Financial Review

Decision Day

Sinclair Noe — July 26, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

DOW + 97 = 21,711
SPX + 0.7 = 2477
NAS + 10 = 6422
RUT – 8 = 1442
10 Y – .05 = 2.28%
OIL – .08 = 48.67
GOLD + 10.50 = 1261.10
BITCOIN + 0.70% = 2568.14 USD
ETHEREUM – 2.22% = 197.74

The major U.S. stock indexes set all-time highs again.

The Federal Reserve Federal Open Market Committee wrapped up its two-day meeting on monetary policy. They left interest rates unchanged and in a statement, said they would begin running off their $4.5 trillion balance sheet “relatively soon”.

The Fed’s language was not dovish, but perhaps a bit less hawkish. That pushed Treasuries higher. The Euro jumped to a 2-1/2 year high against the dollar. The next scheduled FOMC meeting is September 19-20, and there is a good chance the Fed will announce the onset of the balance-sheet reduction after the September meeting, effective on the first of October.

The Fed has raised interest rates 4 times since they began removing emergency policy in December 2015, and project another increase before the end of this year – most likely at the December meeting. As the Fed starts selling securities from their balance sheet, they will start small and gradually increase the sales, which should allow markets to adjust, at least in theory.

The FOMC said it’s “monitoring inflation developments closely.” There isn’t much inflation to monitor right now, the PCE gauge is running at about 1.4%, and seems to be stuck in a rut, despite the Fed’s targets. At this point in the economic cycle, with the unemployment rate at a 16-year low, you would expect to see wages increasing, which would push prices higher.

But prices aren’t going up, and that raises questions about the real strength of the labor market and the economy. Whatever it is, it is a symptom of an economy that just keeps slogging along but can’t really take off.

Get ready for “vote-a-rama”, where Senate GOP leaders will throw everything they have that resembles a health care bill at the wall to see what sticks. Today they voted on a straight repeal of Obamacare – that vote failed (which was expected), there will be a voting frenzy for senators on a series of amendments.

Next up, votes on various amendments to repeal bits and pieces of Obamacare, or what is known as a skinny repeal that would throw the issue to a Senate-House of Representatives negotiating committee. Republicans hope the they can find some amendments which pass and can then be cobbled into some sort of bill which repeals a portion of Obamacare, in some way, shape, or form.

This morning President Trump tweeted that he would ban transgendered people from serving in the military. Who knows whether Trump will follow up his tweets with an actual order. That would normally come from the Pentagon, which was reportedly surprised by the announcement. If there is an actual order, the matter will quickly move to the courts.

New single-family home sales increased in June as purchases in the West surged 12.5 percent to a near 10-year high, but downward revisions to the sales pace for the prior three months pointed to a housing market that is struggling to gain momentum. The Commerce Department said new home sales gained 0.8 percent to a seasonally adjusted annual rate of 610,000 units last month. The sales pace for March, April and May was revised lower. Sales rose 9.1 percent on a year-on-year basis.

Copper rose again, closing at the highest price in two years and bringing its year-to-date gain to 14 percent. While some of the rally has been fueled by the usual fundamentals –  a stronger Chinese economy and labor disputes at mines –  the latest lurch higher may be caused by momentum and a short squeeze. The way that prices have been gaping higher in a straight line up suggests that somebody had some painful options positions to cover.

Earnings reporting season continues to take center stage on Wall Street and most of the news is good. Consider though, that we’re comparing second quarter 2017 to second quarter 2016, when earnings were in a recession. Are corporate earnings genuinely wonderful? It may depend on your perspective.

For example, after-tax corporate profits have grown at an annualized pace of less than 1% over the last five years. You won’t find many five-year periods that have been as anemic as that. You might assert that the only thing of importance is earnings acceleration since the fourth quarter of 2016.

After the closing bell, Facebook reported better than expected profit and revenue. Instagram, the company’s photo-sharing app, helped second-quarter sales climb 45 percent to $9.3 billion. Net income rose to $3.9 billion, or $1.32 a share, from $2.3 billion, or 78 cents, a year earlier.

There are now 2.01 billion monthly active users, and two-thirds of the monthly users are on Facebook every day. Shares dipped roughly 4% in after-hours trading over apparent confusion related to the company’s recent switch to reporting GAAP numbers. But the confusion was soon sorted out and Facebook shares are up about 1%.

PayPal reported a better-than-expected quarterly profit. The company’s shares were up 2.4 percent in trading after the bell.

General Dynamics posted higher-than-expected quarterly profits driven by increased sales in the unit that makes tanks, but projected slightly lower aerospace sales. Its stock fell 4.4 percent

Boeing swung to a net profit of $1.76 billion, or $2.89 a share, from a loss of $234 million, or 37 cents a share, in the same period a year ago. Boeing raised its 2017 adjusted EPS outlook. The stock shot up more than 8%, its largest percentage gain since August 2009, to a record high of $230.43.

Coca-Cola earned $1.3 billion in the last quarter, slightly better than estimates. Revenue came in at $9.7 billion, beating estimates. Sales of sodas and non-soda drinks improved. Then they announced changes to Coke Zero, which will soon be Coke Zero Sugar, and that’s when I sort of stopped caring.

Shares of Buffalo Wild Wings fell nearly 10 percent in extended trading after the company reported sizable misses in its earnings and revenue.

Whole Foods Market reported third quarter earnings that beat estimates. Revenue was flat. The company said its same-store sales fell 1.9 percent in the quarter, not as bad as expected. Amazon reports earnings tomorrow.

Ford Motor reported higher-than-expected second-quarter profits, and in the next breath warned of a rougher ride for the rest of the year. Ford said full-year pre-tax profit, automotive operating margins and cash flow would be lower than 2016 results, sending the company’s shares down 2.1 percent. Ford reported second-quarter net income of $2.04 billion, or 51 cents per share, up from nearly $2 billion, or 49 cents per share, a year earlier.

Britain will ban the sale of new gas and diesel cars by 2040. The UK joins France, which recently announce it would go electric by 2040. The mayors of Paris, Madrid, Mexico City and Athens have said they plan to ban diesel vehicles from city centers by 2025. Electric cars currently account for less than 5 percent of new car registrations in Britain. The shift to electric will require a substantial build-out in charging stations, and for auto manufacturers – who have already started the move to electric.

In Europe, so called ‘green cars’ benefit from subsidies, tax breaks and other perks, while combustion engines face mounting penalties including driving and parking restrictions. Britain’s move will accelerate the decline of diesel and gas cars. Turning away from oil will add to discussions about whether the world is reaching peak oil demand and how additional electric power can be generated.

It also raises questions about leadership; right now, European auto manufacturers are leading both industry and government in the move to electric; Japanese car-makers are strong electric competitors, and the US is lagging. Also, the ability to generate electricity, especially distributed generation of clean energy will be a huge and growing area.

Soon, it will just be an economically easy move for consumers, as improved technology lowers costs. For example, a $1,000 car battery today is expected to cost just $73 within the next 12 years. Given the rate of improvement in battery and electric-vehicle technology over the last 10 years, by 2040 small-combustion engines in private cars could well have disappeared without any government intervention.