Financial Review

When Issued

…..Nasdaq record. Markets squirrely ahead of FOMC policy meeting. Apple earnings mildly disappointing. Plus, other earnings news. Home Prices up in March. US vehicle sales down. Airline execs go to Washington for public flogging. Banks subpoenaed for Treasury market manipulation.

Financial Review by Sinclair Noe for 05-02-2017 

DOW + 36 = 20,949
SPX + 2 = 2391
NAS + 3 = 6095 (record)
RUT – 8 = 1399
10 Y – .03 = 2.29%
OIL – .76 = 48.08
GOLD + .80 = 1257.90

Markets have been a bit squirrely of late. Stocks and bonds have been rising in tandem. Oil is lower, even as the dollar has been weaker since the start of the year. And the Vix, the volatility index has been hugging the 10 range, which represents a state of somnambulance. Typically, assets considered risky like stocks shouldn’t climb at the same time as havens like Treasuries are being bid higher. But that is exactly what has happened in recent trade.  And this is happening as the Fed is in the process of raising rates.

 


The Federal Reserve’s
 policy-making committee holds a meeting today and tomorrow. While trading on Fed funds futures contracts implies less than 5% probability of a rate hike tomorrow, the language in the FOMC statement could be crucial for investors in assessing the June meeting. The tweaking of words by the Fed will hold even more weight since Fed Chair Janet Yellen is not scheduled to hold a press conference following the two-day meeting. So far, it looks like the Fed is still on track to hike rates 2 more times this year.

 

Today’s big earnings news came from Apple, after the closing bell. Apple reported iPhone sales dropped in the quarter, indicating that customers had held back purchases in anticipation of the 10th-anniversary edition launch this fall. Apple sold 50.7 million iPhones in its fiscal second quarter ended April 1, down from 51.2 million a year earlier. However, revenue from the smartphones rose 1.2 percent in the quarter. The company’s net income rose to $11 billion, or $2.10 per share, in the second quarter, from $10.5 billion, or $1.90 per share, a year earlier. They beat estimates by about 8 cents per share. Revenue rose 4.6 percent to $52.90 billion in the quarter, missing estimates. Apple boosted its capital return program by $50 billion, increasing its share repurchase authorization by $35 billion and raising its quarterly dividend by 10.5 percent. Apple shares dropped about 2% in after-hours trade.

 

Microsoft just unveiled the Surface Laptop, aimed squarely at stealing customers away from Apple’s newest MacBooks. The one thing to know is that the Surface Laptop is the poster child for Windows 10 S, a new version of the operating system that Microsoft says is more streamlined and secure.

 

In other earnings news:

 

Mondelez International reported first-quarter net income of $630 million. The Deerfield, Illinois-based company said it had profit of 41 cents per share. Earnings, adjusted for non-recurring costs, were 53 cents per share. The results exceeded Wall Street expectations. The maker of Oreo cookies, Cadbury chocolate and Trident gum posted revenue of $6.4 billion in the period, also beating estimates.

 

Etsy, the arts and crafts online retailer posted revenues of $96.9 million, missing estimates. First-quarter earnings per share was $0. CEO Chad Dickerson will step down from the role tomorrow. John Allspaw, the chief technology officer, is leaving the company. Etsy also announced that it expects to eliminate about 80 jobs, or 8% of its workforce. Etsy shares slammed by 14% today.

 

Gilead Sciences reported first-quarter profit of $2.7 billion, or $2.05 per share. The HIV and hepatitis C drugmaker posted revenue of $6.5 billion; missing top and bottom line estimates.

 

Archer Daniels Midland cautioned that massive global grain stocks are making it difficult to turn a profit trading grain internationally, sending its shares plummeting despite reporting a higher first-quarter profit. The outlook for its agricultural services segment, its largest in terms of revenue, appeared weaker than it did at the beginning of the year. The segment makes money buying, selling, storing, shipping and trading grains and oilseeds. It includes ADM’s global trading desk, which turned in another weak quarter with lower year-on-year earnings. Net profit attributable to ADM rose to $339 million, or 59 cents per share, in the quarter ended March 31, from $230 million, or 39 cents a share, a year earlier. ADM missed estimates. Shares dropped 7.5%.

 

ConocoPhillips reported a quarterly loss as operating costs came in higher than expected. However, the largest U.S. independent oil producer’s results reflected a slow but steady improvement across the industry bolstered by improved pricing for its oil and natural gas. Crude prices are up more than 50 percent from a year ago. Net profit was $800 million, or 62 cents per share, in the first quarter ended March 31, compared with a net loss of $1.5 billion, or $1.18 per share, a year earlier. Conoco beat earnings estimates.

 

Home prices nationwide, including distressed sales, increased year over year by 7.1 percent in March 2017 compared with March 2016 and increased month over month by 1.6 percent in March 2017 compared with February 2017, according to the CoreLogic Home Price Index. Corelogic forecasts national home prices for single family homes will rise by 0.6 percent in April. Year-over-year, national home prices are forecasted to rise by 4.9 percent by March 2018. Arizona home prices were up 0.8 percent month-over-month and up 7.3% year-over-year. Arizona home prices remained 19.4% below peak values.

 

Major automakers posted declines in U.S. new vehicle sales for April in a sign the long boom cycle that lifted the American auto industry to record sales last year is losing steam, sending carmaker stocks down. The drop in sales versus April 2016 came on the heels of a disappointing March, which automakers had shrugged off as just a bad month. Auto sales were a drag on U.S. first-quarter gross domestic product, with the economy growing at an annual rate of just 0.7 percent. Excluding the auto sector the GDP growth rate would have been 1.2 percent. GM said April sales fell 6 percent, but crossovers and trucks continued to see strong growth. Sales at Ford, the No. 2 U.S. automaker by sales after GM, fell 7.2 percent in April, while Toyota recorded a drop of 4.4 percent and FCA sales were off 7 percent. New vehicle sales hit a record 17.55 million units in 2016. But as the consumer appetite for new cars has waned, automakers have leaned more heavily on discounts. GM said its consumer discounts were equivalent to 11.7 percent of the transaction price. The automaker also said its inventory level rose to 100 days of supply at the end of April versus around 70 days at the end of 2016. Kelley Blue Book’s forecast for 2017 calls for auto sales in the range of 16.8-17.3 million units, which represents a 1% to 4% decline from last year.

 

The House of Representatives transportation committee held a hearing for top airline executives to testify, and to determine how Congress might respond to policies that can adversely affect passengers. At the hearing, United Chief Executive Oscar Munoz repeatedly apologized for the removal of a passenger who was dragged off an overbooked plane last month. We have all seen the video of the bloodied and barley conscious man. Munoz was joined at the hearing by United President Scott Kirby and executives from American Airlines, Southwest and Alaska Airlines. American Airlines experienced its own public relations fiasco last month when a passenger video went viral, showing a woman on a plane in tears holding a child in her arms and another at her side after an encounter with a flight attendant over a baby stroller.

 

Federal prosecutors have subpoenaed several banks as part of a criminal investigation into possible manipulation of the US Treasuries market. UBS Group,  BNP Paribas, Royal Bank of Scotland and Morgan Stanley received subpoenas last month seeking information on the $14 trillion market. The Justice Department has been examining the U.S. Treasuries market for roughly two years. The Justice Department in late 2015 asked about when-issued securities as part of broader requests for documents it sent to most or all of the roughly two dozen primary dealers in US Treasuries. The banks have not been accused of wrongdoing by the DOJ. When-issued securities have been a government-debt market fixture since the U.S. Treasury Department effectively authorized their use in 1975. Investors can buy them from a Wall Street bond dealer to guarantee they will be able to get their hands on a bond, bill or note once it’s auctioned by the government. Because they give a preview of auction demand, when-issued securities are an important indicator for primary dealers, which are essentially required to backstop U.S. government debt auctions by making “reasonable” bids for their share of each sale.

 

Trading of these when-issued securities is also the subject of several lawsuits against primary dealers filed since July 2015. In them investors allege that traders at global banks colluded to artificially inflate the price of the when-issued securities, which allow the banks to sell US debt before they own it. Then they bought the debt at auctions for an artificially suppressed price, unfairly profiting at investors’ expense. Trader-to-trader communication is at the heart of recent federal antitrust probes into whether banks coordinated to manipulate interbank interest rates and align foreign-exchange trades. Those cases have resulted in billions of dollars in penalties, and in some cases guilty pleas. The investigation of the Treasuries market grew out those cases. As always, the banksters remain innocent until proven guilty, but I think we are seeing a pattern of wrongdoing.

 

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