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Friday, August 18, 2017

Let Them Eat Cake

Financial Review

Let Them Eat Cake


DOW – 76 = 21,674
SPX – 4 = 2425
NAS – 5 = 6216
RUT – 1 = 1357
10 Y – .01 = 2.19%
OIL + 1.64 = 48.73
GOLD – 3.30 = 1285.20
BITCOIN + 0.69% = 4187.99 USD
ETHEREUM – 0.20% = 295.59

Stocks drifted lower into the close, wrapping up a rough week. While the day’s losses were small, Friday marked the first time stocks haven’t risen the day after a more than 1 percent drop since Nov. 8.

For the week, the Dow was down 0.8 percent, the S&P 500 was down 0.7 percent and the Nasdaq fell 0.6 percent. With a decline of more than 2 percent for the last two weeks, the S&P marked its weakest two-week period since before Trump was elected on November 8.

The S&P 500 closed roughly 1 percent below its 50-day moving average, the furthest below that key technical measure since mid-April. Today also marked the eighth straight day in which the NYSE and Nasdaq had more stocks making new 52-week lows than highs.

Stocks started the trading session in negative territory then struggled into the green, with a sharp spike on word that Trump had fired chief strategist Steve Bannon; that news sent up a cheer on the trading floor of the New York Stock Exchange but stocks drifted lower into the close.

Even after Bannon’s exit, it’s far from clear Trump will tone down his rhetoric. His first instinct is to fight anyone who challenges him and lash out on Twitter, an approach that has pushed his approval ratings to historic lows for a president in his first year.

Consider Trump’s disastrous response to the violent protests at the University of Virginia last weekend. In firing Bannon, Trump has lost his chief ideologue, the man who channeled his base and advocated for the populist-nationalist policies that helped propel Trump to victory.

But he has gained an unpredictable and potentially troublesome outside ally who has long experience running a media organization, and an even longer list of enemies. Sources close to Bannon say he is likely to go back to Breitbart News, the right-wing website he ran before joining the campaign last year.

Whether this is good or bad or just chatter, it is another bit of chaos in a very bad week for the White House. From the Wall Street perspective, it looks like Gary Cohn and General Kelly won the latest round of palace politics; it remains to be seen if they can translate that into getting the legislative agenda back on track.

Also, today, Carl Icahn ended his role as a special adviser to Trump after facing criticism that his recommendations on policy could help his own investments, creating a potential conflict of interest.

Meanwhile, the fallout from the president’s comments on Charlottesville continues. Following the statements against hate and bigotry from the Joint Chiefs and all the top military leaders, secretary of state Tillerson also distanced himself from the president’s position.

Members of the president’s Arts and Humanities Commission have resigned. “I can’t even believe I have to write this: standing up to Nazis is essential; there are no good Nazis. Or Klansmen, or terrorists.”

That comment, along with a million-dollar donation to the ADL, came from Fox CEO James Murdoch. (Oddly, there was no mention of Murdoch’s comments on Fox News’ site.) Mitt Romney called on president Trump to apologize (can you imagine that and a full eclipse happening in the same week?)

The US has initiated an investigation into China’s theft of US intellectual property (IP) using Section 301 of the Trade Act of 1974. What that boils down to is that the US just fired the first shot in a trade war with China. China sees the use of Section 301 as an act of aggression because it allows the president of the United States to act against the Chinese economy without consulting the World Trade Organization.

China has been warning the Trump administration against bypassing the WTO since January. And even though initiating a 301 investigation is not a violation of the WTO in and of itself, earlier this week, Chinese state media was alive with condemnation of the Trump administration for even considering it.

That isn’t to say that the US doesn’t have a legitimate grievance — experts around the world pretty much agree that China has a problem with stealing company’s trade secrets. But again, it’s how the US is going about doing this that is offensive not only to China, but to US allies watching too. Even without anti-globalist Steve Bannon in the White House, many in the Trump administration will carry on his ideology through policy.

All of this makes even our allies nervous about their dealings with this administration, and according to reports they are prepared to fight fire with fire. China is ready too, of course — and it has quite a lot of fire.

From 2001 to 2016, US imports from China increased by a factor of 3.5, while US exports to China increased by nearly a factor of six. China consumes a ton of products made by Trump’s base. It is the largest market for US soybeans (62% in 2016) and airplanes (25% of Boeing passenger planes in 2016). It the second-largest market for US cotton (14% in 2016), auto (17% in 2016), and semiconductors (15% in 2016).

But never mind them, and never mind any of that. You should also think about what a trade war would do to the cost of things Americans buy. A trade war between US and China will hurt not only Chinese manufacturers, but also upstream suppliers and downstream distributors such as US retailers.

If China retaliates, the price of American goods will go up, and markets that were once open to us may start to close.

Tens of thousands of students who attended Corinthian Colleges, a now-defunct for-profit college chain, could be eligible for student loan relief. The Consumer Financial Protection Bureau as well as several states attorneys general announced a proposed settlement Thursday, which if approved, would require private equity firm, Aequitas Capital Management, to forgive $183.3 million worth of student loans that the firm helped fund for former students of Corinthian Colleges.

About 41,000 students could be eligible for debt relief under the agreement, which is subject to approval by a U.S. District Court judge in Oregon. Corinthian Colleges filed for bankruptcy in 2015, amid accusations the school used inflated job placement and graduation rates to lure students.

In a complaint accompanying the settlement, the CFPB also outlined an alleged loan scheme of which Aequitas was a part. Through that scheme Aequitas funded and purchased private loans with high interest and default rates offered to Corinthian students as a way for the school to stay in line with federal regulations governing for-profit colleges.

For-profit colleges are subject to a regulation known as the 90/10 rule, which requires that they can’t get more than 90% of their revenue from federal financial aid. To comply with the regulation, Corinthian raised its tuition beyond the maximum students could take out through the federal financial aid program.

Oh, this was ugly. Foot Locker were crushed today – down 28%, after the company reported a 6% second-quarter same-store sales decline, and a 4.4% year-over-year decrease in sales, to $1.78 billion. The FactSet consensus was $1.80 billion.

In an earnings statement, Foot Locker Chief Executive Richard Johnson reaffirmed the company’s “strong” position in the premium sneaker market and said the company was hurt by “limited availability of innovative new products in the market.” Johnson went on to say he wasn’t worried about Amazon.com. Umm, you might want to be a little worried.

If you owned Foot Locker, you likely need something to sooth your frazzled nerves and lighter wallet, maybe a nice cup of chicken soup. Chicken Soup for the Soul Entertainment had its IPO today. And it was ugly, down about 9%, but let’s focus on the good stuff. It was a unique IPO.

Much like the Chicken Soup books, the initial public offering was crowdsourced. CSS Entertainment was the largest-ever exchange-listed IPO completed under Regulation A+ (an alternative to a traditional IPO that is favored by smaller companies), as well as the first to list on the Nasdaq Global Market.

This process opened the offering to the public. Whether the price drop can be attributed to the crowd-sourcing or because the crowd-sourcing pushed the offering to the maximum allowed – time will tell. Consider this a learning experience. But finally, something new and egalitarian in a Chicken Soup-y kind of way.

Bing is bigger than you think. Bing claims that fully one-third of searches in the US are powered by Bing, either directly or through Yahoo or AOL (both of which provide results generated by Microsoft (It’s true, I googled it.)

Monday is eclipse day and it will be expensive. The eclipse will happen during the workday, and many workers will likely try to watch it. According to an analysis from Challenger, Gray & Christmas, it will cost employers some $694 million collectively.

The company did not even factor in the employees that might be taking time off to travel to watch the eclipse, if they don’t live in its direct path. That also does not include the cost of those glasses you need if you want to look directly at the sun.

And you do not want to look directly at the sun without ISO approved glasses. It is called solar retinopathy and it can result in blindness, even in just a few seconds so be careful.

Stocks Lower as DC Shuffle Continues

Charles Schwab: On the Market
Posted: 8/18/2017 4:15 PM ET

Stocks Lower as DC Shuffle Continues

Unable to hold gains, U.S. stocks finished to the downside but were off the lows of the day after battling back from morning pressure on the heels of reports that Steve Bannon, a key advisor to President Trump, submitted his resignation. Treasuries were slightly lower, crude oil prices rallied and the U.S. dollar and gold ticked to the downside. In equity news, Deere & Co just missed on its Q3 sales figures, while Foot Locker's results added to the recent woes for the retail sector. In economic news, consumer sentiment rose to its strongest level since January.

The Dow Jones Industrial Average (DJIA) lost 76 points (0.4%) to 21,675, the S&P 500 Index declined 4 points (0.2%) to 2,426, and the Nasdaq Composite shed 5 points (0.1%) to 6,217. In moderate volume, 921 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil rallied $1.42 to $48.51 per barrel and wholesale gasoline was $0.03 higher at $1.62 per gallon. Elsewhere, the Bloomberg gold spot price gained $1.54 to $1,286.60 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 94.42. Markets were lower for the week, as the DJIA decreased 0.8%, the S&P 500 Index fell 0.7% and the Nasdaq Composite was 0.6% lower.

Deere & Co. (DE $117) reported fiscal Q3 earnings-per-share (EPS) of $1.97, above the $1.93 FactSet estimate, as net sales of equipment grew 16.6% year-over-year (y/y) to $6.8 billion, just shy of the projected $6.9 billion. Shares were under heavy pressure.

Foot Locker Inc. (FL $34) posted Q2 profits of $0.39 per share, or $0.62 ex-items, versus the expected $0.90, as revenues decreased 4.4% y/y to $1.7 billion, south of the forecasted $1.8 billion. Q2 same-store sales fell 6.0% y/y, compared to the expected 0.8% gain. Shares fell sharply.

Gap Inc. (GPS $23) announced Q2 EPS of $0.68, or $0.58 ex-items, compared to the forecasted $0.52, on previously reported revenues of $3.8 billion. Q2 same-store sales grew 1.0% y/y, versus the estimated 0.1% increase. GPS raised its full-year EPS outlook. Shares gave up early gains and closed lower.

Ross Stores Inc. (ROST $59) rallied after the off-price retailer raised its full-year EPS guidance after posting Q2 earnings of $0.82 per share, above the forecasted $0.77, and same-store sales growth of 4.0% y/y that bested the 2.0% expectation. Revenues of $3.4 billion were roughly in line with estimates.

Expectations drive surprising jump in consumer sentiment

The preliminary University of Michigan Consumer Sentiment Index (chart) rose to 97.6 in August—the strongest since January's thirteen-year high—from the prior month's 93.4 level, and compared to the Bloomberg expectation for it to tick higher to 94.0. The current economic conditions component declined more than expected month-over-month, while the expectations measure posted the biggest jump since December 2011. The 1-year inflation forecast remained at July's 2.6% rate, while the 5-10 year inflation outlook dipped to 2.5% from 2.6%.

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his latest Schwab Sector Views: What Makes the World Go Around?, the industrial sector is often overlooked but is at the center of much of what occurs in the global economy. Brad adds that high consumer confidence could help industrials, along with improving global growth and a solid U.S. economy. However, the diversity of the group and monetary and fiscal uncertainty keep us from upgrading the sector … for now. Read more on the Markets & Economy page at www.schwab.com and follow us on Twitter: @schwabresearch.

Treasuries finished mostly lower, with the yields on the 2-year and 10-year notes gaining 1 basis point (bp) to 1.31% and 2.19%, respectively, while the 30-year bond rate was nearly unchanged at 2.78%.

Treasury yields have been jittery, slipping to the downside this month, while the U.S. Dollar Index has shown some signs of relative stabilization. The markets have grappled with mostly upbeat economic data, though low inflation persists, and flared-up monetary policy uncertainty regarding the Fed and European Central Bank (ECB), while the growing dysfunction in the White House appears to be starting to impact sentiment. Finally, tensions between North Korea and the U.S. seem to be fading.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Twist and Shout: United States Takes on North Korea … Implications for Stocks we don't believe significant military escalation is the likely outcome of the battle of wills between President Trump and North Korea’s Kim Jong Un. But it is a year ending in "7" and there are other forces at work which could keep stocks in a choppy pattern for the next couple of months. Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

Europe pares losses, Asia mostly lower

European equities came off the worst levels of the day but remained mostly lower following yesterday's late-day drop in the U.S.. Risk aversion ramped back up as the exacerbated political dysfunction in the U.S. fostered concerns and the terror attack in Spain further weighed on sentiment. These added to already elevated geopolitical concerns on the heels of the recently ramped up concerns toward North Korea, along with flared-up monetary policy uncertainty toward the ECB and Fed. This comes ahead of next week's key Fed symposium in Jackson Hole, Wyoming, with heads of both central banks set to speak. Travel and leisure issues led to the downside following the terror attack in Spain. The euro was modestly higher and the British pound dipped versus the U.S. dollar, while bond yields in the region finished mixed. In economic news, eurozone construction output declined in June.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA points out in his article, What are fund flows telling us about trends and risks in the global stock market?, that the money coming into ETFs is flowing into a broad range of stock markets featuring a preference for international stocks and revealing a surprising disconnect with the performance and geopolitical risk of the underlying markets. Read more on the Markets & Economy page at www.schwab.com and follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mostly lower on the heels of the drop in the U.S. yesterday, as the global markets rein in risk appetites in the face of political dysfunction in the U.S., along with Fed and ECB monetary policy uncertainty, while geopolitical concerns linger in the wake of the terror attack in Spain and amid the recently flare-up tensions between the U.S. and North Korea. Japanese equities fell with the yen rallying on the heightened risk aversion, while Australian securities decreased. Shares trading in Hong Kong and India were lower and South Korean stocks also dipped, but remained near all-time highs despite the North Korean uneasiness. However, mainland Chinese stocks finished flat. Amid this backdrop, Schwab's Jeffrey Kleintop, CFA, offers his articles, Missiles and Markets: An investor guide to geopolitical risks and The Long Period of Underperformance for Emerging Market Stocks May Finally Be Over on the International Investing page at www.schwab.com.

Back-to-back weekly loss as sentiment swings negative and volatility ticks higher

All looked well to begin the week, with fading tensions between North Korea and the U.S. helping the markets rebound from last week's drop. However, as the week matured sentiment swung to the negative side and volatility flared-up. The woes for the retail sector continued following disappointing guidance from Dow member Wal-Mart Stores Inc. (WMT $79), as well as reports from Coach Inc. (COH $40) and Dick's Sporting Goods Inc. (DKS $27), while Dow component Home Depot Inc's (HD $147) stronger-than-expected report failed to please the Street. Target Corp's (TGT $56) favorable results and a much stronger-than-expected July retail sales report were not enough to offset losses for the consumer discretionary sector. Q2 earnings season is all but in the books and profit growth for the S&P 500 is running just north of 9.0% and sales expansion above 5.0%, per data compiled by Bloomberg.

Moreover, a plethora events and reports this week suggesting growing dysfunction in the White House finally started to show signs of testing stock market resiliency, while minutes from July meetings by the Fed and ECB exacerbated monetary policy uncertainty. Risk aversion regained momentum to stymie an early-week rally in Treasury yields and lift the U.S. dollar, utilities and gold, while applying late-week pressure to market leaders technology and financials. Energy stocks led the weekly decline for the markets, despite Friday's spike in crude oil prices.

Volatility could remain next week as Federal Reserve Chairwoman Janet Yellen and ECB President Mario Draghi are set to speak Friday at the Central Bank's key symposium in Jackson Hole, Wyoming. Leading up to the speeches, next week's economic calendar will bring Markit's August business activity reports, July new and existing home sales, and the preliminary July durable goods report.

As noted in the latest Schwab Market Perspective: Volatility Returns!, Geopolitical, U.S. political and "bubble" concerns rose recently, putting a dent in the market's recent run. U.S. political turmoil is likely to keep market volatility elevated in the near term, along with the Fed's likely commencement of slowly unwinding its bloated balance sheet, but we believe the bull market still has legs. U.S. economic growth continues to be fairly healthy, and earnings season was positive for both bottom- and top-line growth; lending support to the bulls. But the storm in Washington is picking up velocity, especially as the upcoming debt ceiling fight looms large. Read more on the Markets & Economy page at www.schwab.com.

International reports due out next week that deserve a mention include: Japan—Consumer price inflation. Eurozone—Markit's business activity reports, along with German Q2 GDP and business and investor sentiment indexes. U.K.—Q2 GDP.