Morning in Arizona

Morning in Arizona

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Friday, July 22, 2016

Capping Off a Record Week

Financial Review

Capping Off a Record Week

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

DOW + 53 = 18,570
SPX + 9 = 2175
NAS + 26 = 5100
10 Y – .02 – 1.55%
OIL – .51 – 44.24
GOLD – 8.60 = 1323.10

Stocks closed higher for the fourth straight week, with the S&P hitting a new record high. The rise capped the longest run of weekly gains since March. The Dow Industrial Average did not close at a record high but has been positive for 10 of the last 11 sessions.  A three-week rally in global equities has added more than $4.5 trillion in value.

The next big event for the markets likely will be the two-day Fed policy meeting slated for July 26-27. Although the central bank isn’t expected to push benchmark rates higher, market participants will pore over the updated policy statement for clues on the pace and timing of the next rate hike, which could influence the U.S. dollar, Treasuries and the broader stock market.

In the weeks following Brexit, there was a “dramatic deterioration,” in the British economy; that according to a one-time report from Markit Economics published this morning. Services and manufacturing shrank and a gauge of the private-sector economy plunged to 47.7, well below the 50 level that divides expansion from contraction. The slump is the strongest evidence yet that politics is propelling the world’s fifth largest economy into recession. It intensifies pressure on the Bank of England to deliver fresh monetary stimulus and on the government to reverse fiscal austerity.

The pound dropped after the report was published, with Markit saying its latest readings put the economy on course to contract by 0.4% this quarter. Business activity in the eurozone did not fall as much as expected in July, despite Brexit jitters and the Bastille Day massacre, as Markit’s flash PMI for the region dropped to 52.9 from June’s 53.1.

French President Francois Hollande has given U.K. Prime Minister Theresa May a choice: Accept unlimited immigration from the EU or lose access to its single market. May also confirmed that the triggering of Article 50 won’t come this year as her government works out its negotiating position. Article 50 refers to the official notification to withdraw from the Euro Union. And this is an important point because the UK is not officially out of the EU until it has triggered Article 50 and then gone through 2 years of negotiations. Now the UK could conduct negotiations during that period, but a big part of any new trade deals will be with countries in the EU. Bottom line, the Brits will have a very tough time getting trade deals in place before they exit the EU.

Finance ministers and central bank governors from G20 countries are gathering in Chengdu, China, for a two-day meeting that begins tomorrow. Brexit and monetary policy at a global level are likely to be the main topics of discussion. Ahead of the G20 meeting, the IMF painted a dark outlook for the global economy, issuing an “urgent” call for the world’s largest economies to roll out more growth-boosting policies and act more aggressively.

General Electric reported a sharp rise in adjusted net income in the second quarter, as its aviation, healthcare and power businesses countered weak demand for oil and gas and transportation equipment. During the quarter, GE returned $18 billion to shareholders through stock buybacks. The company shed its designation as a non-bank systemically important financial institution after divesting most of its GE Capital business. GE’s results included four different earnings-per-share numbers.

The conglomerate has said year-over-year comparisons are difficult as the company has recorded both gains and losses from sales of several businesses as part of its GE Capital exit plan, acquired Alstom and recognized pension costs and restructuring charges. The actual bottom line based on generally accepted accounting principles (GAAP) was earnings of $2.74 billion, or 30 cents a share, compared with a loss of $1.36 billion, or 13 cents a share, in the same period a year ago. GE shares dropped about 1.6%.

Boeing has revealed more expensive stumbles with the production of new commercial and military jets, saying it would take $2.1 billion in charges in its coming earnings. The pretax charges stem from delays in developing its new Air Force refueling tanker, demand concerns about its 747 jumbo and the original high costs of its 787 Dreamliner.

American Airlines reported better than forecast second-quarter earnings but profit fell even though the airline managed to cut fuel costs — a major expense — by one-fifth. Overall operating revenue is down, while the average airfare paid fell 6.4% and load factor — a measure of how full flights are — dropped one half percent. Earlier this week, United and Southwest both reported similar revenue pressures. Reduction in spending on the part of the airline and the consumers is a sign of a weakening global economy or, at the least, a sign that growing concern the global economy is headed that way. Britain’s historic vote to leave the EU, is one reason.

American Airlines President Scott Kirby said during the earnings call, “We have seen historically that if there is a business confidence problem, the first thing businesses do is cut entertainment and travel budgets.” In fact, for everyday consumers, air travel is also one of the first budgetary items to be cut when there is concern about the economy. As a result, softness in airline revenues and a decline in demand for air travel can be seen as a bellwether for looming economic issues.

Schlumberger and Halliburton, the world’s two largest providers of oilfield drilling and fracking services, have said that the worst of the two-year-old oil market crash may be over. The first half of the year has seen something of a pick-up in deals, while the backlog of drilling, but not fracked, wells in the U.S. has stopped growing. The one thing that is missing from the picture so far is a recovery in oil prices. WTI crude oil prices dropped about 3% this week.

Even though Schlumberger thinks the oil patch has hit bottom and may be turning around, they will cut more jobs. The world’s largest oil field services provider earned an adjusted $0.23 a share, topping estimates of $0.21. Revenue of $7.16 billion edged out the $7.15 billion that Wall Street was expecting. Schlumberger says it cut 16,000 jobs in the first half of the year, leading to a $646 million restructuring charge.

Meanwhile, the latest news from baker Hughes shows oil rig counts increased by 14 in the last week – up 6 of the last 7 weeks. So, as we look at rebalancing in the oil patch, $50 a barrel looks like the level where the rigs pump come out of hibernation. This week’s report from EIA revealed a slight draw-down in crude oil inventories. Crude oil stocks were down 2.3 million barrels, posting the ninth straight week of declines and adding momentum to a slow but steady oil market balancing. Still, oil inventories stood at 519.5 million barrels as of mid-July, about 60 million barrels higher than year-ago levels. Combined, all U.S. crude oil and refined product stocks jumped to 2.08 billion barrels, an all-time high. This comes at a time of year when peak demand is supposed to draw down on inventories.

There was some strong economic news this week, existing home sales were up, and it looks like first time buyers made up about one-third of all buyers last month.  The low interest rate environment is certainly a factor on home sales. It suggests that important cylinders of the US economic engine continue to fire, despite the slowdown in China and the weakness in Europe.

Aside from homes, cars—another interest-rate dependent sector—are going strong too. GM’s profit was up 150% when they reported earnings the other day. All those new cars are more efficient; they get better mileage, which might explain why we have an oil glut right now.  Refiners are contributing to the draw-down in crude oil stocks, pulling oil out of storage, but they are simply spinning that into gasoline, which then ends up in storage because people are not using as much as the industry thought it would. As summer comes to an end and refiners turn to maintenance and cutback on refining runs, the upward pressure on gasoline inventories could subside, but the demand on crude could also fall.

Automakers are betting big on electric cars, in part to meet aggressive U.S. fuel-economy standards that project the vehicle fleet will average more than 50 miles per gallon by 2025. And while the cars are efficient, they still have to charge up with electricity. The Energy Department has announced a plan to provide $4.5 billion in loan guarantees to build car charging stations, aiming to complete a U.S. network by 2020 to make “coast-to-coast, nationwide zero-emissions travel” a reality.

Stepping into the student loan marketplace, Amazon has formed a partnership with Wells Fargo, in which the bank will offer interest rate discounts to select “Prime Students.” The offer, which will shave a half percentage point off WFC’s student interest rates, will be accessible to Amazon shoppers who want loans to attend college and those who want to refinance existing loans.

Pokemon GO has finally launched in Japan, the birthplace of the little virtual monsters. Besides Nintendo, which owns stakes in both The Pokemon Company and game developer Niantic, shares of McDonald’s Holdings Japan are getting a big boost from the news. Its fast food restaurants across the country are set to become “gyms,” where players can train their Pokemon for virtual fights.

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