Financial Review

Unintended Consequences

…Stocks flat. Earnings still strong. Facebook again. Trump threatens max tariffs on China. China responds. Trump hits Fed again – bad idea. Playmate payoff tape. Google works on Fuschia.

Financial Review by Sinclair Noe for 07-20-2018

DOW – 6 = 25,058
SPX – 2 = 2801
NAS – 5 = 7820
RUT – 4 = 1696
10 Y + .05 = 2.90%
OIL + .85 = 70.31
GOLD + 9.20 = 1232.50

For the week, the S&P 500 and Nasdaq closed slightly lower while the Dow rose 0.1 percent to post its first three-week winning streak since January. As the second-quarter reporting period gains momentum, analysts forecast for profit at S&P 500 companies have risen to 22 percent, compared with the 20.7 percent gain seen on July 1, according to Thomson Reuters I/B/E/S. Of the 87 S&P 500 companies that have reported so far, 83.9 percent have topped profit expectations, compared with a 75 percent beat rate over the past four quarters.


After the closing bell Thursday, Microsoft posted better-than-expected fiscal fourth-quarter earnings on the surging strength of its cloud computing business. Today, Microsoft gained 1.8%


General Electric reported an adjusted profit and revenue that fell from a year ago but beat analyst expectations, with even its biggest but most troublesome power business topping revenue forecasts. GE shares gained a little over 2.5%. And then CEO John Flannery said the company was working “intensely” to fix the issues in the power business, with “a total sense of urgency.” He followed that by saying, “It’s going to be a multiyear fix, with some volatility.” And he said the current outlook for earnings per share “is at the low end” of the previously provided guidance range of $1.00 to $1.07. GE share dropped 4.4%.


Honeywell delivered another solid earnings beat, reporting an 8% sales jump.  Honeywell also raised guidance on full-year earnings. Shares were up 3.8%, one of the best trading sessions for Honeywell in 2 years, and one of the better earnings reports for a pure-play industrial stock since the threat of a trade war with China emerged.


V.F. Corp, as the parent company of clothing brands like Wrangler and North Face beat on earnings and raised its full year forecast.


Private equity firm Apollo Global Management is in advanced talks to acquire LifePoint Health, in its latest bid to consolidate the rural U.S. hospital sector. The deal could value LifePoint at close to $6 billion, including debt. LifePoint shares jumped 40%.


Facebook said it has temporarily suspended a data analytics firm, Crimson Hexagon, while it looks into whether it violated data-sharing policies. Facebook was responding to an inquiry from the Wall Street Journal, which reported that Crimson Hexagon had deals to analyze Facebook data for clients including several U.S. governmental agencies and a Russian organization with Kremlin ties. Boston-based Crimson Hexagon claims it maintains a database of over 1 trillion social-media posts, including from Facebook, Instagram, Twitter, Reddit and other discussion forums, blogs, and other sources. That means you are probably in their database, even though you never knowingly gave them permission to collect data on you. The situation with Crimson Hexagon comes after revelations that info on up to 87 million Facebook users may have been improperly sold via a third-party researcher with Cambridge Analytica, a firm that worked for Trump’s 2016 campaign to target Facebook users.


Trump said he was ready to impose levies on $500 billion worth of goods from China; basically tariffs on everything China exports to the US. So far, the U.S. has slapped tariffs on just $34 billion of Chinese products, which China met with retaliatory duties. China only imports $130 billion worth of US goods, so there’s no way it can match the latest tariff threat. That doesn’t mean it can’t retaliate, though. China holds about $1 trillion of US Treasury bonds. If the Chinese government gets pushed too far, it could decide to sell off its holdings or stop buying new US bonds. China can make life miserable for US companies doing business in China. China could try to out-trade the US with the rest of the world. Imagine if China decided to be part of the Trans Pacific Partnership, opening tariff-free trade with the 11 participating nations. Or, China could devalue the yuan, which could act as an offset against tariffs – which they did just hours after Trump made his announcement. The People’s Bank of China set the dollar’s reference rate at 6.7671 yuan, steering the currency 0.9 percent lower and weakening it the most in two years.


On Thursday, Trump threatened “tremendous retribution” against the European Union and stood by a pledge to levy tariffs on automobile imports. The Wall Street Journal reported that Republican Sen. Orrin Hatch sent a letter to the White House this week warning Trump against a continued pursuit of import tariffs. If the tariffs are put in place, the price of a new car could jump by between $1,400 and $7,000 for top-selling models, according to the Peterson Institute for International Economics. All the cars in the US market have some foreign components and the average cost of all cars would rise because of that, whether they are imported or made in the US. For instance, compact cars, such as the Chevy Cruz, Nissan Sentra or Honda Civic, average 51 percent foreign content. The $16,381 base price of a Chevy Cruz could jump by $2,140 if 100 percent of the tariffs were passed through to consumers. A Sentra could jump by $3,075 to about $19,300, based on the fact it has an 80 percent foreign content. The biggest cost increases would be on some of the luxury models, which have the most foreign parts or are made abroad. Trump says stock market gains since election give him opportunity to wage a trade war: “We’re playing with the bank’s money”.


Trump attacked the Federal Reserve again today, tweeting, “The United States should not be penalized because we are doing so well. Tightening now hurts all that we have done.” Apparently, Wharton does not teach the concept of inflation. At this point it is likely Fed chair Powell will raise rates 2 more times this year, if for no other reason than to affirm the Fed’s independence. Now, there’s a reason presidents aren’t supposed to talk about monetary policy, and that’s the 1972 election. Back then, as we now know from his tapes, President Richard M. Nixon was able to pressure then-Fed Chair Arthur Burns into cutting rates when he really shouldn’t have in the run-up to his reelection. The result was not only faster growth that helped Nixon secure a second term but also what would eventually be much higher inflation that would take more than a decade to wring out of the economy. And it’s something we still have to worry about today. That’s because lower rates are always good for a president’s short-term prospects but aren’t always for the economy’s long-term ones. The only way to solve this problem, then, is to avoid it by keeping politicians out of monetary policy to begin with.


There is also the example of the 1992 election. Instead of going along with the George H.W. Bush administration’s public and private demands for lower rates, the Alan Greenspan Fed stood firm. Probably too firm. The Fed did not cut rates aggressively enough to keep the unemployment rate from still going up even a year after the 1990-91 recession officially ended. Which, as Bush ruefully pointed out a few years later, is what cost him the election. The lesson was that trying to push the Fed to do something might make them less likely to do it, since looking as if they could be bullied would damage their credibility so much that it’d be harder for them to do their job.


The Department of Justice investigation into former Trump attorney Michael Cohen now includes a secret recording of Trump discussing a payoff to a former Playboy model, Karen McDougal, who says she had an affair with Trump in 2006 and 2007. Cohen had secretly recorded the conversation — which took place two months before the presidential election — and the tape was seized in a raid of Cohen’s office earlier this year. And it is believed there are more tapes.


A group of engineers within Google has been working on software that they hope will eventually replace Android, the world’s dominant mobile operating system. The project, known as Fuchsia, was created from scratch to overcome the limitations of Android as more personal devices and other gadgets come online. It’s being designed to better accommodate voice interactions and frequent security updates and to look the same across a range of devices, from laptops to tiny internet-connected sensors. Don’t look for immediate changes because Android supports dozens of hardware partners, thousands of developers, and billions of dollars of mobile-advertising. Still, Fuchsia is more than a basement skunkworks effort. Fuchsia now has more than 100 people working on it. The initiative is focused on better competing with Google’s chief smartphone rival, Apple. While Android’s roughly 85 percent market share crushes Apple’s 15 percent, the Apple operating system has a leg up in areas like performance, privacy and security, and integration across Apple devices. Another key advantage: Most iPhone users quickly update their phones when Apple releases a new version of the operating system, while less than 10 percent of Android users do. This means Google’s latest services only reach a fraction of Android users.


Google relies on phone makers and wireless network operators to push regular operating system and security updates to Android devices. These partners don’t have as much incentive as Google to distribute the latest software, they would rather sell new hardware. Switching away from Android could provide Google the opportunity to hit the reset button on any mistakes they believe they made a decade ago, as well as pushing new updates faster.

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