared to 5.4% price growth for more expensive homes. In Arizona, home prices increased 6.4% over the past 12 months, and 0.5% from December to January. CoreLogic says that out of 50 major metropolitan areas, one-half are overvalued, including the Phoenix market.
Volkswagen has secured $25 billion in battery supplies to underpin an aggressive push into electric cars in the coming years. VW will equip 16 factories to produce electric vehicles by the end of 2022, compared with three currently to supply batteries in Europe and China. With the powerpack deliveries secured for its two biggest markets, a deal for North America will follow shortly. Volkswagen’s battery plans compare to Tesla’s $17.5 billion worth of purchase obligations as of last year, including $15 billion in deals through 2022. Even with the battery-purchase deals, Volkswagen’s power-supply issues are still far from over. The company, which has struggled to secure sources of cobalt, a critical component for modern batteries.
Toys “R” Us has missed payments to some suppliers in recent days as its US division heads toward a likely liquidation. The payments apparently stopped without explanation. Toys “R” Us filed for bankruptcy in September and faces a $5 billion debt load. Toymakers Mattel and Hasbro touched their daily lows on the news. Toys “R” Us also recently stopped negotiating settlements with vendors on money owned before it filed for bankruptcy.
Tomorrow is Walkout Wednesday. Students from about 3,000 schools across the country are expected to leave classes at 10am for 17 minutes, in honor of the 17 people killed one month earlier at a school in Parkland, Florida.