Financial Review

A Long Week

Sinclair Noe — August 11, 2017

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

DOW + 14 = 21,858
SPX + 3 = 2441
NAS + 39 = 6256
RUT + 1 = 1374
10 Y – .02 = 2.19%
OIL + .16 = 48.75
GOLD + 2.90 = 1289.70
BITCOIN + 0.39% = 3693.86 USD
ETHEREUM + 3.87% = 312.44

The tweets continued today.

Trump says the US military is “locked and loaded”. In Guam, they are telling the schoolkids to duck and cover. China published an editorial in a state-run newspaper, basically saying that the first one to throw a punch loses. If North Korea launches a missile first, threatening U.S. territories and triggering retaliation, China will remain neutral.

A pre-emptive strike against Pyongyang, however, would provoke a Chinese response and they would counter reunification of the peninsula. Russian Foreign Minister Sergei Lavrov said “Unfortunately, the rhetoric in Washington and Pyongyang is now starting to go over the top. We still hope and believe that common sense will prevail.”

Wall Street is betting nothing will happen, which is a smart bet in an otherwise insane news cycle. Fire and Fury. Locked and Loaded. Duck and cover. Dumb and Dumber… It’s been a long week.

And, if nobody does something incredibly stupid, we get back to business as usual, sort of. 200 S&P 500 components, or 40 percent, are in correction territory. A stock or an asset class enters a correction when it falls at least 10 percent from its 52-week high. Among the stocks in a correction were e-commerce giant Amazon.com, Goldman Sachs, Exxon Mobil, Starbucks and Netflix.

After a calm and pleasant summer, we can probably expect more volatility. August is when traders take vacation and drama hits the markets. September and October are typically volatile months; and typically trade lower. The past may be prologue or irrelevant, which is what makes stock markets so interesting.

Traders are digesting second quarter earnings and trying to decide if recent record highs are justified. In Washington, the politicians will pull up their socks and get to work on the debt ceiling, plus tax reform at some point, and maybe eventually infrastructure, and there is still work to do on healthcare – repeal has failed, so now they need to fix what they have.

Meanwhile the Fed wants to normalize and tighten, which sends shivers down the jellied spines of Wall Street traders. So, there is still plenty of stuff that could blow up. For individual investors, the key is now and will remain – discipline.

You wouldn’t know it from today, but it’s been just about the worst week all year. For the week, the S&P fell 1.4 percent and the Dow lost 1.1 percent – their largest weekly drops since the week ending March 24 – the Nasdaq was off 1.5 percent and the Russell 2000 index lost 2.7% for the week.

European stocks fell and U.S. junk bonds had the biggest drop since March. Nearly $1 trillion has been wiped out from global equity markets since Trump’s vow on Tuesday to unleash “fire and fury” on North Korea if it threatens the United States.

The VIX briefly topped 16.

Consumer prices remained soft for the fifth straight month in July. The consumer price index rose a seasonally adjusted 0.1% in July. Food prices rose 0.2% in July while energy prices slipped 0.1%.

The core CPI, which excludes volatile food and energy costs, also rose 0.1%. Consumer prices have risen an unadjusted 1.7% over the past 12 months, up slightly from 1.6% in June.

But on a core basis, which is watched more closely by Fed officials, consumer prices remained at a 1.7% annual rate, the same rate as in May and June. The core rate was held down by a sharp decline in new vehicle prices, which fell 0.5%, the biggest decline since August 2009.

The cost of cell phones continued to decline, falling 0.3%. The index of used cars fell 0.5%, its seventh consecutive decline. The price of a car may be lower but the rent is still too damn high.

The cost of rent was up 3.8% compared to a year ago, according to the Labor Department. That’s down a tick from the 3.9% annual pace it notched in June. And it’s not as high as the 4.3% annual pace it averaged in the year before the Great Recession started.

It’s not just renters who are feeling the squeeze. The inflation category called “Owner’s equivalent rent,” which tries to quantify how much homeowners would pay for their housing if they rented it, was 3.2% higher in July than a year ago. Still, it’s growing a lot faster than wages.

Muted inflation in the July consumer price data is not something the Federal Reserve is going to be happy to see. But the central bank will have four more reports to review before it needs to decide late year whether to raise short-term interest rates again, as had been previously projected.

Shares of Snap ended down 14 percent after hitting another record low following a miss on revenue and daily active users. At least 12 brokerages cut their price targets on the stock. Valuation is disappearing faster than its messages.

Blue Apron’s stock “performance” makes one wonder why the company ever wanted to go public and why anyone agreed to underwrite it. The recipe-in-a-box startup failed to show adequate signs of life in its first quarter and even reported a very nettlesome operations problem.

Shares of APRN have fallen as far as 20% since the results came out yesterday morning and now even Blue Apron’s underwriters are admitting that they might have missed something during the IPO journey. Goldman Sachs led the underwriting and they just downgraded the stock. Maybe they can their free Blue Apron subscription to order crow.

Starbucks is now facing some serious competition. From other Starbucks. The old joke about a Starbucks on every corner may be coming true. The coffee chain’s relentless pursuit of ubiquity is becoming one of its own foils, according to analysts at BMO Capital Markets, saying the company has saturated the American market so much that it’s now losing sales competing with itself.

Market watchers have an all-too appropriate term for this phenomenon: cannibalization. On average, for every one Starbucks location in the US, there are now about four others within a one-mile radius to compete against. Over all in 2017, more than 62% of Starbucks now compete with at least one other Starbucks coffeeshop.

More than 100 Applebee’s locations and around 20 IHOPs will shutter this year. DineEquity, the parent company of both brands, is focusing on shuttering under-performing locations. An earnings report released yesterday shows sales fell by more than six percent at Applebee’s and nearly three percent at IHOP in the last quarter; meanwhile, DineEquity’s stock has lost almost half its value this year.

Diners these days tend to go either high, spending money on special, fine-dining experiences, or low, eating at cheaper fast-casual chains, meaning places in the middle are feeling the squeeze. These kinds of chains tend to suffer from bloated menus that try to do everything at once, versus the currently-booming specialty fast-casual spots that focus on doing one or two things and doing them well.

J.C. Penney finished down 16.6 percent after hitting a record low following the retailer’s bigger-than-expected quarterly loss. Its 1.3% drop in same-store sales was slightly worse than anticipated, and it lost $62 million in the quarter. The company has been trying to refocus its business more on home appliances and services and less on apparel, but the efforts evidently haven’t paid off.

Department stores almost across the board are in a period of turmoil as they battle the rise of e-commerce, especially Amazon. and in any case, are contending with shoppers who are heading out to malls and stores less often—and usually looking for deep discounts whenever they do. Many chains have announced widespread store closures, and even more may be necessary to get their businesses to the right size for the current era.

President Trump just got a nasty review of his immigration plans from the alma mater he loves to tout. A new study from the University of Pennsylvania’s Wharton business school found that the proposals he backs would dent growth and cost over 1 million jobs over 10 years.

The president has strongly endorsed a bill introduced by US Sens. Tom Cotton and David Perdue called the Raise Act, which adds to the president’s campaign promise to focus on illegal immigration by going after legal immigrants as well. Its proponents say they want to welcome only “good” immigrants — those with a lot of money and high levels of education.

But the Wharton report finds that the legislation, which is supposedly aimed at boosting economic growth and creating more American jobs, would actually have the opposite effect. According to the Wharton model, the Raise Act would reduce GDP by 0.7% and reduce jobs by 1.3 million, over the next 10 years. The estimates suggest nearly 100,000 jobs would be lost in the first year alone.

Vegetable prices may be going up soon, as a shortage of migrant workers is resulting in lost crops in California. Farmers say they’re having trouble hiring enough people to work during harvest season, causing some crops to rot before they can be picked. Already, the situation has triggered losses of more than $13 million in two California counties alone.

It’s unclear exactly how widespread the labor shortage is for farmers throughout the country, which would have a bigger impact on prices consumers pay. Ultimately, drought and flooding have a more significant impact on farms.

Low oil prices could also offset any impact of the worker shortage. But for farmers, who have seen net farm income fall 50% since 2013, any lost income could be potentially devastating.