Financial Review

Waiting on the FOMC

Markets calm ahead of FOMC decision. Apple chopped.

Financial Review by Sinclair Noe for 04-26-2016

DOW + 13 = 17,990
SPX + 3 = 2091
NAS – 7 = 4888
10 Y + .03 = 1.93%
OIL + .45 = 44.49
GOLD + 5.40 = 1244.30
The Federal Open Market Committee started a two day meeting today. No change in policy is anticipated at the meeting. The credit markets are mixed, although the thirty year Treasury bond futures are down for seven days in a row. The U.S. dollar is lower and most other currencies are higher as traders believe the pace of Federal Reserve rate hikes is slowing. The lower dollar has provided a boost to oil prices, which have climbed in the face of bad news. The Federal Reserve will certainly be considering oil prices as a component of inflation. The Fed began pulling back on its efforts to stimulate growth back in May 2013, when then-Chairman Ben Bernanke said that the central bank would likely begin to reduce the bond-buying known as quantitative easing; clearly the thinking was that we were getting close to the Fed’s target of 2% inflation, but that didn’t happen. The Fed has missed its inflation target, badly. The Fed might be well advised to hold off on any rate increases until the target is hit or even surpassed.

 

The CME Group’s FedWatch Tool, indicates a 0% probability of a rate increase in April and a 23% probability of a rate increase in June. Of course, even if the Fed does not change rates, they can provide guidance, which would be enough to change the course of the dollar, and possibly even oil.

 

Right now, the Fed’s dot-plot charts show policymakers looking at rates rising to 3.5%, but the market has only priced in 1.75%, or half what the Fed is projecting. The Fed might come down a bit but the market needs to come up a bit. So, the question is whether the Fed will be hawkish or dovish, and I think a big issue to that point comes on Thursday, when we get a read on first quarter GDP, forecast to come in at just 0.7% growth rate. Something has got to give; either the markets push the Fed or the markets learn you can’t fight the Fed. So despite all the earnings news today, it felt like the calm before the storm.

 

The Standard & Poor’s/Case-Shiller 20-city home price index rose 5.4 percent in February, compared with a year earlier. That’s down slightly from January’s 5.7 percent rise. Prices are rising even as sales have leveled off in recent months. The number of homes for sale last month was 1.5 percent lower than a year earlier. That’s pushed buyers to act quickly, with homes on the market just 47 days in March. In Phoenix, home prices were up 0.3% from January to February, and up 6% in the past 12 months.

 

Orders for U.S. durable goods climbed 0.8% in March, pushed by increases in demand for military hardware. Orders for large commercial aircraft fell 5.7% in March even though Boeing reported 69 bookings compared to just two in February. Bookings for new cars and trucks dropped 3%. Excluding transportation, orders fell 0.2%. Key segments that posted gains included primary metals, up 0.8%, and machinery, which rose 0.5%. Still, the overall tone of the report was weak. Core orders, a proxy for business investment, were flat last month after a 2.7% drop in February.

 

The Conference Board’s consumer confidence index fell by about 2 points in April to 94.2, reversing the March gain.  The present situation sub-index improved, including a 1-point gain in the assessment of labor market conditions to the best reading of the cycle.  However, expectations deteriorated, unwinding the 4-point rise registered in March.  Over the last five months, the headline index has been steady; within a 4-point range, which might also indicate a steady consumer spending picture.

 

Today is a primary election day in 5 states: Maryland, Pennsylvania, Rhode Island, and Delaware. Trump and Clinton are the favorites. If you’re wondering what effect the election has on the markets, the answer is not much. The markets are also not particularly good at predicting the election. Any market speculation is just that – speculation, with a big dose of noise. Any insights in political outcomes could just as easily be found in other sources. And whatever the markets might seem to be saying is open to interpretation and our own bias. So when you hear political opinion overlaying market movement, take it with a grain of salt and hold onto your purse.

 

If this week’s earnings calendar feels more overwhelming than usual, that’s because it is. As many as 900 companies will report results this week, including 183 members of the S&P 500, according to Zacks Research. By Friday, a full 60% of the S&P 500 will have reported. Last week, 14 members of the Dow Jones Industrial Average reported.

 

After the closing bell, Apple reported that revenue for its second fiscal quarter, which ended in March, fell 13 percent to $50.6 billion as sales of iPhones dropped. Net income fell 22 percent to $10.5 billion, or $1.90 a share. The results fell short of Wall Street expectations. In last year’s second fiscal quarter, Apple reported net income of $13.6 billion, or $2.33 a share, on revenue of $58 billion.

 

The results snapped a 13 year streak of continuous quarterly growth. Apple has high hopes for some of its consumer-oriented services, such as Apple Music and iCloud, but those have yet to turn into big profit centers. The iPad tablet has had disappointing sales in recent years and the Apple Watch never really caught on. More than two-thirds of Apple’s revenue is made up of iPhone sales. So where the iPhone goes, so goes Apple. Apple dropped 8% in after-hours.

 

Twitter reported earnings of $595 million, missing estimates. Twitter posted a loss of $80 for the first quarter – half the first quarter loss from a year ago, but still, a loss. Twitter added 5 million net new users in the first quarter, bringing its global logged-in audience to 310 million, up 1.6% from the prior quarter; nothing to Tweet about. Shares dropped 10% in after-hours trade.

 

eBay earned $482 million, or 41 cents a share; revenue was up 4% to $1.1 billion. Top line and bottom line beat estimates. Shares rose 4% in late trading after ending the regular trading day up 1.1%.

 

Chipotle lost $26 million in the first quarter of 2016. It’s the first quarterly loss the company has ever reported since it went public in 2006. During the same quarter last year, Chipotle reported a net income of $122 million. Chipotle said its same-store sales were down nearly 30% from last year. After numerous customers around the country were sickened by multiple outbreaks of foodborne illnesses, Chipotle launched a series of promotions and overhauled its food prep system to win back diners. The campaigns haven’t been cheap.

 

Du Pont’s Q1 net profit rose to $1.2 billion from $1 billion a year earlier and adjusted EPS of $1.26 beat expectations, while the company increased its profit guidance as well. Q1 revenue dropped 5.5% to $7.4 billion but also topped consensus.
BP, the first of the major oil companies to report earnings this week, said on Tuesday that it had lost $583 million in the first quarter of 2016, compared with a $2.6 billion profit in the same period last year.

 

Standard & Poor’s stripped Exxon Mobil of its top credit rating. Nearly every oil and gas company has been downgraded recently; scores of mostly small ones have filed for bankruptcy protection. Exxon was cut to AA+, which is still very good. Only two American companies now have AAA ratings: Microsoft and Johnson & Johnson.

 

Volkswagen tops global auto sales. Volkswagen deliveries rose 0.8% to 2.5 million, pushing it ahead of Toyota for the top spot. Toyota deliveries fell 2.3% to 2.46 million during the January-to-March period, and that number is likely to slip a bit more in the current period as a result of the recent earthquakes in Japan. General Motors took the No. 3 spot. Auto makers reported the weakest rate of sales in March in 13 months, after setting records in February.

 

Mitsubishi Motors now admits that it improperly tested the fuel economy of its cars for 25 years, including falsifying data. Last week, Mitsubishi said it hadn’t been complying with Japanese testing standards since 2002. Japan’s sixth-largest automaker has lost half its market value – some $3.9 billion – since it admitted last week to manipulating test data for four domestic mini-vehicle models, including two it produced for Nissan.

 

There have been “a number of recent cyber incidents” involving Swift transfers. Reuters reports that Swift, the financial network used to transfer billions of dollars each day, has seen numerous “cyber incidents” in which attackers sent fraudulent messages over its system. The admission comes as authorities continue to investigate the $81 million that went missing from Bangladesh’s account at the New York Fed. Swift says users need to install its new security platform by May 12.

 

Alibaba affiliate Ant Financial Services has raised a whopping $4.5 billion at a reported valuation of $60 billion, making the deal the world’s largest private fundraising round for an Internet company. Ant operates Alipay, which is China’s biggest online-payments platform by transaction volume and which has 450 million annual active users. Ant was spun off before Alibaba’s record $25 billion New York IPO in September 2014. The companies still invest together and Alibaba uses Alipay.

 

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