Financial Review

Weird Wednesday

…More wild swings, Dow nosedives into the close. Senate has a 2-year budget deal, the House is next. Conventional wisdom and the market crash. Oil dips on production boom. SpaceX launch, Tesla loss. Consumer borrowing surge.

Financial Review by Sinclair Noe for 02-07-2018


DOW – 19 = 24,893
SPX – 13 = 2681
NAS – 63 = 7052
RUT + 0.80 = 1507
10 Y + .08 = 2.84%
OIL – 1.93 = 61.46
GOLD – 5.40 = 1319.30


After Black Monday, a turnaround Tuesday, you just knew today would be a little weird. The Dow Industrial Average broke through the 25,000 milestone… again. While Wednesday’s trading lacked the wild swings of the prior two sessions, the Dow industrials moved in a more than 500-point range, more than three times the average daily swing over the past year. In the final half-hour of trading the Dow surrendered a 250-point gain; an ugly finish to a weird day. The Nasdaq could not get out of negative territory.


The Senate has cobbled together a bipartisan two-year budget deal to raise federal spending by almost $300 billion. The agreement, announced by both the Republican and Democratic leaders of the Senate, would lift caps on defense funding and some domestic government spending. The deal lifts funding for domestic programs by $128 billion and hikes defense budgets by $160 billion. Along with tax cuts approved by Congress in December, the new round of spending would further add to the bulging federal deficit. The deal also includes an extension, until March 2019, of the government’s debt ceiling. The Treasury Department has been warning that without an extension in borrowing authority from Congress, the government would run out of borrowing options in the first half of March. The Senate is expected to pass the bill tomorrow morning, then send it over to the House of Representatives for a vote. The agreement also provides funds for disaster relief, infrastructure, programs addressing opioid abuse, and a 10-year extension of the Children’s Health Insurance Program. It does not include any agreement on immigration. While this is a major step forward for Democrats and Republicans, there are still roadblocks ahead. The conservative and progressive flanks in the House are sounding alarm bells over what is looking like a significant spending hike and still no deal on immigration; and threatening to vote against the final agreement. It looks like the deal will pass, but it is not a sure thing.


The conventional wisdom regarding the recent stock market shellacking is that it’s largely good news—a much needed correction fueled by a healthy dose of accelerating inflation and rising bond yields, but also accompanied by robust corporate profits and a synchronized pick-up in global economic activity. But a devil’s advocate might wonder whether it’s more than a coincidence that all this market commotion follows so quickly after reports confirming that the Trump tax cuts will seriously compound the U.S. government’s debt problems at the same time that its push to reduce legal immigration will only reduce government revenues and economic growth in perpetuity.


Let’s start with just how dramatically the recently passed “Tax Cuts and Jobs Act” has changed the U.S. government’s fiscal outlook. The GOP bent over backwards to make sure that its bill would “only” add $1.5 trillion in new debt to the government’s balance sheet, but then proceeded to convince its members to vote for the package with the promise that it would never go through with planned middle-class tax increases that kept the bill from adding even more to the debt after 2027. According to the Committee for a Responsible Federal Budget, if you discount these and other budgetary fig leafs, and it’s much more likely that the bill will add $2.2 trillion to the debt in ten years, and leave the federal government with even fewer resources to care for a baby boom generation that will be aged between 61 and 81 years by the end of this decade. It’s more than a little rich to see a Republican Party that decried the unaffordability of the 2008 stimulus package so enthusiastically embrace a corporate tax cut three times the size of the Recovery Act, especially in an economy healthy enough to withstand a bit of fiscal prudence. Republicans used to profess to be extremely worried about the budget deficit. Many of us suspected at the time that they were full of it. And one big thing we’ve learned this week is that they were, indeed, full of it.


Absent prudence, investors in U.S. Treasuries are worried about inflation risk, and rightly so. The labor market is getting tighter, meaning wages should start rising. Higher debt loads unquestionably makes an economic system more fragile, and its participants more fearful. The case of Japan’s soaring sovereign debt, which is three times the size of even America’s, is direct evidence that we really have no idea how much debt is too much debt when it comes to the most developed economies. But logic dictates that at some point we’ll pay the price for growing debt-induced fragility, and the boneheaded macroeconomic policy on display in Washington. In other words, don’t be surprised if the recent spike in volatility is just an overture for what’s to come.


Oil prices fell to a one-month low after reports showed a build in inventories and record high crude production, raising worries that the market could be in for more selling. U.S. crude inventories rose 1.9 million barrels last week, according to the U.S. Energy Information Administration. This was less than expected, but that was in part because of a surprising increase in refining activity that boosted fuel inventories. However, U.S. crude production also rose, hitting 10.25 million barrels per day, which is a record level. Bullish sentiment that was built on OPEC cuts and geopolitical unrest is slowly fading away as recognition of U.S. production surpassing 10 million bpd sinks in, which also puts Saudi Arabia and Russia at risk of losing further market share.


Yesterday, SpaceX launched the world’s most powerful rocket in 45 years, then flew two of its spent boosters back to the Florida coast for a spectacular, simultaneous recovery on land. It was spectacular. The live-stream of the Falcon Heavy Test Flight was the second-most-watched in YouTube’s history, and the launch led all three television network broadcasts Tuesday evening. Falcon Heavy cleared the launch pad without blowing up and continued on to deliver Musk’s cherry red Tesla Roadster with a space-suit wearing mannequin at the wheel toward an Earth-Mars elliptical orbit around the sun.


Today, Elon Musk came back to Earth with a thud as Tesla posted a net loss of $675 million for the fourth quarter, and revised production targets for its Model 3 electric sedan. And while Tesla is still burning through cash, the loss was less than expected, and revenue grew. Shares moved higher in after-hours trade.


Wynn Resorts climbed 7 percent after casino mogul Steve Wynn resigned as the chief executive following sexual misconduct allegations. The board of Wynn Resorts has been sued by shareholders, claiming the board knew for years that Steve Wynn, founder and chief executive of the casino operator, had been accused of sexual misconduct and failed to investigate.


Snapchat owner Snap soared 46 percent after it reported surging growth in users and revenue in its latest quarter.


Consumer borrowing remained strong in December, although slower than the torrid pace seen in the prior month. The Federal Reserve reports consumer credit increased $18.4 billion in December to a record seasonally adjusted $3.84 trillion, posting an annual growth rate of 5.8 percent. The prior two months were revised higher by $5.5 billion. Revolving credit, like credit cards, rose 6% in December, less than half the 13% pace seen in November. Revolving credit is $1.03 trillion, the highest on record. Nonrevolving credit, typically auto and student loans, rose 5.7% in December after an 8.6% rise in the prior month. The data does not include mortgage debt. In the fourth quarter, consumer credit rose at a 7.7% annual rate, the strongest quarter of the year. For all of 2017, consumer credit rose at a 5.4% rate. Consumers have not only been using their credit cards, they have been dipping into their savings. The U.S. savings rate fell to 2.4% in December, the lowest level since 2005.


Corelogic reports that home price nationally rose 6.6% for the 12 months ending in December. “Affordability continues to erode, making it more challenging for both first time buyers and moderate-income families to buy,” CoreLogic said in a release. “At this point, we estimate that more than one-third of the 100 largest metropolitan areas are overvalued.” The top three “overvalued” metro areas in CoreLogic’s analysis were Las Vegas, where prices were 11.2% higher than a year ago in December; Denver, where they jumped 8.1% for the year; and Los Angeles, where prices rose 7.8% for the year. Looking ahead, CoreLogic forecasts home prices will rise 4.3% in the year ending December 2018.

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