Financial Review

What Inflation?

….Stocks post 4th day of gains. CPI shows inflation up 0.5%, yawn. Retail sales slip. Chipotle hot again. Cisco has revenue again. Fannie Mae in the red again. Uber, Buffett, Apple. SpaceX wants to launch broadband satellites.

Financial Review by Sinclair Noe for 02-14-2018


DOW + 253 = 24,893
SPX + 35 = 2698
NAS + 130 = 7143
RUT + 27 = 1522
10 Y + .07 = 2.91%
OIL + `1.50 = 60.69
GOLD + 20.90 = 1351.20


Stocks started the morning in the red, following a CPI report showing inflation. Investors shrugged off stronger-than-expected inflation data and snapped up shares of Facebook, and Apple. Facebook jumped 3.7 percent while and Apple both rose more than 1.8 percent. Since Thursday, the S&P 500 has surged 4.56 percent, its strongest four-session performance since mid-2016. The index remains down about 6 percent from its record high on Jan. 26. The CBOE Volatility index fell below 20 for the first time since Feb. 5. Treasury yields were higher, with the 10-year hitting 2.91% and the 2-year hitting 2.17%. Ten days ago, the whiff of inflation was enough to send markets into a nosedive; today, it barely gets a yawn.


Consumer prices rose 0.5% in January, compared to December. The main CPI gauge rose 2.1 percent from a year earlier, the same pace as in December and exceeding forecasts for a 1.9 percent increase. Excluding volatile food and energy costs, the so-called core gauge increased 0.3 percent, also above forecasts for 0.2 percent. It was up 1.8 percent from a year earlier, higher than the 1.7 percent estimate. Policy makers look at the core index to better gauge underlying inflation because food and energy prices tend to be volatile. The latest report showed energy prices rose 3 percent from the previous month and food costs advanced 0.2 percent. There was a big jump in the price of clothing. The 1.7 percent monthly gain in apparel prices, which account for about 3 percent of the CPI, was the biggest since 1990. Women’s apparel costs jumped a record 3.4 percent. If the big threat of inflation is in the form of higher clothing costs – well, maybe inflation is not a huge threat. Other items contributing to the gain in CPI included rents and owners’ equivalent rent, which both rose 0.3 percent from December; medical care, up 0.4 percent; and motor vehicle insurance, which advanced 1.3 percent, the most since 2001.


A separate report showed U.S. retail sales unexpectedly fell in January. The decrease in January sales and the downward revision to December were spread throughout the major retail categories. The soft report suggests consumer spending, the biggest part of the economy, started the current quarter with less momentum following a 3.8 percent annualized increase in the fourth quarter. Auto sales tanked 1.3% (but that is coming off a couple of months where auto sales got a boost following hurricanes) and spending at home and garden centers tumbled 2.4%. Both declines were unusually large and not likely to be repeated soon. Throw in poor weather across most of the U.S. — not to mention major fires out West — and weaker sales in January are understandable.


Higher-than-expected inflation and weaker-than-expected consumer spending in January start the year off on the wrong foot, but do not establish a compelling trend. While economists and investors have seen a Fed interest-rate hike in March as a near-certainty, the details of the latest CPI report could play a role in the timing and number of rate increases throughout 2018. The central bank’s preferred gauge of inflation — a separate figure based on consumer purchases and issued by the Commerce Department — has mostly missed its 2 percent goal in the past five years. The measure excluding food and energy is also below the Fed’s target. January data are due for release on March 1.


There are two sides to inflation—the kind fueled by rising consumer demand, and the kind brought on by higher wages. Growing paychecks feed spending, which in turn feeds higher prices and induces workers to demand higher pay. From the looks of it, both wages and prices are on the up. In its most recent jobs report, the labor department confirmed American wages were finally on the rise. But, you have to consider the effects of inflation on wages. Inflation just took the biggest bite out of Americans’ paychecks in almost five years. Real average hourly earnings of production and non-supervisory workers, who make up more than 80 percent of employees at companies, fell 0.5 percent in January. It marked the fifth decline in the last six months and could go a long way in explaining the abrupt slowdown in January retail sales, and why fourth-quarter credit-card debt registered the second-largest percentage increase since 2007.


The Fed has raised rates since the financial crisis, but they’re still low. It announced the unwinding of a program that injected trillions into the US economy, but it is to happen slowly and gradually, over five years. Meanwhile, politicians finally stopped pretending they are deficit hawks, and they are now spending money like drunken sailors. The White House’s proposed spending bill, at $4.4 trillion, is larger than the fiscal stimulus during the depths of the recession. Couple that with a tax cut, and that’s enough money to supercharge the economy. Maybe enough to bring inflation roaring back. But not today.


Shares of Chipotle Mexican Grill rallied after the company announced it was poaching Taco Bell CEO Brian Niccol to take the mantle as its new chief executive. The burrito chain’s stock spiked more than 15 percent, closing up more than $38 per share at $289.91. Investors praised Chipotle’s hire, suggesting that the addition of Niccol could be the move that finally initiates a solid turnaround for the company. Chipotle has struggled of late to win customers back after a number of food-safety issues trampled traffic and sales.


Cisco saw its stock jump 6 percent after the company reported better than expected earnings for its fiscal second quarter, which ended on Jan. 27. Earnings came in at 63 cents per share, vs. 59 cents per share as expected by analysts. Revenue grew to $11.89 billion, vs. $11.81 billion as expected by analysts. With revenue growth of 3 percent, Cisco has finally ended its streak of two years straight of year-over-year revenue declines.


Changes to U.S. tax law led to a $6.53 billion loss at Fannie Mae last quarter, putting the government-controlled mortgage company in the position of seeking cash assistance from taxpayers for the first time since it emerged from the housing crisis six years ago. Fannie Mae said its net worth sank to a negative $3.7 billion after it had to “remeasure” its deferred tax assets to the tune of $9.9 billion as required by the Tax Cuts and Jobs Act. Due to the tax charge, Fannie Mae reported 2017 net income of $2.4 billion for 2017, down from $12.3 billion in 2016. But its pretax income was $18.45 billion, slightly better than the $18.33 billion in 2016.


Uber narrowed its 2017 fourth-quarter loss to $1.1 billion from a loss of $1.46 billion in the previous quarter. Meanwhile, the ride-hailing company’s quarterly revenue rose 11.8 percent to $2.2 billion from its previous quarter – that figure is up 61% compared to 2016. Uber’s quarterly gross bookings rose 14 percent to $11.1 billion from the third quarter. The improved numbers come as Uber tries to move past an ugly chain of events. The company has been wracked by a string of scandals, sparked by allegations of sex discrimination at the company, and peaking with the departure of embattled chief executive Travis Kalanick.  Last week, Uber agreed to pay $245 million-worth of its own shares to Google’s sister self-driving car company Waymo to settle a legal dispute over trade secrets. Uber has gone on to raise more than $14 billion in new funding. Last month, Uber closed a deal with SoftBank in which the Japanese conglomerate, along with other investors, took about a 17.5 percent stake in the company.


Apple’s shareholder meeting this week rekindled speculation about how the tech giant will spend its $285.1 billion cash hoard, which can now be deployed in the U.S. at a cheaper tax rate. When prodded on the topic, executives told investors that an update would be coming in April, and that the board was committed to an annual dividend. Apple’s earnings could pop as much as 30 percent higher than current estimates — if the company buys back 10 percent of its shares each year over the next several years. That’s one of several likely scenarios for America’s most valuable public company as it aims to fulfill its previously mentioned plan of becoming “cash neutral”. Apple is likely to spend almost all of its cash on share buybacks, and potentially increased dividend yields, by 2023.


Warren Buffett has increased his stake in Apple — and gotten rid of almost his entire IBM stake. Buffett’s Berkshire Hathaway revealed Wednesday that it increased its Apple holdings by 23 percent to 165 million shares, according to SEC filings, and dumped about 94 percent of its IBM holdings, leaving just 2.05 million shares. Berkshire also trimmed its Wells Fargo stake by 6 million shares to 458 million, and its stake in General Motors by 10 million shares, to 50 million. Berkshire Hathaway reported a $358 million stake in Teva Pharmaceutical, shares popped 11 percent on the news.


SpaceX, the Elon Musk-founded company that last week launched its Falcon Heavy rocket — and a Tesla into space  — came a step closer to deploying satellites that would deliver broadband Internet across the US. SpaceX plans to launch more than 4,420 small satellites into low orbit around the Earth beginning next year, with full deployment expected by 2024. That low-orbit position could deliver broadband speeds equal to current speeds from traditional Net providers. There are barriers to making broadband available in some rural areas. Overall, 73% of Americans say they have a broadband connection at home, but only two-thirds (63%) of rural Americans do. SpaceX hopes to have more than 40 million subscribers to its satellite broadband service and bring in more than $30 billion in revenue by 2025. The plan still needs regulatory approval.






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