Morning in Arizona

Morning in Arizona

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Friday, March 24, 2017

Scotch and Cigarettes

Financial Review

Scotch and Cigarettes


DOW – 59 = 20,596
SPX – 1 = 2343
NAS + 11 = 5828
RUT + 1 = 1354
10 Y – .02 = 2.40%
OIL + .31 = 48.01
GOLD – 1.70 = 1243.90

House Speaker Paul Ryan pulled his Obamacare repeal bill from the floor this afternoon, a day after President Donald Trump had threatened to walk away from health care reform if he didn’t get a vote. Ryan reportedly met with Trump, presented the expected vote totals and recommended the President pull the bill.

The decision was ultimately Trump’s. Trump had gambled big by presenting holdout House conservatives with a take-it-or-leave it ultimatum on Thursday night and put his own credibility on the line. It also puts Ryan in a much-weakened political position, after being defied by his own conference.

And somewhere John Boehner is puffing on a cigarette and enjoying a Friday afternoon Scotch.

So, what now? The GOP effort to repeal Obamacare is dead. The House meltdown on Obamacare repeal has serious implications for the American health care system, with Republicans apparently unable to repeal the law but also unwilling to fix the deficiencies that the White House says will collapse the law.

Ryan told fellow Republicans they are “moving on” from health care; which means the next issue will likely be tax reform, another complex and divisive issue, made even more complicated because health care represents nearly 20% of the economy.

Still, shifting focus to tax reform from the quagmire that is health care reform might be a positive in the eyes of Wall Street.

Stocks rose from session lows to end little changed. Investors now have a weekend to consider implications. Treasuries rose. The dollar slipped for a second week. The S&P 500 Index capped its worst week since the election as political wrangling in Washington dominated sentiment. Banks sank 3.8 percent in the week. Shares of hospital operators finished sharply higher.

New orders for key US-made capital goods fell in February, but shipments surged. The Commerce Department said non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, dipped 0.1 percent last month after rising 0.1 percent in January. A recovery in oil prices from multi-year lows is driving demand for equipment in the energy sector, helping to lift the manufacturing sector after a prolonged slump.

Separately, orders for durable goods advanced 1.7% while the increase in January was raised several notches to 2.3%, reflecting a pickup in manufacturing that kicked in toward the end of last year. The increase in bookings last month was spearheaded by commercial aircraft, whose orders jumped almost 48%. That offset a nearly 1% drop in orders for new cars and trucks.

US auto sales in March will increase almost 1.9 percent from a year earlier, even as consumer discounts continue to remain at record levels. Per industry consultants J.D. Power and LMC Automotive, March U.S. new vehicle sales are expected to be about 1.62 million units.

Oil posted its third weekly drop ahead of this weekend’s meeting in Kuwait, at which OPEC and its production-cutting allies will assess the effectiveness of their actions to date. Talks will also be overshadowed by the question of whether the persisting glut requires curbs to be extended beyond the summer.

US shale producers are drilling at the highest rate in 18 months but have left a record number of wells unfinished in the Permian Basin in Texas, the largest oilfield in the country – a sign that output may not rise as swiftly as drilling activity would indicate. A record 1,764 wells were left unfinished in the Permian in February. In February alone, 395 wells were drilled and only 300 completed. That was the highest drilling rate in the Permian in two years.

President Trump announced this morning the granting of a permit for construction of the controversial Keystone XL pipeline, calling it “the first of many infrastructure projects” that he would approve in order to put more Americans to work.  The $8 billion project would span 1,200 miles, connecting Alberta’s massive tar sands crude with pipelines and refineries on the Texas gulf coast that are particularly well-suited to handling the thick oil.

TransCanada, the Calgary-based firm that has been trying to win approval for the pipeline for nearly 10 years, announced that the State Department has signed and issued a construction permit for the project. Because of the approval, TransCanada will drop an arbitration claim it filed for $15 billion in damages under the North American Free Trade Agreement. And Trump made no mention of using US steel, as he earlier said would be required of any new pipeline.

That doesn’t necessarily mean the pipeline will be built – at least not any time soon – but it will result in many new jobs…, for attorneys. Since Obama had nixed the pipeline based on an environmental assessment commissioned by the State Department in early 2014, opponents will likely argue in court that Trump can’t reverse the decision without conducting a new assessment.

The Presidential Permit is only one part of a web of federal, state, and local permits that must be obtained prior to starting construction. TransCanada may still need to reach deals with hundreds of potentially affected landowners, plus state and local regulators on the pipeline’s route.

Dallas Fed President Robert Kaplan sees three interest rate rises in 2017 as “a reasonable baseline.”  Kaplan said he is not looking for a pause in rate hikes if US employment and inflation figures continue to improve, adding that it would be right for the Fed to begin trimming its balance sheet in the future. Kaplan is a voting member on the FOMC.

New York Fed President William Dudley said today that the economy will cope “just fine” with gradual policy tightening. Meanwhile, St. Louis Fed President James Bullard does not share that confidence, and believes 2 more hikes might potentially be overkill. Bullard told reporters, “It’s not necessary to raise rates that quickly if the goal is to keep inflation near target and keep unemployment between 4.5 and 5 percent.”

US financial regulators are telling four foreign banks to improve their living wills. Barclays, Credit Suisse, Deutsche Bank and UBS were each given until July 2018 to improve their resolution plans, which are intended to map out a strategy so their US operations could be closed under bankruptcy law without taxpayer assistance in the event of an unexpected crisis.

At the same time, the Federal Reserve and the Federal Deposit Insurance Corporation said livings wills presented by 16 large US banks would be functional. Only Northern Trust’s living will have shortcomings that must be addressed.

Germany’s state-owned development bank KfW mistakenly transferred more than $5.4 billion to four banks because of a technical glitch that repeated single payments multiple times. We don’t know how that could happen but the money has been recovered. Maybe the “send” key got stuck or something.

Apparently, this kind of glitch is not uncommon. In June 2015, Deutsche Bank’s foreign exchange unit mistakenly sent $6 billion to a hedge fund client and recovered the sum a day later. And of course, there have been multiple hacks on multiple banks, including the Federal Reserve Bank of New York.

Still, the KfW blunder is distinctive because KfW’s own website touts it’s been awarded the title of the world’s safest bank by Global Finance magazine. You’ve probably never heard of KfW, but if it does register it might be because of an ill-timed payment of more than 300 million euros KfW made to Lehman Brothers in September 2008, just as the U.S. investment bank filed for bankruptcy.

At the time, the German lender failed to refresh its counter-party check that would have prevented it from processing the regular transaction. The transfer turned into a political scandal in Germany, with newspaper Bild calling KfW “Germany’s dumbest bank.”

Passengers on some flights to the US and UK must check in most types of electronic devices starting at 3 a.m. ET on Saturday. The ban includes laptops, cameras, gaming devices and tablets such as iPads. Some airlines flying to the U.S. have already started enforcing the new rules. Officials said the move is a response to fears that terrorist groups may target commercial aircraft by smuggling explosive devices in electronic devices.

On a party-line vote of 50-48, the Senate has approved overturning regulations from last October that put strict requirements on consumer privacy protection. The FCC, then led by Tom Wheeler, voted to require ISPs to get consumer consent before using data like health and financial information, as well as precise geolocation in ads and internal marketing. Major providers opposed the restrictions at the time.

The YouTube advertising exodus continues as Johnson & Johnson, JPMorgan and LYFT join other major advertisers in the US and the UK to pull ads from the platform, due to concerns they may have appeared on channels that broadcast offensive videos. Whether the recent events are a harbinger of bigger problems may depend on whether Google can give businesses more control over ad placement.

Japan’s Toshiba Corp has informed its main lenders it is planning for US nuclear unit Westinghouse Electric to file for bankruptcy on March 31. Reuters reports Toshiba expects a Chapter 11 filing for Westinghouse would expand charges related to the US unit in the current financial year to around $9 billion, about 30% higher than earlier estimates.

The decision comes only three months after Toshiba first warned of multi-billion dollar charges for Westinghouse. The ensuing financial meltdown has already caused Toshiba to put up its prized memory chip unit for sale, consider a sale of a majority stake in Westinghouse and miss deadlines to file earnings that have put it at risk of a delisting.

Stocks Lag Over Healthcare Bill Future

Charles Schwab: On the Market
Posted: 3/24/2017 4:15 PM ET

Stocks Lag Over Healthcare Bill Future

U.S. equities lost momentum late in the day as investors awaited the tally of today’s result of the healthcare vote, only to be left in the dark after President Trump asked Speaker Ryan to pull the bill in the wake of a lack of “yes” votes. In economic news, preliminary durable goods orders were mixed for February and Markit's Manufacturing PMI Index fell short of estimates, but remained in expansion territory. Treasuries, gold and crude oil prices were all higher, while the U.S. dollar dipped.

The Dow Jones Industrial Average (DJIA) fell 60 points (0.3%) to 20,597 and the S&P 500 Index shed 2 points (0.1%) to 2,344, while the Nasdaq Composite was 11 points (0.2%) higher at 5,829. In moderate volume, 791 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.27 higher to $47.97 per barrel and wholesale gasoline gained $0.02 to $1.62 per gallon. Elsewhere, the Bloomberg gold spot price rose $3.20 to $1,248.40 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—declined 0.2% to 99.58. Markets were lower for the week, as the DJIA lost 1.5%, the S&P 500 Index decreased 1.4%, and the Nasdaq Composite was 1.2% lower.

After the closing bell yesterday, Micron Technology Inc. (MU $28) announced fiscal 2Q earnings of $0.77 per diluted share on a GAAP basis and $0.90 per diluted share ex-items, versus the FactSet estimate of $0.86, while revenues jumped 58.4% year-over-year (y/y) to $4.7 billion, roughly matching expectations. Shares of MU were sharply higher.

GameStop Corp. (GME $21) also reported earnings after the close yesterday, announcing 4Q earnings of $2.36 per diluted share on a GAAP basis and $2.38 per diluted share ex-items, topping the FactSet estimate of $2.29, while revenues dropped 13.6% y/y to $3.1 billion, roughly in line with forecasts. Shares of GME finished solidly lower.

A large amount of investor focus was tuned to the current health-care bill that was expected to be voted on yesterday by the House of Representatives, but was postponed to today, only to be pulled from voting today. Though the legislative process is currently underway, many questions still surround the health-care industry and may or may not be addressed by the proposed legislation, however, Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA tackles this sector with his three-to-six month outlook in the most recent Schwab Sector Views: How Should Investors Look at Health Care Now?. And be sure to check out Brad's views on ten other sectors at www.schwab.com/marketinsight. Follow Schwab on Twitter: @schwabresearch.

Mixed read on durable goods orders

February preliminary durable goods orders (chart) rose 1.7% month-over-month (m/m), compared to the Bloomberg estimate of a 1.4% rise and January's upwardly revised 2.3% increase. Ex-transportation, orders were 0.4% higher m/m, compared to forecasts of a 0.6% gain and versus January's upwardly revised 0.2% increase. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, decreased 0.1%, versus projections of a 0.5% increase, and following the favorably revised 0.3% decline in the month prior.

The preliminary Markit U.S. Manufacturing PMI Index came in at 53.4 for March, down from February's final read of 54.2, and compared to estimates calling for an improved level of 54.8. A reading above 50 denotes expansion.

Treasuries were higher, as the yield on the 2-year note was unchanged at 1.26%, the yield on the 10-year declined 2 basis points (bps) to 2.40% and the 30-year bond rate decreased 3 bps to 3.01%.

As noted in the recent Schwab Market Perspective: Teflon Market, helping to bolster our belief in a strengthening economy—and our bullish stance—is the increased hawkishness of the Federal Reserve and their decision to hike rates at the March Federal Open Market Committee (FOMC) meeting. Additionally, the Fed signaled willingness to continue to hike rates in the coming months, which would mark the first time we would see more than one hike in a year since the financial crisis. Read the whole perspective at www.schwab.com/marketinsight. Also, for analysis on the Fed and its implications for bond investors, see the video from Schwab's Chief Fixed Income Strategist, Kathy Jones and Vice President of Trading and Derivatives, Randy Frederick titled Three Fed Hikes Seen in 2017: How Should Bond Investors Respond?, at www.schwab.com/insights. Follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick.

Europe lower following delayed health-care vote, Asia mostly higher

European equities finished trading mostly lower on Friday with financials and energy issues leading the decline. Traders seemed to be exercising a cautious and uncertain tone following the delayed health-care vote in the U.S. The declines in the region developed despite some upbeat manufacturing data as Germany and France both posted better-than-expected manufacturing PMI reads, though France also announced its 4Q GDP grew at a 1.1% annualized pace which was just shy of the 1.2% forecast. Elsewhere, U.K. consumers have coped fairly well since the Brexit referendum; however, they may face a real-income squeeze in 2017 as recent reports reveal the lowest level of household saving in the country since the 2008 crisis. The British pound declined versus the U.S. dollar after a U.K. policy maker attempted to downplay the chances of an interest rate increase. In his recent article The future of Europe: EU 2.0 and its impact on the markets, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, informs us that after 60 years of integration, a rising tide of nationalism threatens to pull Europe’s union apart in the years ahead and there are five possible scenarios defined by the European Commission to address the question of what Europe may look like in 2025. Find out what these scenarios are by reading the whole article at www.schwab.com/oninternational and follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mostly higher following the delayed health-care vote in the U.S. and as the yen weakened, giving markets in Japan a boost, while comments from Bank of Japan (BoJ) Governor Kuroda may have also lent a hand. In referring to the central bank's current government bond buying program, Kuroda said that he does not think it will face difficulties in the near future and that the BoJ will not raise its target level of the long-term interest rates just because of such rises in other countries. Schwab's Director of International Research Michelle Gibley, CFA, discusses in her recent article Fed Rate Hikes May Benefit Japanese Stocks, that the central bank wants to overshoot its 2% inflation target in a bid to get people accustomed to the idea of rising prices again. This could keep changes by the BOJ at bay for some time. Read the whole article at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Stocks in China and Hong Kong were higher, despite recent concern over central bank policy, as Schwab's Jeffrey Kleintop, CFA, discusses in his recent article The Fed has China in a Tough Spot, where he notes that additional Fed rate hikes in 2017 may put increasing strain on China and revive worries about growth, currency and capital flows as tough trade negotiations near. Read the rest of the article at www.schwab.com/oninternational. Australian securities advanced, with banks contributing solidly to the gains, while listings in India also gained ground, but those traded in in South Korea declined.

Stocks unable to erase losses for the week

U.S. stocks finished the trading week noticeably lower, though most of the downward action took place during Tuesday's session. The economic calendar was slow to start and without much data to drive direction, equities pulled back from recent all-time highs that were reached earlier this month. The delayed health-care vote also seemed to subdue sentiment, but didn't exacerbate the weekly decline. When economic data began to dole out, traders were treated to some mixed housing reports as existing home sales and mortgage applications declined, but new home sales increased and topped expectations. Additional reads showed weekly jobless claims unexpectedly rose and some regional manufacturing activity moved further into expansion territory.

In earnings news for the week, Nike Inc. (NKE $56), Cintas Corp. (CTAS $126), and Lennar Corp. (LEN $51) bested top line projections, though NKE announced a contraction in gross margins, while FedEx Corp. (FDX $188) and General Mills Inc. (GIS $59) missed forecasts. In her latest article, Big Machine: Why Large Caps Are Likely to Outperform, Schwab’s Chief Investment Strategist Liz Ann Sonders notes that momentum, breadth, sentiment, earnings, valuation and macro conditions currently support a bias within the U.S. equity market toward large caps over small caps. Read why at www.schwab.com/marketinsight.

Data expected next week

Next week, the U.S. economic calendar will again start slowly, with Monday's sole release expected to be the Dallas Fed Manufacturing Index, but the docket will be relatively busy for the remaining four days. A report that will likely garner a fair amount of attention is Thursday's release of the third and final read on 4Q GDP. However, when viewing the results our experts remind us in the recent Schwab Market Perspective, that investors should remember that GDP growth is backward-looking and the stock market is forward looking; which is why leading economic indicators are more valuable "forecasting" tools for the stock market. Read more at www.schwab.com/marketinsight.

Additional reports of note for next week include the advance goods trade balance, wholesale inventories, the Richmond Fed Manufacturing Index, pending home sales, personal income and spending, and the final University of Michigan Consumer Confidence Index.

The international calendar will bring some data worth noting: Japan—retail sales, jobless rate, CPI, industrial production, construction orders, housing starts and vehicle production. China—current account balance, manufacturing PMI and non-manufacturing PMI. Eurozone—consumer confidence and CPI, along with German Ifo business climate survey, Import Price Index, CPI and retail sales. U.K.—consumer credit, GDP, total business investment and GfK consumer confidence.