Up and Down the Chain
…..Russell rebalance day. Trumpcare loses another senator. New home sales rebound. Amazon continues to crush. Brexit birthday. Fedspeak. SpaceX doubleheader. Remembering Blackberry. Gmail gets less creepy.
Financial Review by Sinclair Noe for 06-23-2017
DOW – 2 = 21,394
SPX + 3 = 2438
NAS + 28 = 6265
RUT + 10 = 1414
10 Y – .01 = 2.14%
OIL + .43 = 43.17
GOLD + 6.60 = 1257.60
Energy stocks led the S&P 500 higher, posting its only positive session of the week. Overall, U.S. stocks closed little changed for the week, with the Dow and S&P posting small gains in the period. The Nasdaq posted a 1.8% gain for the week. Health care stocks pulled back about 0.1 percent today, but the sector still notched a weekly gain of 3.7 percent to outperform the other spaces.
Today is a Russell Rebalancing Day. That is the annual reconstitution of the Russell Indexes, where the index provider makes rule-based changes to composition of its indexes, to ensure that changes in market value or investment styles, like shares of companies deemed value or growth, for example, are properly accounted. Total market capitalization for Russell components increased more than 10% to around $27 trillion since last year. Rebalancing day typically results in a little extra trading volume but not much effect on price action for the overall market.
Yesterday, the Senate unveiled its version of Trumpcare, or the Better Care Reconciliation Act. Four GOP senators announced they would not support the bill. Rand Paul, Ted Cruz, Mike Lee, and Ron Johnson said the legislation did not go far enough in its repeal of Obamacare. Today, Nevada Senator Dean Heller said he would not support the legislation. Heller is up for reelection in 2018 in a state won by Hillary Clinton in last year’s presidential election. Nevada also expanded the Medicaid program under the Affordable Care Act, or Obamacare, and the Senate bill would phase out that expansion starting in 2020. Heller said he can’t support a bill “that takes insurance away from tens of millions of Americans and hundreds of thousands of Nevadans.” Several other senators are leaning toward opposition, including Portman of Ohio, Murkowski of Alaska, and Collins from Maine. Look for lots of deal making and arm twisting.
Sales of newly-constructed homes rebounded in May, and government data was revised to show a stronger spring selling season than had been previously reported. New-home sales ran at a seasonally adjusted annual rate of 610,000. That was 2.9% higher than in April and 8.9% higher than a year ago. So far in 2017, 271,000 new homes have been sold, which is 12% higher than during the same period last year. The median sales price in May was $345,800, up from $310,200 in April and $296,000 in May 2016. At the current pace of sales, it would take 4.6 months to exhaust available supply.
About a week ago, Amazon it would acquire Whole Foods, then followed that with news it will start selling Nike products directly online. Once again, Amazon is shaking up the retail universe. Amazon stock has been on a nice run the past week, adding $18 billion in market capitalization. In contrast, $31 billion in competitor market cap has been wiped out in the same period. Walmart and Costco have been hit the hardest, both losing more than $8 billion in value since the Whole Foods deal was announced on June 16. Whole Foods stock has been trading above Amazon’s offer of $42 a share, however, signaling that investors believe a bidding war could emerge and drive up the final price for Whole Foods.
Competitors like Target, Costco, and Kroger have been rumored as potential suitors, and they would do anything to make this deal harder for Amazon. Walmart is probably the only retailer that can truly compete with Amazon, but today they said they will not bid. At the same time, Morgan Stanley said in a research note that the retail drug space could experience a wave of M&A action as companies try to outflank Amazon. Basically, any link in the supply chain is now subject to the influence of Amazon. Meanwhile, outdoor gear retailer Eddie Bauer has hired investment banks to explore strategic alternatives, including a potential sale of the company. Also today, Sears Holdings is closing an additional 20 money-losing stores. The move includes 18 Sears stores and two Kmart stores. Sears is hardly the only retailer shuttering locations. There have been about 5,300 store closing announcements so far this year, according to Fung Global Retail & Technology, a retail think tank.
Meanwhile, Amazon has filed for a patent for beehive-like towers that would serve as multi-level fulfillment centers for its delivery drones to take off and land. The facilities would be built vertically to blend in with high rises in urban areas. Amazon envisions each city would have one. The patent application features several drawings of these buildings, such as the beehive, a cylinder-shaped center and one that looks like a UFO.
The Brexit vote happened one year ago. Britain’s stock market, the FTSE 100, has gained nearly 17% since the UK’s June 23, 2016, vote to leave the European Union. The divorce talks between Brussels and Britain finally kicked off this week, but the outcome of the final agreement remains extremely uncertain. The government will be working against the clock to hammer out a deal before the deadline of March 29, 2019, two years after UK Prime Minister Theresa May triggered the so-called Article 50 that officially set off the Brexit process. Little progress has been made in the three months since the Brexit clock started ticking. The UK is in a weak negotiating position. And nobody is really sure what Brexit means or what it will ultimately look like.
Qatar has 10 days to meet 13 demands from the Gulf states. Qatar is being ordered to reduce diplomatic ties with Iran, sever ties with terrorist organizations, and shut down Al Jazeera and affiliated networks, among other things, before the Gulf states will lift their blockade on the country.
Another day of Fedspeak. Cleveland Federal Reserve Bank President Loretta Mester said that recent inflation weakness was likely temporary and it should not delay another interest-rate hike this year, even though there is no “immediate need” to tighten policy. Mester is considered one of the more hawkish policymakers. St. Louis Fed president James Bullard says the Fed can afford to stop raising short-term interest rates and wait and see how economic developments and Washington policy debates play out in coming quarters. Bullard says optimism about the economy has faded since March with economic data surprising to the downside. Bullard is considered one of the more dovish policymakers, calling for rates to remain flat through 2019.
By raising interest rates for the second time this year, Federal Reserve officials doubled down on their long-held belief that inflation will level out at their 2% target, even though the numbers hint at another story. The Fed has been singing the same tune on inflation for nearly the entirety of this decade, and one could be forgiven for wondering how much inflation is really playing into the Fed’s decision-making process at this point. Yellen and friends made the move to lift rates to between 1% and 1.25% even though most inflation readings have drifted away from its long-run target of 2% in recent months. Instead, it seems that a marginally improved labor market, and a desire for more wiggle room to cut rates for a slowdown that is becoming increasingly mathematically inevitable, are motivating the push to tighten policy. That includes the Fed’s outline for reducing its balance sheet, the manner of which but not the timing, was unveiled alongside the rate hike.
Treasury yields have fallen from their 2017 highs recently, with the benchmark 10-year yield trading around 2.15 percent. In March, it traded around 2.6 percent. The bond market doesn’t see inflation coming in the near term, and so far it’s been right. Adding to the deflationary ledger – oil prices dropped about 4% this week.
Today, SpaceX successfully fired up a Falcon 9 rocket for the eighth time this year, matching its flight total for all of last year. Its next launch is scheduled just two days later, with the ramped-up cadence putting the company on track to achieve the 20 to 24 total missions it’s targeting for the year. The launch used a “flight proven” Falcon 9 rocket booster, which means it’s flown to space previously and been returned and refurbished. The rocket carried a Bulgarian communications satellite destined for geostationary orbit. It launched from the historic 39A pad at NASA Kennedy Space Center in Florida, where Neil Armstrong left from before landing on the moon in 1969. On Sunday, SpaceX will launch 10 satellites for Iridium Communications from Vandenberg Air Force Base on California’s central coast.
Remember Blackberry? Once upon a time, about 8 to 10 years ago, Blackberry was the mobile phone of choice. The company reported earnings of $0.02 per share, compared to an estimated zero, but revenue fell to $235 million from $400 million from the year before. The company outsourced the manufacturing of Blackberry hardware in late 2016 in order to focus on software and services. Shares were up about 50% this year, until today – down 12%.
If you use Google’s Gmail, you may have noticed a that anything in your emails is likely to pop up as an ad. It’s not just a coincidence. Gmail scans and analyzes emails – or at least they did. They will stop the practice, due to privacy concerns and the general creepiness. But this doesn’t mean you won’t see targeted ads in Gmail. Instead, they’ll be personalized with information gleaned from other sources. For example, Google collects data about you based on the YouTube videos you watch or the searches you make.