Stocks Mixed as Harvey, Dollar and Oil the Focus

Charles Schwab: On the Market

Posted: 8/28/2017 4:15 PM ET

Stocks Mixed as Harvey, Dollar and Oil the Focus

U.S. equities were mixed with investors eyeing the impact of Hurricane Harvey, as well as the continued decline in the U.S. dollar following Friday's uneventful speeches from Fed Chair Yellen and ECB President Draghi in Jackson Hole, Wyoming. Energy stocks were lower as crude oil prices fell, despite a rise in gasoline prices as refineries in Houston are offline. Treasuries were nearly unchanged and gold was solidly higher.

The Dow Jones Industrial Average (DJIA) declined 8 points to 21,806, the S&P 500 Index inched a point higher to 2,444, and the Nasdaq Composite gained 17 points (0.3%) to 6,283. In moderate volume, 704 million shares were traded on the NYSE and 1.5 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.30 to $46.57 per barrel and wholesale gasoline rose $0.03 at $1.57 per gallon. Elsewhere, the Bloomberg gold spot price jumped $19.87 to $1,311.07 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.6% lower at 92.21.

Gilead Sciences Inc. (GILD $75) announced an agreement to acquire cell therapy company Kite Pharma Inc. (KITE $178) for $180.00 per share in cash, in a transaction valued at about $11.9 billion. GILD traded higher and KITE rallied over 25%.

CBS Corp. (CBS $64) announced an agreement to acquire Network Ten, one of three major commercial broadcast networks in Australia, and it will launch its digital subscription video on-demand service, CBS All Access, in the Australian market. Terms of the deal were not disclosed. Shares were lower.  

Expedia Inc. (EXPE $143) came under pressure amid reports that the travel booking site's Chief Executive Officer (CEO), Dara Khosrowshahi, is leaving the company to become the CEO of Uber. EXPE's Chairman Barry Diller acknowledged that Dara has been asked to lead Uber and said that talks with him indicate that he will accept, but pointed out that nothing has been finalized yet.

Preliminary reads on wholesale inventories and trade deficit mixed

The advance goods trade deficit widened more than expected to $65.1 billion in July, from the upwardly revised $64.0 billion in June, and compared to the Bloomberg expectation of $64.5 billion.

Preliminary wholesale inventories rose 0.4% month-over-month (m/m) in July, versus forecasts for a 0.3% increase, and following June's downwardly revised 0.6% rise.

The Dallas Fed Manufacturing Activity Index nudged further into a level depicting expansion (a reading above zero). The index improved to 17.0 in August, from 16.8 in July, matching forecasts.

Treasuries were nearly unchanged, as the yields on the 2-year note and the 30-yield were flat at 1.33% and 2.74%, respectively, while the yield on the 10-year note was 1 basis point (bp) higher at 2.16%. For our latest analysis of the bond markets, check out Schwab's Chief Fixed Income Strategist Kathy Jones' article, What's the Bigger Risk: Bond Market Bubble or Complacency? on the Fixed Income page at www.schwab.com, and follow Kathy on Twitter: @kathyjones.

Treasury yields and the U.S. Dollar Index saw some pressure on Friday, with the latter extending losses to more than a two-year low, as the markets digested speeches by Fed Chair Janet Yellen and European Central Bank (ECB) President Mario Draghi at the Fed's highly-anticipated annual symposium in Jackson Hole, Wyoming. Both central bank leaders held off on offering new insight to monetary policy changes. The Fed is expected to begin shrinking its behemoth $4.5 trillion balance sheet next month and uncertainty remains whether it raises rates one more time this year. The ECB is expected to begin discussing the possibility of tapering its stimulus efforts later this year.

This week, low volume, politics and the geopolitical front will likely remain sources of volatility, but a robust back-end loaded U.S. economic calendar is poised to garner attention, headlined by Friday's August nonfarm payroll report. A look at August Consumer Confidence will get the ball rolling tomorrow, with economists anticipating a level of 120.3, slightly lower than the 121.1 posted in July, followed by Wednesday’s second read (of three) on Q2 GDP and July personal income and spending data, while August releases of the ISM Manufacturing Index, final University of Michigan Consumer Sentiment Index and auto sales will join the labor report to close out the week.

Some housing data is also on tap for tomorrow, with the S&P Corelogic Case-Shiller Home Price Index slated for release, forecasted to show home prices in the 20-city composite rose 0.3% m/m on a seasonally-adjusted basis, and 5.8% y/y.

As noted in the latest Schwab Market Perspective: Volatility Returns!, the latest bout of volatility illustrates why investors should stay focused on the longer-term. Risks for a more substantial pullback in the near-term still exist, as valuations remain elevated. After a weak first quarter, U.S. economic growth has rebounded, with an improving employment picture, tightening labor market, rising median wage growth, and a relatively healthy consumer. Even though past performance is no indication of future results, a prolonged bear market has never occurred outside the context of a recessionary environment. Looking at the Index of Leading Economic Indicators (LEI) from the Conference Board, there are no signs of a coming recession and the U.S. economy is getting some support from the rest of the world. Read more on the Markets & Economy page at www.schwab.com.

Europe dips as euro extends rally, Asia mixed 

European equities dipped, with the markets reacting to late-Friday's speech from ECB President Mario Draghi that offered no new monetary policy clues and boosted the euro to a two-and-half year high versus the U.S. dollar. The euro extended gains and the markets also assessed the impact of the weekend's Hurricane Harvey in the U.S., which continues to damage parts of Texas. Volume was lighter than usual as markets in the U.K. were closed for a holiday, though Brexit negotiations resumed and the British pound gained ground on the greenback. In economic news in the region, Italian economic, manufacturing and consumer sentiment reports all improved for August. Bond yields in the region finished mostly lower. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA offers a look at a potential milestone for global profits in his latest article, Earnings may be about to do something they've never done before, on the Markets & Economy page at www.schwab.com and for a look at Brexit talks, see our article, Brexit Begins: What's Next for the U.K.? on the Insights & Ideas page. Follow Jeff and Schwab on Twitter: @jeffreykleintop and @schwabresearch.

Stocks in Asia finished mixed, with the markets digesting speeches from central bank leaders in the U.S. and Europe, which lacked details regarding changes to the path of monetary policy. Also, the impact of Hurricane Harvey in Texas was closely followed, with an eye on the oil and gas markets, while U.S. political and global trade uncertainty lingered. Recently flared-up tensions toward North Korea appeared to continue to recede. For analysis of this backdrop, see Schwab's Jeffrey Kleintop's, CFA, article, Missiles and Markets: An investor guide to geopolitical risks on the International Investing page at www.schwab.com, as well as his video with Vice President of Trading and Derivatives, Randy Frederick, Political Risk: How Should Investors Respond? on the Insights & Ideas page. Follow Randy on Twitter: @randyafrederick. Japanese equities finished flat with the yen ticking slightly higher, while stocks in mainland China and Hong Kong gained modest ground, with earnings optimism bolstering brokerage stocks. Australia securities declined, with weakness seen in financials, and those traded in South Korea also fell, as technology issues weighed on the markets. Finally, stocks in India advanced.

Tomorrow’s international economic calendar will include personal income and wage data from Japan, consumer confidence from Germany, and GDP and consumer spending from France.

Tuesday, March 25, 2014 - Want to Buy a Cookie?

by Sinclair Noe

Financial Review

DOW + 91 = 16,367
SPX + 8 = 1865
NAS + 7 = 4234
10 YR YLD un 2.73%
OIL - .39 = 99.21
GOLD + 2.10 = 1312.70
SILV + .07 = 20.10

According to the S&P/Case-Shiller home price report, the home price index covering 10 major US cities increased 13.5% in the year ended in January. The 20-city price index advanced 13.2% for the year. Month to month, the 20-city index dropped 0.1%; the drop is not just weather related; from December to January, prices fell in 12 of the 20 cities Case-Shiller tracks.

Taking a look at a few cities: LA was down 0.3% for the month but up 18.9% for the past year, San Diego was up 0.6% for the month and 19.4% for the year, Phoenix was down 0.3% for the month but up 13.8% for the year, San Francisco was up 0.5% for January and 23.1% for the year, the hot spot was Las Vegas up 1.1% for the month and 24.9% for the year, to lead the nation.

The Commerce Department reports new home sales dropped 3.3% from January to February to a seasonally adjusted rate of 440,000. Sales fell in all regions except the Midwest, where they jumped 36.7%. Sales dropped 15.9% month to month in the West. The national median price for a new home was $261,800 last month, up from $260,800 in January. Compared with February 2013, the median price fell 1.2%. At the current sales pace there is a 5.2 month inventory.

A recent Trulia report gauges whether home prices are over or undervalued, and where. Nationally, home prices are still undervalued by about 5%. When home prices hit their bottom at the end of 2011, national home prices were about 15% undervalued. That’s no longer the case, and in some select markets rising prices are coming unchained from their long-term fundamentals. Six of the nation’s ten most overvalued cities were in California. Trulia figures the Orange County metro area is about 16% overvalued, and Los Angeles is 13% overvalued.

The Commerce Department also reported today that nationwide personal income growth slowed to 2.6% last year from 4.3% in 2012. Personal income rose 0.3% in January from a month earlier. Residents in every state saw weaker income growth from a year earlier. The personal income report measures everything Americans receive from all sources, including wages, salaries and property income. Several factors contributed to the slower overall income growth, including the expiration of a 2% payroll tax “holiday” last year. As a result, many people received salary bonuses and personal dividends in 2012, which boosted that year’s incomes. Earnings grew in 2013 in every industry except civilians who work for the federal government. Inflation pressures remained weak over the year, with the price index for personal consumption expenditures rising only 1.1% in 2013 from 1.8% in 2012.

The Conference Board Consumer Confidence Index rose to 82.3, up from 78.3 in February. Overall, consumers expect the economy to continue improving and believe it may even pick up a little steam in the months ahead, but they are feeling less optimistic about their current economic circumstances. Hope springs eternal.

Each year about this time, the Girl Scouts send forth minions to sell cookies for 7 weeks. Katie Francis, a sixth grader from Oklahoma City, set a new sales record of 18,107 boxes, topping the old record of 18,000; that works out to about 370 boxes sold per day; figure 12 hours a day, that works out to a sale every 2 minutes. Her secret to success: time, energy, and asking absolutely everyone she comes in contact with to buy cookies.

The Federal Reserve today published 11 research papers which tend to confirm information we have relayed in the past; big banks get a hidden subsidy in the form an implied bailout, or the idea they are too big to fail. The new research focuses on the primary bond market where banks sell their new debt to investors, instead of measuring the taxpayer subsidy through bank bond “spreads” in the secondary market. And the new research only covers up to 2009, so things may have changed a bit, but the biggest US banks enjoyed an extra $60 million to $80 million of cost savings per average new bond sale over their smaller competitors.

Fed staff wrote in one paper that a greater likelihood of government support leads to more risk-taking at big banks, including impaired lending and net charge-offs. Regulators have shied away from suggestions that they should break up banks, pointing instead to the new rules that require banks to reduce leverage, maintain a supply of assets they could sell quickly, and stop making risky trades with their own money. Officials say they also have made strides to ensure regulators are equipped to resolve big banks in a crisis rather than bail them out.

The Murdoch Street Journal is reporting the SEC is investigating whether a boom in complex new bond deals is being used to hide certain illegal risks. A number of likely cases are in the pipeline. Separately, the government has expanded an inquiry into how Wall Street banks may have been cheating their clients by mispricing certain bond deals.

If you are still trying to figure out what Bitcoin is, you are not alone, but the IRS thinks they have figured it out; it is not legal tender in any jurisdiction; it is property and should be taxed as such. That means that employers who choose to pay wages in Bitcoins will have to report those wages just like any other payment made with property, and Bitcoin income will be subject to the normal federal income withholding and payroll taxes. And the same goes for profits on the sale of Bitcoins, at least the Bitcoins that aren’t lost in the digital wallets of Mt. Gox.

Another study says that you should pay closer attention to annual shareholder meetings, and maybe the most important thing to watch is where the meeting is held. Companies that schedule annual shareholder meetings in unusually remote locations tend to announce bad news fairly shortly thereafter; the more surprising the location, the worse the news, and the harder the company's stock price falls. It’s not a hard and fast rule, just a general indicator.

Global markets have been increasingly concerned about the impact of slowing economic growth on Chinese financial institutions. Apparently the locals are also nervous. Hundreds of Chinese citizens had an old fashion run on the banks, trying to withdraw cash from branches of 2 small Chinese banks in the Jiangsu province after rumors spread about the solvency of one of them.

The Houston Shipping Channel remains closed today because of a weekend oil spill. The closure from this weekend has delayed shipments of crude and refined products in and out of the channel. Roughly 11% of the US refining capacity is transported through the channel. The incident was coincidentally timed around the 25th anniversary of the Exxon Valdez disaster. If the closure lasts much longer, refiners will begin to miss scheduled deliveries and companies expected to have product to load and offload may have to declare force majeure. You know what happens to oil and gas prices if that occurs and continues.

The White House and the House Intelligence Committee have leaked separate proposals that are supposedly aimed at ending the mass collection of Americans’ phone records. The full draft of the House bill is not yet available but it is tentatively named the “End Bulk Collection Act. The plan would have telephone companies hold on to phone data and the government could search data from those companies based on "reasonable articulable suspicion" that someone is an agent of a foreign power, associated with an agent of a foreign power, or "in contact with, or known to, a suspected agent of a foreign power". The NSA’s current phone records program is restricted to a reasonable articulable suspicion of terrorism.

A judge would reportedly not have to approve the collection beforehand, and the language suggests the government could obtain the phone records on citizens at least two “hops” away from the suspect, meaning if you talked to someone who talked to a suspect, your records could be searched by the NSA. A report in The Guardian says that coupled with the expanded “foreign power” language, this kind of law coming out of Congress could, arguably, allow the NSA to analyze more data of innocent Americans than it could before.

The New York Times reports the White House proposal would supposedly end the collection of phone records by the NSA, without requiring a new data retention mandate for the phone companies, while restricting analysis to the current rules around terrorism and, importantly, still requiring a judge to sign off on each phone-record search made to the phone companies.

We still don’t know what would happen to other types of bulk data collection, such as internet and financial records. Also, the NSA has been collecting phone data on people up to three hops away from a suspect so long as it had “reasonable articulable suspicion” that the suspect was involved in terrorism; then they hold that bulk data, dumping it into something they call a “corporate store” where they feel free to conduct further analysis even if they don’t have “reasonable articulable suspicion”.

The existence of the NSA program was disclosed and then declassified last year following leaks by Edward Snowden, the former NSA contractor. The current court order authorizing the collection of data is set to expire on Friday. The FISA court is expected to renew authorization for at least 90 days while changes are considered. The government has been unable to point to any thwarted terrorist attacks that would have been carried out if the program had not existed, but has argued that it is a useful tool.