…..3Q GDP strong. Home sales improve. Confidence high. Cyber sales sizzle. Oil prices bet against OPEC. You can’t have Brexit cake and eat it. Allstate-Squaretrade. Zika in Texas. McFly sneakers. Lake Mead is shrinking and a cross-border water-sharing pact might dry up and blow away.
Financial Review by Sinclair Noe for 11-29-2016
DOW + 23 = 19,121
SPX + 2 = 2204
NAS + 11 = 5379
RUT – 1 = 1328
10 Y – .02 = 2.30%
OIL – 1.82 = 45.26
GOLD – 5.40 = 1189.40
The Nasdaq Composite hit a new intraday high at 5403, but the major indices could not close at new highs.
The economy grew at the fastest pace in over two years in the third quarter. Gross domestic product expanded at a 3.2% annual rate, up from an earlier reading of 2.9%. Consumer spending rose 2.8% in the quarter, stronger than the original estimate of 2.1% and the strongest pace since 2002. Another big contribution to the economy was business investment in structures like offices and factories, which expanded at a 10.1% pace, faster than the initial estimate of a 5.4% clip. Corporate profits soared 6.6% in the third quarter, a much better performance than the 0.6% decline in the second. And after-tax profits were up 7.6% from the second quarter. Exports were marked up slightly, to a 10.1% gain from 10.0%, largely thanks to a surge in soybean exports.
Gross domestic income was up 5.2% in the third quarter. That was the fastest pace of increase in gross domestic income since the second quarter of 2014 and followed a 0.7 percent rate of increase in the second quarter. The average of GDP and GDI, which economists consider to be a more accurate measure of current economic growth and a better predictor of future output, increased at a 4.2 percent rate in the third quarter, the fastest pace in two years. A measure of core inflation, which excludes volatile categories like food and energy, rose 1.7% during the quarter, unrevised from the initial reading. That’s inching closer to the Federal Reserve’s 2% target. The Atlanta Fed is currently forecasting GDP rising at a 3.6 percent rate in the fourth quarter. Tomorrow, the Federal Reserve publishes the Beige Book, to help prepare for the next FOMC policy meeting in two weeks.
National home price appreciation stayed strong in September. The S&P/Case-Shiller 20-City index was up 0.1% in the three months ending in September, and was 5.1% higher than a year ago. Case-Shiller’s national index rose 5.5% compared to a year ago, and passing the peak high of 2006. There are fewer homeowners enjoying those higher prices; the homeownership rate has dropped from 69.2% in 2004 to just 63.5% today. And only 7 major markets have recovered from the downturn – Phoenix home prices are still below the peak. In Phoenix, existing home prices were up 0.3% in September, and up 5.3% in the 12 months through September.
A separate report from the Conference Board showed its consumer sentiment index surged in November, climbing back to pre-recession levels. Consumers were upbeat about the labor market and current business conditions. The upbeat attitude is extending to holiday sales. U.S. online sales gained momentum on Cyber Monday and hit a single day record of $3.45 billion, according to Adobe Digital Insights.
Oil prices fell 3.8% on signs leading oil exporters were struggling to reach a deal to cut production to reduce global oversupply. OPEC will meet in Vienna tomorrow, aiming to implement a deal outlined in September to cut output by around 1 million barrels per day. Non-OPEC producer Russia confirmed it would not attend the OPEC gathering. There remains disagreement among OPEC members over which producers should cut by how much.
UK Prime Minister Theresa May has always insisted that Brexit means Brexit, without adding much in the way of detail. A photograph of scribbled notes in the arms of a Conservative Party aide entering Downing Street yesterday reveals something of the plan, showing the UK aim is to “have your cake and eat it.” In testimony to European Parliament lawmakers, ECB President Mario Draghi took a different view, warning that Britain’s economy would be the first to suffer from a so-called ‘hard Brexit.’
Allstate has agreed to acquire privately held Squaretrade, which sells warranties for electronic products, for about $1.4 billion from a group of shareholders that includes Bain Capital.
AT&T took the wraps off its new DirecTV Now streaming service on Monday, making a foray into the new and crowded online video service market. The company said it will offer three new streaming plans – DirecTV Now, Freeview and Fullscreen – starting Nov 30. DirecTV Now pricing bundles will range from over 60 channels for $35/month to over 120 channels for $70/month.
Texas has reported its first home-grown case of Zika virus – making it the second US state with mosquitoes spreading the disease. It’s a long-feared development but not a surprising one. Like Florida, South Texas is home to the mosquitoes that spread Zika and also hosts many travelers to and from countries where the virus has been spreading.
Intel confirmed it will supply chips for self-driving car systems designed by Delphi Automotive and the Israeli company Mobileye. Those two companies announced in August plans to sell automakers a system by 2019 that can give less expensive cars and trucks the intelligence to drive themselves.
Shoppers can finally buy Nike’s self-lacing, “Back to the Future Part II”-inspired sneakers. Nike says the sneakers are the “first step into the future of adaptive performance”; that means the hi-top sneaker can sense how snugly it should be laced, without the wearer having to tighten and loosen it manually. The HyperAdapt 1.0 shoes will retail at $720, which will put a squeeze on your pocketbook.
If you make the drive from Phoenix to Las Vegas, you cross the Colorado River at Lake Mead, and you can easily see the effects of 16 years of drought on this vital source of water for about 40 million people in 7 US states and 2 Mexican states. The lake has a big bathtub ring, where the water once was; now, the water is at its lowest point since the lake was first filled in the 1930s. And that is raising the stakes for the US and Mexico to try to hammer out an extension of a 4-year-old agreement on how to share the water. That agreement expires at the end of 2017. Negotiators who have worked for years are pressing to finish a new pact. Water policy experts say that even before Trump’s election, the Obama administration had been pressing to tie up a new deal for the Colorado River and avoid any delays caused by the change in administrations.
The Colorado River provides the lifeblood of much of the American Southwest, feeding desert metropolises including Phoenix, San Diego and Las Vegas, and supplying farmers who grow 15 percent of the nation’s food. Farmers and cities in Arizona and Nevada could face their first cuts in water supplies a year from now, just as the existing agreement ends. Without a new agreement with Mexico, it is unclear whether or how those cuts could be shared across the border, raising the prospect of either deeper, swifter cuts to US states or a bitter cross-border dispute. Mexico holds significant leverage since its water is the most protected as a treaty obligation. It also has the right to take the US to international arbitration, and controls the delivery of Rio Grande water to American farmers in Texas. Under a 1944 treaty with Mexico, the U.S. must send 1.5 million acre-feet of water — nearly half a trillion gallons —across the border each year, an amount that’s roughly enough to supply 3 million homes. But the treaty’s provisions laying out rules on what happens during a drought are vague and undefined. Moreover, hydrologists now realize that the period in the early 20th century when the Colorado River’s water supply was divvied up was unusually wet. And as temperatures rise and climate change shrinks the winter snow pack that feeds the Colorado, the river is likely to carry even less water in the future.
Water levels behind the Hoover Dam at Lake Mead this year plummeted to the lowest level since the reservoir was built. Under existing law, Arizona and Nevada must start taking cuts when water levels reach 1,075 feet above sea level in late summer. The Bureau of Reclamation estimates a 50-50 chance that the lake will hit that level next year, triggering the first supply cuts for the U.S. — and potentially Mexico — in 2018. In fact, if the existing compacts and treaties had been strictly followed, the cuts would already have begun. But after years of battling each other in court and across the negotiating table, the U.S. and Mexican governments and the seven U.S. states in the Colorado River basin decided to stop fighting and start working together, ultimately staving off water delivery cuts for several years.
Arizona, Nevada and California have struck several deals to undertake and fund aggressive water conservation programs. The U.S. and Mexico struck a similar deal as part of the water sharing agreement signed in 2012 that is set to expire next year. Under that deal, called Minute 319, the states and the U.S. government are investing $21 million in water conservation programs in Mexico like lining canals to reduce leaks and improving water efficiency at farms. That deal also takes steps to restore the parched river delta south of the border, and allows Mexico to store some of its Colorado River water supplies in Lake Mead to make up for capacity that was lost in Mexico after a 2010 earthquake damaged its dams. That helped Mexico solve its shortage problem while bolstering water levels at the critical reservoir. But that history of collaboration may be tested if the negotiations drag on.