Financial Review with Sinclair Noe
DOW – 26 = 17,086
SPX + 3 = 1987
NAS + 17 = 4473
10 YR YLD un = 2.46%
OIL = 103.12
GOLD – 3.50 = 1305.00
SILV - .06 = 21.01
SPX + 3 = 1987
NAS + 17 = 4473
10 YR YLD un = 2.46%
OIL = 103.12
GOLD – 3.50 = 1305.00
SILV - .06 = 21.01
The Standard & Poor’s
500 index rose to an all-time high, as Apple boosted technology companies and
health-care shares rallied through another busy day of earnings reports. The
Dow was lower, mainly due to Boeing – we will get to that in a moment. Apple
hit its highest level since 2012, based on earnings reported after the close
yesterday.
Profits at S&P 500
members probably rose 6.2 percent in the second quarter, while sales gained 3.3
percent. Let’s knock out a few earnings reports:
Facebook posted $791
million in net income, or 30 cents a share compared with $333 million or 13
cents a share in the second quarter of 2013; revenue totaled $2.9 billion
compared to $1.8 billion in the year ago period. Mobile advertising represented
62% of its ad revenue; they have figured out Facebook on a smartphone. Facebook
now claims 1.32 billion monthly users.
AT&T was once the
telephone company, now it’s the second largest US mobile provider; they
earned $3.6 billion or 68 cents per share in the second quarter, down
from $3.8 billion or 71 cents per share a year ago; even as revenue increase
from $32.1 billion to $32.6 billion.
Biogen Idec rallied 11
percent after raising its full-year forecast, while Intuitive Surgical jumped
18 percent as results topped estimates.
At first blush,
Boeing’s numbers looked good; the aerospace giant earned $2.40 per share,
easily beating estimates of $2 per share; the company lifted its earnings
outlook for the rest of the year. Shares dropped about 2%. Revenue growth
disappointed. Commercial airline sales were up less than expected; there was a
substantial charge for a military tanker. Boeing is one of the dogs of the Dow
– down 7% year to date.
Delta Air Lines said
its second-quarter earnings were up 17%, driven by higher passenger and operating
revenue as traffic increased. Delta has said it plans to reinvest about 50% of
its operating cash flow back into the business, resulting in $2 billion to $3
billion of capital expenditures annually through 2018, with $2.3 billion
planned for 2014.
Another day, another
General Motors recall; the only difference is that today’s recall does not
involve ignition switches; it is a problem with the seats. Today’s recalls
total 717,950 vehicles covering six models; bring the total for the year to
about 29 million. If you own a GM vehicle, call the dealer. The problem with
ignition switches has not gone away, just today, it moved to Jeep-Chrysler,
which announced nearly 800,000 vehicles would be recalled for ignition switch
problems.
Another month, another
downward revision from the IMF. In June, the International Monetary Fund
forecast US economic growth would be about 3% to 3.5% for the rest of this
year, and then they revised forecasts down to 2%. Today, the IMF said US
economic growth would be about 1.7%. The IMF says lower growth expectations
should contribute to continued slack in the labor market for the next three to
four years, with the United States remaining below full employment until 2018.
The IMF says the
Federal Reserve could keep its benchmark interest rates at zero beyond the
middle of 2015, the date implied by policymaker forecasts, as long as inflation
and financial stability concerns remain subdued. Future US growth could be
disappointing if interest rates rise too quickly, or if there is a broader and
concerted slowdown in emerging markets, or if increasing geopolitical tensions
in Iraq and Ukraine prompt higher energy prices and severe financial and trade
disruptions. The IMF also warned that an aging US population meant the economy would
not be able to grow above 2% long term without significant reforms, including
tax and immigration changes, more investment in infrastructure and job
training, and the provision of childcare assistance, which could help lure more
Americans into the workforce. Even without these measures, the IMF said there
is "a strong case" for more government spending to support the
economic recovery in the near-term, as long as there is a plan to deal with
high entitlement spending later on.
Meanwhile, the IIF, the
Institute of International Finance says investors have been willing to take on
more risk, pushing borrowing costs down and stock prices higher, based in part
on strengthening confidence in the US and global recoveries, but with perhaps
too much exuberance. Investors do not seem to be taking adequate account of the
uncertainties around economic growth and monetary policy, and that point to a pullback
in markets. With uncertainty likely to increase on both fronts, a correction
from current ultra-low levels of volatility could continue, accompanied by a
correction in asset valuation. The IIF’s concerns echo those of some Federal
Reserve officials, who said at their June meeting that low volatility levels
and increased risk-taking signaled “market participants were not factoring in
sufficient uncertainty about the path of the economy and monetary policy.”
Another day and the
fighting continue in the Middle East. The latest count has 687 Palestinians
killed in the conflict. Ben Gurion Airport in Tel Aviv remains closed to US
airlines, and many other global carriers. Secretary of State John Kerry is
trying to negotiate a ceasefire but it looks unlikely.
In the Netherlands, a
day of mourning as the bodies of the victims were returned for identification.
Most of the passengers were Dutch. Two military planes, one Dutch and the other
Australian, carrying the first 40 coffins landed at Eindhoven air base. They
were met by members of the Dutch royal family, the Prime Minister and hundreds
of victims' relatives. In Kiev, the Ukrainian government reports two Ukrainian
military jets were shot down within 20 miles of the crash scene.
The downing of a
civilian jetliner might turn out to be the Lusitania moment that could draw the
US and Russia into a new world war, but for now, it does not seem likely. The
more likely reaction will be an increase in sanctions against Russia, which the
US has already done; the EU is more reticent. The European Commission, the EU’s
executive arm, will put forward its proposals to a committee of the 28 EU
member governments in Brussels tomorrow. The bloc’s foreign ministers this week
called for plans for measures that could hit “access to capital markets,
defense, dual-use goods, and sensitive technologies, including in the energy
sector.” Russia supplies 30% of the natural gas to Europe, and it is a major
trade partner. Yesterday, France delivered a $1 billion dollar warship to
Russia, saying the Russians had paid for it and it was scheduled for delivery.
Business drives the truck; coffins are placed in the back.
Events in Gaza and
Ukraine have, for the time being, taken global attention away from the Syrian
civil war and the ISIS’s advance through Iraq. Last Thursday and Friday were
the two bloodiest days yet in Syria’s civil war, with more than 700 people
killed in fighting between the Syrian government and ISIS, the Sunni militant
group. An ISIS suicide bombing killed 31 people, mainly civilians, in Baghdad
yesterday. ISIS appears to be consolidating its newly acquired territories. The
government in Baghdad appears to be struggling to cobble together something
that would actually pass as a government. The civil wars in Syria and Iraq are
growing increasingly chaotic and there does not seem to be much hope for
resolution.
The Gaza and Ukraine
conflicts are not likely to draw greater powers into a major conflict. One
reason is that Gaza and Ukraine are not major oil producers. The conflict that
represents the largest potential threat to markets is still the ISIS invasion
of Iraq; there oil supply could be severed and the jockeying among regional
middle powers could possibly lead to a wider scale conflagration between Sunni
and Shia sponsor states.
So, one of the
indicators that things are getting better or worse will be reflected in the
price of energy. Think of it this way: Everything you did this morning involved
energy consumption: Waking up to your smart phone (charging overnight), putting
on the coffee, pouring the cold milk from the fridge, taking a shower, driving
the car to work and walking into your air-conditioned office. Likewise, the
rest of your day will be one big consumption of energy. Anything that disrupts
that supply of energy disrupts the work you do.
Right now, there is
probably a $5 to $10 fear premium built into the price of oil, and that seems
to be acceptable. The signal from the energy market about the demand of energy
and the risk of getting enough of it is clear: Prepare for less growth, less
certainty and more geopolitical risk. The market, however, maintains a steady
hand: Israel will be contained more or less; Russia and Ukraine will find a
solution or just fade away. The non-acceptance of Black Swans is clear for
everyone to see. The market is “perfect” in its information, zero interest
rates will save us and we have all been fooled into believing that the real
world no longer matters. Unemployment, social inequality, wars, innocents being
killed, and TV images of people fighting to live another day are not relevant.
Maybe, after 13 years of war, the US is just weary of any threat.
At some point the fear premium could pop and
oil prices could jump to $150 or $200 a barrel, and if that happens the IMF
forecast is way too high; if that happens the economy comes to a grinding halt;
if that happens, everybody in the US and Europe will wake up and scream bloody
murder, but for now, it’s just another day, another dollar.
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