Morning in Arizona

Morning in Arizona
Rainbows over Canyonlands - Dave Stoker

The Headline Animator

Wednesday, July 19, 2017


Financial Review


DOW + 66 = 21,640
SPX + 13 = 2473
NAS + 40 = 6385
RUT + 14 = 1441
10 Y + .01 = 2.27%
OIL + .69 = 47.09
GOLD – 1.00 = 1242.00
BITCOIN + 1.75% = 2334.63 USD
ETHEREUM – 2.36% = 209.06

The Dow Industrials, S&P 500, Nasdaq Composite and Russell 2000 all closed at record highs today. This is the first time all 4 indexes closed at a record high on the same day since March 1st.

ETFs have seen net new inflows of $250 billion thus far this year, and more than half of that inflow has gone to just 20 ETFs, or about 1% of the ETF universe. The most popular ETF this year, in terms of flows, has been the iShares Core S&P 500 ETF (IVV), which has taken in $18.5 billion.

Two other iShares equity products—the iShares Core MSCI EAFE ETF (IEFA) a market-cap-weighted index of developed-market stocks in Europe, Australasia and the Far East, and excludes the US and Canada, and the iShares Core MSCI Emerging Markets ETF (IEMG), —rounded out the top three.

According to a Bank of America Merrill Lynch survey of 207 investors with a total of $586 billion under management, money managers are a net 20 percent underweight U.S. stocks. That’s despite the major averages setting new records on an almost weekly basis.

There are a few takeaways here, all supportive of equities. One is that the survey suggests there is lots of money that could be put to work in stocks. Another is that there aren’t a lot of natural sellers left, since anybody who wanted to sell has already done so. And finally, the most successful investors say that the time to buy is when everyone else is selling.

Investors will focus on quarterly earnings to see if high valuations are justified in the face of mixed economic data, tepid inflation and policy gridlock in Washington.

Analysts estimate an 8.7 percent rise in second-quarter earnings and a 4.6 percent increase in revenue for the S&P 500 companies from a year earlier. The S&P tech sector has been the best performing sector this year despite concerns about stretched valuations as investors look for growth sectors immune to policy uncertainties.

The exception is IBM, down 4.2 percent today to a one-year low after the company’s quarterly revenue came in below expectations – that’s 21 consecutive quarters of declining revenue for Big Blue. The stock was the biggest drag on the Dow and the S&P 500.

Wall Street has a new bond trading king. Morgan Stanley rose 2.1 percent after the Wall Street bank reported better-than-expected profit and bond trading revenue declines that were modest compared with arch-rival Goldman Sachs. Goldman was down 0.5 percent.

While revenue from fixed income fell during a quiet second quarter, Morgan Stanley still reported fixed income sales and trading revenue of $1.2 billion – and while that is down 4 percent from last year, it was better than the stunning 40 percent drop reported Tuesday by rival Goldman Sachs over the same period.

Morgan Stanley has bested Goldman in fixed income revenue for two quarters now, with $2.9 billion of fixed income trading revenue in the first half of the year versus Goldman’s $2.8 billion.

CSX fell 6.5 percent after the third-largest U.S. railroad operator’s forecast missed expectations. Other railroad companies such as Union Pacific fell 2 percent, while Kansas City Southern edged down 0.7 percent.

American Express’ profit fell less than expected in the second quarter, as higher spending by card members made up for increased costs from offering rewards. AmEx said card member spending was up 8 percent in the second quarter ended June 30. Revenue was flat and net income came in better than estimates. American Express dropped 1% in trading today.

T-Mobile beat revenue and profit estimates, and added more customers than expected in the most recent quarter. Shares gained 5%.

Vertex Pharmaceuticals jumped as much as 26 percent to an all-time high after the company reported positive results for its cystic fibrosis treatment. The stock was the biggest boost on the S&P and the Nasdaq.

Spices maker McCormick & Co has won the battle to buy Reckitt Benckiser’s North American food business, paying a higher than expected $4.2 billion. Reckitt said in April it was reviewing options for the unit, which includes French’s mustard and Frank’s RedHot sauce, to cut debt following its $16.6 billion purchase of baby formula maker Mead Johnson.

The Senate Republican plan to repeal and replace Obamacare could not muster enough support for a vote Monday. Yesterday, President Trump said he wanted to just repeal the Affordable Care Act, and come up with a replacement down the road. Today, the Congressional Budget Office released an estimate saying that just a repeal would result in 17 million more uninsured within a year, and 32 million more uninsured within 9 years.

Today, it is back to repeal and replace, and Trump wants the senators to stay in Washington until they get it done. Polling shows just 12% of Americans support the Senate healthcare bill.  Meanwhile, their counterparts in the House looked to reset matters with a fresh budget proposal.

The House Republicans’ spending plan aims to balance the federal budget within a decade, reducing the deficit by $6.5 trillion, partially by cutting billions of dollars from entitlement programs such as Medicare and Social Security. Like the proposal the White House released in May, the House proposal is a blueprint, not a bill set in stone. It also assumes the Senate health package will become law, an increasingly unlikely outcome.

But even if this budget is not passed as written, it puts House Republicans’ financial priorities on full display. The House budget proposes increasing the base national defense budget by $70 billion, from $551 billion in fiscal year 2017 to $621 billion in fiscal year 2018. That’s more than the $574 billion in base defense spending recently proposed by the White House.

Also included in the proposal is $75 billion to fight terrorism, as well as “significant funding” on resources for border security, which includes construction on a controversial border wall between the U.S. and Mexico.

The House budget proposes reducing spending on entitlement programs such as Medicare by $203 billion next year, instructing 11 House committees to find ways to reduce spending. These cuts would in part come from programs like Medicare, which could face $487 billion in cuts over the next decade, and Social Security, which faces $4 billion in cuts in that same time frame.

The proposal assumes that the Senate GOP health bill will become law, resulting in what the Congressional Budget Office estimates would be $834 billion in Medicaid cuts over the next decade.

The House proposal also recommends reducing funding for food stamp programs, noting that spending on such initiatives doubled between 2001 and the start of the financial crisis. Spending on the Supplemental Nutrition Assistance Program, or SNAP, increased from about $18 billion in 2001 to about $33 billion in 2009, according to the USDA.

The House proposal mandates that the chamber’s Ways and Means Committee pass a tax reform bill that does not increase the deficit, reduces overall tax rates and simplifies the tax code. The budget also stipulates that such a bill should repeal the alternative minimum tax and reduces the corporate tax rate. The budget instructs the committee to pass this reform through a process called reconciliation, which was primarily designed to pass budgetary laws.

This means that if a tax reform plan is passed by the House, it would only need majority support in the Senate, and won’t be subject to a filibuster. That gives the Senate’s Republican leadership additional wiggle room to pass the measure; with 52 Senators, the GOP can afford two defections.

However, the same strategy did not help avoid the internal party discord that derailed their efforts to repeal and replace the Affordable Care Act.

Supreme Court rejected parts of Trump’s travel ban. The three-sentence order by the justices,  widened the definition of which citizens from six mostly Muslim countries covered by the travel ban are still eligible to travel in the US. And that will include grandparents, cousins and other relatives of a person in the US.

The court plans to hear arguments on the travel ban on Oct. 10; the latest scuffle centered on the rules that will apply in the interim.

Crude closed above $47 a barrel for only the second time since early June as US inventories fell by 4.73 million barrels last week as measured by data from the Energy Information Administration. Gasoline supplies shrank 4.44 million barrels, the most since March.

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