Stocks Rally Ahead of Senate Tax Vote

Charles Schwab: On the Market

Posted: 11/30/2017 4:15 PM EST

Stocks Rally Ahead of Senate Tax Vote

 

U.S. stocks traded nicely higher as market participants weighed the likelihood of the Senate passing its tax reform bill, with a vote expected to be held soon. Energy stocks rose as crude oil prices ticked higher and Treasury yields extended recent gains, while gold and the U.S. dollar traded lower. Domestic economic reports showed that personal income and spending in October rose and weekly jobless claims dipped. Kroger announced upbeat quarterly profits and Costco reported better-than-expected same-store sales growth. 

The Dow Jones Industrial Average (DJIA) rallied 332 points (1.4%) to 24,272, the S&P 500 Index advanced 22 points (0.8%) to 2,648, and the Nasdaq Composite gained 50 points (0.7%) to 6,874. In heavy volume, 1.5 billion shares were traded on the NYSE and 2.4 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.10 higher to $57.40 per barrel and wholesale gasoline was unchanged at $1.73 per gallon. Elsewhere, the Bloomberg gold spot price decreased $8.30 to $1,275.34 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% lower at 93.07.

PVH Corp. (PVH $135) reported Q3 earnings-per-share (EPS) of $3.05, or $3.02 ex-items, versus the $2.91 FactSet estimate, as revenues increased 5.0% year-over-year (y/y) to $2.4 billion, above the projected $2.3 billion. PVH issued Q4 EPS guidance that was below expectations, though it raised its full-year profit outlook. The parent of Calvin Klein and Tommy Hilfiger projected Q4 and full-year revenues to be slightly above estimates. Shares declined.

Kroger Co. (KR $26) posted Q3 profits of $0.44 per share, compared to the forecasted $0.40, with revenues rising 4.5% y/y to $27.7 billion, above the expected $27.5 billion. The grocer's Q3 same-store sales grew 1.1% y/y, versus the estimated 0.9% gain. KR reaffirmed its full-year EPS outlook. Shares rallied.

Costco Wholesale Corp. (COST $184) moved nicely higher after the company said its November same-store sales grew 10.8% y/y, above the projected 7.9% increase. L Brands Inc. (LB $56) said its November same-store sales declined 1.0% y/y, versus the forecasted 0.2% gain, but noted that it sees December sales being flat to up low-single digits. LB rallied.

Personal income and spending rise, jobless claims dip

Personal income (chart) rose 0.4% month-over-month (m/m) in October, above the Bloomberg forecast of a 0.3% gain, and compared to September's unrevised 0.4% increase. Personal spending increased 0.3% last month, matching expectations, and versus September's downwardly revised 0.9% gain. The October savings rate as a percentage of disposable income was 3.2%. The PCE Deflator was 0.1% higher, in line with expectations and versus the prior month's unrevised 0.4% gain.

Compared to last year, the deflator was 1.6% higher, north of estimates of a 1.5% rise and compared to September's upwardly revised 1.7% gain. Excluding food and energy, the PCE Core Index was 0.2% higher m/m, matching expectations, and versus the prior month's upwardly revised 0.2% gain. The index was 1.4% higher y/y, in line with estimates, and compared to September's upwardly revised 1.4% increase.

Weekly initial jobless claims (chart) declined by 2,000 to 238,000 last week, versus forecasts calling for it to match the prior week’s upwardly revised 240,000 figure. The four-week moving average rose by 2,250 to 242,250, while continuing claims grew by 42,000 to 1,957,000, north of estimates of 1,890,000.

The Chicago Purchasing Managers Index (chart) declined in November to 63.9 from October's unrevised 66.2 level, and better than expectations calling for a decline to 63.0. The index remained solidly in expansion territory (above 50) and pulled back from the highest level since March 2011, adding to a long list of signs that the manufacturing sector remains solid.

Schwab's Chief Investment Strategist Liz Ann Sonders notes that U.S. business capital spending has already picked up but an even sharper recovery could be in the cards for 2018, while tax reform—if we get it—would be an additional kicker in her article, Takin Care of Business: Several Important Kickers for a Strong Capex Cycle. Tomorrow, November manufacturing activity will be on display with the releases of the ISM Manufacturing Index and the final Markit Manufacturing PMI Index. The ISM index is projected to dip to 58.3 from 58.7 in October, while Markit's index is expected to be revised higher to 54.0 from the preliminary 53.8 reading, but slightly below October's 54.6 level. Readings above 50 for both reports denote expansion.

Treasuries traded lower, with the yield on the 2-year note rising 2 basis points (bps) to 1.78%, the yield on the 10-year note gaining 3 bps to 2.42%, and the 30-year bond rate ticking 1 bp higher to 2.83%.

Treasury yields added to yesterday's noticeable curve steepening after a recent bout of flattening that fostered some market weariness, while the U.S. dollar pared its modest weekly rebound.
The markets continued to grapple with the continued signs of broad-based global economic growth and mostly favorable earnings results, along with tax reform uncertainty. The Senate appears headed to vote later today or tomorrow on its bill with signs emerging the past couple days that it has been tweaked enough to find enough support to pass. This has fostered some optimism regarding tax reform becoming a reality this year, but has also resulted in some rotation in the stock market sectors, which helped lead yesterday's selloff in the tech sector.

Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend notes in his latest commentary, Tax Reform Bills Progress, but Many Hurdles Remain, if the bill passes the Senate, the House and Senate would need to convene a conference to negotiate and reconcile differences between the two bills to produce a single consensus bill. That bill would then need to be approved by both chambers before it could be sent to President Donald Trump for his signature.

Negotiations between the two chambers will likely be extremely challenging, given the differences between the two approaches. For investors, we still think it is too early to take any drastic action. If and when a tax bill passes, there will be time to review the details and amend your tax and financial plans accordingly. Regardless of the outcome of the tax bill, it’s always a good idea to meet with your tax and financial advisors before the end of the year to review your current financial situation and discuss your plans for the coming year.

Tomorrow, the U.S. economic calendar will give us a look at national manufacturing activity in November with the releases of the ISM Manufacturing Index, projected to dip to 58.3 from 58.7 in October, and the final Markit Manufacturing PMI Index, expected to be revised higher to 54.0, but down from October's 55.3 level. Readings above 50 for both depict expansion. Construction spending for October will also be reported, forecasted to have increased 0.5% after rising 0.3% in September.

Europe gives up gains as euro and pound rally, Asia mostly lower

European equity markets relinquished early gains and finished mostly lower, with the euro extending a rise amid a downside reversal for the U.S. dollar late in the session and the British pound jumping on signs of progress in deadlocked Brexit negotiations. Energy issues gave up an advance as crude oil prices were choppy ahead of today's OPEC production decision. OPEC is expected to deliver an extension of cuts to the end of 2018 but there were some uncertainties that lingered ahead of the decision. U.S. tax reform optimism continued but this fostered yesterday's noticeable rotation out of the technology sector, and the group remained under pressure on this side of the pond. In economic news, eurozone consumer price inflation estimates came in a bit cooler than expected for November, while the region's October unemployment rate dipped unexpectedly. German retail sales surprisingly fell last month. In his latest article, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, addresses the question Are Stocks too Expensive?, noting that although world stock market valuations are above average, similar valuations have produced double-digit gains over the following 12 months during the past 50 years. Jeff concludes that valuations support a globally diversified portfolio offering the best diversification benefits in 20 years. Bond yields finished mostly lower to exacerbate pressure on financials.

Stocks in Asia finished mostly lower, with the global selloff in the tech sector weighing on markets, while optimism of U.S. tax reform lingered and a flood of data in the region was digested. Shares trading in mainland China and Hong Kong fell, with the weakness in tech more than offsetting the government's reports on manufacturing and the key services sectors showing growth accelerated for both, with the former surprisingly increasing. South Korean equities dropped as the tech pullback was met with an expected increase in the Bank of Korea's benchmark interest rate and an unexpected drop in the nation's industrial production. Australian securities moved lower with financials seeing some pressure after the government announced that it will launch an inquiry into the sector. Indian stocks also traded to the downside on the tech volatility and ahead of the nation's Q3 GDP report. After the closing bell, India's Q3 GDP accelerated to a 6.3% y/y pace of growth, but slightly below the projected 6.4% expansion.

However, Japanese equities rose with the yen extending yesterday's weakness and strength in financials helping counter the slide in the tech sector. Japan reported that industrial production rose at a smaller rate than expected but growth in vehicle production accelerated solidly in October. Despite the downside pressure on most markets, they remain nicely higher on the year, fostered by the broadest economic growth in a decade and is expected to continue in 2018 as discussed by Schwab's Jeffrey Kleintop, CFA, in his article, 5 Reasons Investors Should Give Thanks.

The international economic docket for tomorrow will yield a host of reports from Japan as the island nation reports its jobless rate, CPI, capital spending, company sales and vehicle sales. China, India and South Korea will deliver manufacturing PMI reads and the latter will also announce final Q3 GDP. Reports from across the pond will include Markit Manufacturing PMI reads from the U.K., Germany, France, Italy and the eurozone.

Markets Mixed in Lackluster Session

Charles Schwab: On the Market

Posted: 11/27/2017 4:15 PM EST

Markets Mixed in Lackluster Session

 

U.S. equities finished mixed with energy stocks finding pressure amid a drop in crude oil prices ahead of this week's OPEC production meeting. However, consumer discretionary stocks got a boost on upbeat holiday spending data, while an unexpected jump in new home sales to a decade high also added some optimism. Treasury yields were little changed and the U.S. dollar ticked higher, while gold gained modest ground. 

The Dow Jones Industrial Average (DJIA) rose 23 points (0.1%) to 23,581, the S&P 500 Index declined 1 point to 2,601, and the Nasdaq Composite fell 11 points (0.2%) to 6,879. In moderate volume, 766 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil decreased $0.84 to $58.11 per barrel and wholesale gasoline was $0.01 higher at $1.79 per gallon. Elsewhere, the Bloomberg gold spot price increased $6.05 to $1,294.42 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—ticked 0.2% higher to 92.92.

Meredith Corp. (MDP $67) announced an agreement to acquire Time Inc. (TIME $18) for $18.50 per share in cash, for a total transaction value of about $2.8 billion, including the assumption of debt. Shares of both companies rallied.

The retail sector was mostly higher with the markets paying attention to reports on how the holiday shopping season unofficially kicked off during the Black Friday weekend, and bolstered by today's online shopping deals known as Cyber Monday. According to Adobe Analytics, online sales on Thanksgiving Day and Black Friday rose 17.9% year-over-year (y/y) to about $7.9 billion and are estimated to be up 16.5% today to a record $6.6 billion.

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in our article, Holiday Shopping Season: Are Consumers Set to Stuff Some Stockings?, that we do think the picture entering the season is a positive one, with unemployment low, wages trending higher and consumer confidence the highest in almost 17 years. There are 32 days between Thanksgiving and Christmas this year, the second largest number of days possible between the two holidays. And Christmas falls on a Monday, giving shoppers one last weekend to ring the register. However, Brad cautions investors that at this point this rosy picture for consumers doesn't mean you should run out and buy retailers as discussed in his latest Schwab Sector Views: 'Tis the Season…Almost.

New home sales surprisingly jump to kick off busy week

New home sales (chart) unexpectedly jumped to the highest since October 2007, rising 6.2% month-over-month (m/m) in October to an annual rate of 685,000 units, versus the Bloomberg forecast calling for a drop to 625,000 units and the downwardly revised 645,000 unit pace in September. The median home price was up 3.3% y/y to $312,800. New home inventory fell to 4.9 months of supply at the current sales pace from 5.2 in September.

Sales surged m/m in the Northeast and jumped in the Midwest, while also rising solidly in the South and West. New home sales are based on contract signings instead of closings. Sales of properties in which construction has not yet started reached the highest in over a decade, suggesting housing starts could start to accelerate. The heightened confidence and status of the consumer appears to be translating into increased willingness to make major purchases, adding credence to Schwab's Brad Sorensen's, CFA, latest analysis of how important the consumer is not only to the holiday season but for the overall economy in his latest Schwab Sector Views.

The Dallas Fed Manufacturing Activity Index dropped more than expected but remained solidly in expansion territory (a reading above zero). The index fell to 19.4 in November from 27.6 in October—the highest since March 2006—and versus forecasts of a decline to 24.0.

Today's reports kick off the week that will return to normal operating hours and bring plenty of reports and events for the markets to contend with. OPEC will conduct a production meeting, the Senate could vote on its tax reform plan that differs significantly from the House's plan that passed two weeks ago, and Fed Chairwoman Janet Yellen is expected to address the Joint Economic Committee of Congress. Moreover, we will get a number of economic reports, continuing with tomorrow's releases of Consumer Confidence, forecasted to show sentiment remains elevated at a level of 124.0 for November, but slightly lower than the 125.9 posted in October, as well as the advance goods trade balance, wholesale inventories, the Richmond Fed Manufacturing Index and the S&P CoreLogic Case-Shiller Home Price Index. Late in the week, investors will be treated to the second look (of three) at Q3 GDP, the Fed's Beige Book, personal income and spending, Markit's Manufacturing PMI Index, the ISM Manufacturing Index, and November auto sales.

As noted in the latest Schwab Market Perspective: Incredible, Amazing…Unstop-a-bull?, the bull market continues to be undisturbed by myriad actual or potential negative events and momentum favors the bulls for the foreseeable future. However, elevated valuations and growing investor complacency pose risks that could lead to a long-awaited pullback and/or a pickup in volatility from today’s extremely low base.

Treasuries were little changed, as the yield on the 2-year note and the 30-year bond were flat at 1.74% and 2.77%, respectively, while the yield on the 10-year note dipped by 1 bp to 2.34%. The yield curve has flattened and the U.S. dollar has found pressure as of late with the markets grappling with tax reform uncertainty, subdued inflation expectations, and broad-based global economic growth.

Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend notes in his latest commentary, Tax Reform Bills Progress, but Many Hurdles Remain, we believe the prospects for a tax reform bill being signed into law before the end of the year are improving, but a number of tricky steps must still be overcome. Schwab's Chief Investment Strategist Liz Ann Sonders points out in her newest article, Green Grass and High Tides: Earnings Stellar But Not Without Risk, both earnings and revenues were strong; and importantly, the "beat rates" were well above average. The outlook for 2018 is bright, but we are on watch for an expectations bar that gets set too high.

Europe dips despite eased German political concerns, Asia mostly lower

European equity markets finished mostly lower, even as the euro dipped slightly after a recent run to a two-month high versus the U.S. dollar. Energy issues saw noticeable pressure as crude oil prices fell ahead of this week's OPEC production meeting, while the markets shrugged off cooling political concerns in Germany after reports suggested coalition talks could resume after collapsing last week. This joins deadlocked U.K. Brexit talks and festering U.S. tax reform uncertainty to keep the markets on edge. However, Spanish stocks rose slightly amid eased concerns as polls ahead of next month's vote in Catalonia are showing pro-Spain parties have as much support as pro-independence forces, per Bloomberg. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Vice President of Trading and Derivatives Randy Frederick point out in the video, Political Risk: How Should Investors Respond?, that a long history of these developments shows us that holding a well-diversified portfolio may buffer the short-term market moves that are often the result. So, investors should avoid overreacting to the political and geopolitical drama and stick to their long-term financial plans. The British pound was little changed versus the greenback and bond yields in the region finished mostly lower.

Stocks in Asia finished mostly to the downside, with technology issues weighing heavily on South Korean equities, while the Bank of Korea is expected to raise rates after its monetary policy meeting later this week. Mainland Chinese stocks and those traded in Hong Kong declined, with sentiment being hampered by the recent rally in the nation's bond yields, which appears to be fostering some profit-taking after this year's strong gains, while a report showed growth in the country's industrial profits slowed in October. Schwab's Jeffrey Kleintop, CFA, offers a look at the global market rally seen this year that has been fostered by the broadest economic growth in a decade and is expected to continue in 2018 in his latest article, 5 Reasons Investors Should Give Thanks. Japanese securities traded slightly to the downside, with the yen gaining ground late in the session amid the continued pressure on the U.S. dollar amid yield curve concerns and political uncertainty, but markets in Australia and India bucked the trend, finishing modestly higher.

The international economic calendar will be light tomorrow, with reports slated for release to include import prices and consumer confidence from Germany, and consumer confidence from France.

Stocks Finish with Slight Gains in Muted Session

Charles Schwab: On the Market

Posted: 8/7/2017 4:15 PM ET

Stocks Finish with Slight Gains in Muted Session

U.S. equities were marginally higher to start the week, as data was on the lighter side, as continued upward momentum in tech stocks was tempered by energy issues amid a decline in crude oil prices ahead of OPEC's looming production cut compliance meeting. Treasury yields were nearly unchanged, showing little reaction to an afternoon release of consumer credit, while gold and the U.S. dollar were lower.

The Dow Jones Industrial Average (DJIA) gained 26 points (0.1%) to 22,118, the S&P 500 Index added 4 points (0.2%) to 2,481, and the Nasdaq Composite rose 32 points (0.5%) to 6,384. In moderate volume, 743 million were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.19 to $49.39 per barrel and wholesale gasoline was $0.02 lower at $1.63 per gallon. Elsewhere, the Bloomberg gold spot price was $1.19 lower at $1,257.69 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—traded 0.1% lower at 93.43.

Tyson Foods Inc. (TSN $67) reported fiscal Q3 earnings-per-share (EPS) of $1.21, or $1.28 ex-items, versus the $1.19 FactSet estimate, as revenues grew 4.8% year-over-year (y/y) to $9.9 billion, north of the forecasted $9.5 billion. TSN raised the low end of its full-year EPS outlook. Shares were solidly higher.

NxStage Medical Inc. (NXTM $30) jumped after the U.S.-based medical technology and services company announced an agreement to be acquired by German dialysis products and services provider, Fresenius Medical Care AG (FMS $46), for $30.00 per share in cash in a transaction valued at about $2.0 billion.

Consumer credit kicks off economic week that will have an inflation focus

Consumer credit, released in the final hour of trading, showed consumer borrowing expanded by $12.4 billion during June, below the $15.8 billion forecast of economists polled by Bloomberg, while May's figure was adjusted slightly downward to an increase of $18.3 billion from the originally reported $18.4 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, rose $8.3 billion, its slowest pace in a year (y/y), while revolving debt, which includes credit cards, increased by $4.1 billion.

Treasuries were slightly higher, with the yield on the 2-year note little changed at 1.35%, while the yields on the 10-year note and the 30-year bond dipped 1 basis point to 2.26% and 2.84%, respectively. Schwab's Chief Fixed Income Strategist Kathy Jones offers a look at the bond markets in her article, Bond Market Mid-Year Outlook: Redefining the Borders of 'Lower for Longer' on the Fixed Income page at www.schwab.com.

Treasury yields showed some signs of life and the U.S. Dollar Index bounced off of lows not seen since 2016 on Friday in the wake of the July nonfarm payroll report. The employment data, which showed job growth topped forecasts, the unemployment rate matched a 16-year low, and wage growth, appeared to preserve expectations for one more Fed rate hike and the beginning of the reduction of its bloated balance sheet this year.

This week, the economic docket likely begin to regain some of the markets’ attention as earnings season winds down, headlined by the releases of the Producer Price Index (PPI) and Consumer Price Index (CPI). Inflation is the other side of the Fed's dual mandate and has remained subdued to foster some uncertainty regarding if the Central Bank has one more rate hike in it this year. The PPI and CPI will follow tomorrow's releases of the NFIB Small Business Optimism Index, with economists expecting a slight downtick to a level of 103.5 for July from the 103.6 posted in June, as well as the JOLTS Job Openings report, with forecasts calling for the measure of unmet demand for labor to show 5.70 million jobs were available to be filled in June, up marginally from the 5.67 million registered in May. Later in the week, the economic calendar will offer the preliminary Q2 nonfarm productivity and unit labor costs.

As noted in the latest Schwab Market Perspective: Things are Looking Good … But are They Too Good?, earnings season has been solid and equity indexes continue to set record highs. The bull market should continue but the risk of a "melt-up" appears to be rising. The U.S. economy is growing modestly and the Federal Reserve is maintaining its slow pace of policy normalization—both supports for further equity market gains, but geopolitical risk remains elevated. While the weaker U.S. dollar is a benefit for U.S. companies, there is a downside internationally … but it may not be where you think. Read more on the Markets & Economy page at www.schwab.com.

The political front remains in focus and a source of uncertainty with dysfunction in the White House and another failed attempt at health care reform dampening optimism of other policy implementation. For analysis, see Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's articles, Health Care Reform: What Investors Should Know, and Washington Midyear Update: 4 Key Issues for Investors to Watch, on the Insights & Ideas page at www.schwab.com.

Europe mixed on data and geopolitics, Asia higher following U.S. employment report

European equities finished mixed, as optimism following Friday's upbeat U.S. employment report gave some way to an unexpected drop in German industrial production and lingering geopolitical concerns as the U.N. imposed new sanctions on North Korea. The euro ticked higher, though the British pound dipped versus the U.S. dollar, while bond yields in the region were mostly lower. Energy issues showed some resiliency in the face of softness in crude oil prices as the markets await this week's OPEC gathering on production cut compliance. For a look at global investing, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, and Vice President of Trading and Derivatives, Randy Frederick's video, Why Add Foreign Stocks to Your Portfolio?, on the Insights & Ideas page at www.schwab.com. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick.

Stocks in Asia finished mostly higher amid optimism on the heels of Friday's stronger-than-expected U.S. employment report, which helped overshadow exacerbated geopolitical concerns as the United Nations Security Council imposed new sanctions on North Korea and China/U.S. trade uncertainty lingered. Japanese equities advanced, with the yen holding onto losses that stemmed from the U.S. jobs report, while stocks in mainland China and Hong Kong rose on the U.S. data and as steel companies rallied. Markets in Australia increased 0.9% and shares traded in South Korea ticked slightly higher, but stocks in India declined amid some weakness in the technology sector. South Korean and Indian markets remain near all-time highs. Amid this global backdrop, Schwab's Jeffrey Kleintop CFA, offers his articles, The Long Period of Underperformance for Emerging Market Stocks May Finally Be Over on the International Investing page at www.schwab.com, and Missiles and Markets: An investor guide to geopolitical risks on the Markets & Economy page.

Tomorrow's international economic calendar will host trade data from Japan and China, retail sales from the U.K., as well as the trade balances from Germany and France.

Stocks Mixed Amid Rise in Tech, Fall in Oil

Charles Schwab: On the Market

Posted: 7/5/2017 4:15 PM ET

Stocks Mixed Amid Rise in Tech, Fall in Oil

U.S. equities finished mixed in their return to action from yesterday's Independence Day holiday, as strength in the tech sector was tempered by a decline in energy stocks amid a tumble in crude oil prices on flared-up OPEC production cut uncertainty. Treasuries were modestly higher following a factory orders report and the release of the Fed's June meeting minutes, while appearing to shrug off yesterday's first test of an intercontinental ballistic missile (ICBM) by North Korea. Gold was higher, while the U.S. dollar was nearly unchanged.

The Dow Jones Industrial Average (DJIA) lost 1 point to 21,478, the S&P 500 Index gained 5 points (0.2%) to 2,434, while the Nasdaq Composite increased 41 points (0.7%) to 6,151. In moderate volume, 885 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil dropped by $1.94 to $45.13 per barrel and wholesale gasoline lost $0.03 to $1.50 per gallon. Elsewhere, the Bloomberg gold spot price gained $3.14 to $1,226.56 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly flat at 96.24.

Vantiv Inc. (VNTV $60) announced a tentative agreement to acquire U.K.-based Worldpay Group PLC. ((WPYGY $15) for about $10.0 billion in cash and stock. The companies said they are still negotiating the final terms of the deal. VNTV traded lower, while WPYGY rallied in U.S. trading.

O'Reilly Automotive Inc. (ORLY $179) tumbled over 18% after warning that its Q2 same-store sales rose at a pace that was below its previous forecast, noting that after exiting Q1 and entering April on an improved sales trend, it faced a more challenging sales environment than it expected for the remainder of the quarter. The auto parts chain said it saw continued headwinds from a second consecutive mild winter and overall weak consumer demand.

Tesla Inc. (TSLA $327) saw marked pressure after announcing Q2 deliveries that came in below the Street's forecasts, citing a severe production shortfall of battery packs that impacted deliveries, which it said was addressed in early June.

Amid the recent volatility in the tech sector that has led the stock markets to record highs recently, Schwab's Chief Investment Strategist Liz Ann Sonders offers her commentary, The Space Between … Tech Today Doesn't Resemble Tech Circa 2000, as well as her latest article, 2017 Mid-year US Equity Outlook: Rattle and Hum. Liz Ann notes that we think the latest pullback in tech is more likely to represent a pause that refreshes some excess optimistic sentiment than it is the start of something nastier. We are maintaining our outperform rating on the tech sector, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: From the Top Down for more, but as with any fast-growing segment of a portfolio’s holdings, we also remind investors of the power of diversification and periodic rebalancing.

Also, Liz Ann adds that stocks have had a remarkable—and recently drama-free—run over the past eight-plus years. We are likely in a more mature phase, which could be marked by bouts of volatility and/or pullbacks—possible driven by Fed policy. But liquidity remains ample, financial conditions loose and earnings growth healthy; which have underpinned this bull for much of its history. Those are the key things on which to keep an eye as we head into the year's second half. Read these articles on the Markets & Economy page at www.schwab.com and follow us and Liz Ann on Twitter: @schwabresearch and @lizannsonders.

Factory orders drop more than expected, Fed offers minutes

Factory orders (chart) fell 0.8% month-over-month (m/m) in May, versus the Bloomberg expectation of a 0.5% decline, while April's figure was negatively revised to a 0.3% decrease. May durable goods orders—preliminarily reported last week—were unadjusted at the preliminarily-reported 1.1% fall.

At 2:00 p.m. ET, the Federal Reserve released the minutes from its June monetary policy decision, in which it raised its target for the fed funds rate by 25 bps and provided some insight into its plans to reduce the size of its balance sheet. The report showed that the Committee was divided on the timing of the balance sheet program, noting, " Several preferred to announce a start to the process within a couple of months,' but others' emphasized that deferring the decision until later in the year would permit additional time to assess the outlook for economic activity and inflation." At the June meeting the Fed said it would trim holdings on Treasuries initially at $6 billion per month, increasing by $6 billion every three months over 12 months, until it reaches $30 billion. For agency- and mortgage-backed securities, the cap would begin at $4 billion, and rise by $4 billion every three months until it hits $20 billion a month. The Committee also reiterated its stance for continued gradual rate increases. Schwab's Chief Fixed Income Strategist, Kathy Jones provides additional insight in her article Fed Raises Rates, Sticks With Plans for One More Hike This Year.

As noted in the latest Schwab Market Perspective: Shifting Sentiment?, a more hawkish Fed than the market in terms of the expected trajectory of rate hikes, despite the mixed economic picture along with softer inflation readings, has raised concerns over a possible monetary mistake. We believe there is a strong desire among most Fed members to get rates to a more normal level and to start the process of reducing the balance sheet; but they also remain focused on not making decisions that may harm economic activity. Ongoing Fed policy uncertainty is likely to result in increased bouts of volatility. Read more on the Markets & Economy page at www.schwab.com

This sets the stage for tomorrow's robust economic calendar, which will offer reads on the labor market ahead of Friday's key June nonfarm payroll data in the form of weekly initial jobless claims and ADP's Employment Change report. Also, the critical U.S. services sector will be in focus following the releases of the ISM non-Manufacturing Index and Markit's final Services PMI Index, with both expected to show continued expansion. MBA mortgage applications and the trade balance will round out the day.

Treasuries finished higher with the yield on the 2-year note flat at 1.41%, while the yield on the 10-year note declined 2 basis points (bps) to 2.33% and the 30-year bond rate dipped 1 bp to 2.86%.

Bond yields have rebounded from depressed levels and Schwab's Kathy Jones notes in her Bond Market Mid-Year Outlook: Redefining the Borders of 'Lower for Longer' in the second half of 2017, we expect 10-year Treasury yields to remain in a 2% to 2.5% range, consistent with the eight-year "lower for longer" theme in the bond market. We expect the Federal Reserve to continue to tighten monetary policy and reduce its balance sheet gradually, assuming inflation doesn't slip further. Read Kathy's articles, including how we feel investors should position themselves in this environment on the Fixed Income page at www.schwab.com and follow Kathy on Twitter: @kathyjones.

Finally, for a look at the political front, which remains a source of market uncertainty, see Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's latest article, Washington Midyear Update: 4 Key Issues for Investors to Watch, on the Insights & Ideas page at www.schwab.com.

Europe mixed on data and geopolitics, Asia mostly higher

European equities finished mixed, with the euro dipping versus the U.S. dollar, while the global markets digested a rise in geopolitical concerns following actions by North Korea. Economic data in the region likely aided sentiment, with Markit's eurozone Composite PMI Index—a gauge of business activity in both the services and manufacturing sectors—being revised to a faster pace of growth than preliminarily estimated for June. Eurozone retail sales rose in line with forecasts and Markit's U.K. Composite PMI Index slowed but remained in expansion territory for last month. The British pound was little changed versus the greenback and bond yields in the region were mixed. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his article, Are bonds signaling a major stock market peak? on the Markets & Economy page at www.schwab.com, while Jeff and Vice President of Trading and Derivatives, Randy Frederick offer the video, How Do U.S. Equity Market Valuations Compare to Other Developed Markets?, on the Insights & Ideas page at www.schwab.com. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick. Technology issues rebounded, while oil & gas stocks saw pressure as crude oil prices fell after a recent string of gains, exacerbated by reports that Russia is opposing any changes to the current OPEC-led production cuts.

Stocks in Asia finished mostly to the upside with the U.S. markets set to return to action following yesterday's Independence Day holiday, while shrugging off flared-up geopolitical concerns as North Korea conducted a test of an intercontinental ballistic missile (ICBM) yesterday. For more, see Schwab's Jeffrey Kleintop's, CFA, article, Missiles and Markets: An investor guide to geopolitical risks on the Markets & Economy page at www.schwab.com. Japanese equities gained ground, with the yen paring gains late in the session, and South Korea's Kospi Index also moved to the upside. Mainland Chinese stocks and those traded in Hong Kong advanced on the heels of a report from Caixin that showed the nation's key services sector output slowed but continued to showed growth. Indian securities ticked higher following data showing growth in the country's business activity accelerated, but markets in Australia declined, with oil & gas and healthcare weakness overshadowing strength in basic materials. The move comes in the wake of this week's decision by the Reserve Bank of Australia to leave its monetary policy unchanged. For a look at the global landscape, see Jeffrey Kleintop's, CFA, 2017 Mid-year Global Market Outlook: Broader Growth, Narrower Risks on the International Investing page at www.schwab.com.

Financial Review

Cats and Dogs

Sinclair Noe — May 25, 2017

Podcast: Play in new window | Download (Duration: 13:16 — 7.6MB)

DOW + 70 = 21,082
SPX + 10 = 2415
NAS + 42 = 6205
RUT + 0.88 = 1383
10 Y – .01 = 2.25%
OIL – 2.50 = 48.82
GOLD – 3.20 = 1256.40
BITCOIN + .29% = 2483.51
ETHEREUM - 8.01% = 174.63

The S&P 500 and Nasdaq hit record closing highs. The surprising part is that retail led the charge.

Best Buy beat profit expectations, reported a surprise increase same-store sales and provided an upbeat outlook. The net profit for the quarter dropped to $188 million, or 60 cents a share, from $229 million, or 70 cents a share, in the same period a year ago. Still they blasted through analyst estimates.

Best Buy shares jumped 22% today.

Tommy Hilfiger owner PVH was the second-biggest S&P gainer with a 4.8-percent jump to a near 6-month high on strong results.

Dollar Tree reported earnings that matched estimates. Sales rose 4%, while same-store sales rose 0.5%.

Sears posted a quarterly loss on an adjusted basis. Revenue dropped. Same-store sales fell 11.2% in the quarter. But Sears recently announced cost cutting measures and they still have cash on hand for operations.

Today, shares popped 12%.

The trade gap in goods—services are excluded—widened to $67.6 billion in April from $65.1 billion in March, the government said in its advanced report. The full report will be released on June 2. Exports of goods fell in April, while imports expanded; that means the trade gap will likely cut into second quarter gross domestic product.

There had been hope for a big bounce back in the second quarter to make up for extremely sluggish first quarter growth of 0.7 percent, which had been blamed on temporary factors like weather.

Housing data this week was also disappointing when new home sales fell 11.4 percent and existing home sales fell by 2.3 percent in April.

Initial jobless claims rose by 1,000 to 234,000 in the seven days stretching from May 14 to May 20. That’s just a few notches above the post-recession low set in February, and near the lowest level since April 1973.

The U.S. economy has been churning out new jobs at a rapid pace since 2011, pulling the unemployment rate down to 4.4% and eliciting widespread complaints from businesses that they cannot find enough skilled workers to fill open positions, although not enough to push wages significantly higher.

OPEC agreed to extend oil production cuts for another 9 months, as expected. Oil traders were not impressed, maybe even disappointed cuts weren’t extended for 12 months. Production cuts have bolstered prices in the past, at least for a while, and then the euphoria fades – it just seemed to fade real fast today.

Of course, there is more at play. The biggest beneficiary of price cuts might be the US shale producers, who are expected to increase their output by about 900,000 barrels a day this year, soaking up much of OPEC’s production cuts.

Short-term projections call for a draw down in storage tanks in the coming weeks as the summer driving season gets underway, but the oil glut is likely to continue absent a big increase in demand – and the long-term outlook for demand faces headwinds from improved efficiency and conservation.

And a move to more electric engines.

There is a definite move away from diesel. The whole idea of clean diesel is being shot down in lawsuit after lawsuit. It started with Volkswagen cheating on diesel emissions; then Mercedes, Peugeot, Renault, and Fiat Chrysler. Add GM to the list.

GM is accused in a lawsuit of rigging hundreds of thousands of diesel trucks with devices like those used by Volkswagen AG, to ensure they pass emissions tests. The proposed class-action lawsuit covers people who own or lease more than 705,000 Chevrolet Silverado and GMC Sierra pickups fitted with “Duramax” engines from the 2011 to 2016 model years.

It said GM used at least three “defeat devices” to ensure that the trucks met federal and state emission standards, even if they generated more pollution in real-world driving. The complaint was filed in the federal court in Detroit.

In a 10-to-3 decision, a federal appeals court affirmed the freeze on the second iteration of President Trump’s executive order on immigration from six majority Muslim countries. The court said that national security “is not the true reason” for the order, despite Trump’s insistence to the contrary, saying it “drips with religious intolerance, animus and discrimination.”

Writing for the majority, Chief Judge Roger Gregory said Mr. Trump’s statements on the campaign trail concerning Muslims showed that the revised order was the product of religious hostility. Such discrimination, he wrote, violates the First Amendment’s ban on government establishment of religion.

Trump issued his initial order on Jan. 27, a week into his presidency. Less than two weeks later, the Court of Appeals for the Ninth Circuit affirmed an order halting it. Though Trump vowed to fight the ruling, he did not appeal to the Supreme Court. Instead, he issued a revised executive order. Now that it has been struck down, he is again faced with the choice of whether to appeal to the Supreme Court.

President Trump was in Brussels for a NATO meeting and he intensified his accusations that NATO allies were not spending enough on defense and warned of more attacks like this week’s Manchester bombing unless the alliance did more to stop militants.

In unexpectedly abrupt remarks as NATO leaders stood alongside him, Trump said certain member countries owed “massive amounts of money” to the United States and NATO — even though allied contributions are voluntary, with multiple budgets.

His scripted comments contrasted with NATO’s choreographed efforts to play up the West’s unity by inviting Trump to unveil a memorial to the Sept. 11, 2001, attacks on the United States at the new NATO headquarters building in Brussels.

Now, two of Germany’s leading newspapers are reporting that in a meeting with the EU’s top leadership he insulted Germany, calling the Germans “bad, very bad” for their running a trade surplus with the US and threatening to cut off car imports to the US.

The European Union said it doesn’t share a common position with Trump on Russia, while differences remain in key policy areas, including climate change and trade, adding to signs of strain in the world’s closest political and economic alliance.

Senate Republicans are weighing a two-step process to replace Obamacare that would postpone a repeal until 2020, as they seek to draft a more modest version than a House plan that the nonpartisan Congressional Budget Office analysts said would undermine some insurance markets.

Republicans say they may first act to stabilize premium costs in Obamacare’s insurance-purchasing exchanges in 2018 and 2019. Major insurers have said they will leave the individual market in several states. A Senate plan is likely to continue subsidies that help low-income Americans with co-pays and deductibles.

The Congressional Budget Office said Wednesday that the House plan narrowly passed May 4 would result in 23 million more people without insurance and, in some states, plans that are too costly for older or sicker people. A Quinnipiac University national poll released today said Americans voters disapprove of the House measure by 57 to 20 percent.

Nvidia has enjoyed a particularly charmed existence since November 8. The graphics-chip maker’s stock price has exploded 95% higher since then, the biggest gain in the S&P 500 by almost 30 percentage points.

On one hand, the company has been targeted by large speculators as a stock likely to decline, as reflected by the roughly $3 billion in short positions held by hedge funds. But it’s also one of the favorite stocks for millennial investors. And while share prices across the technology industry have soared since the election, Nvidia has even more going for it than strength by association and the adoration of millennials

On Wednesday, SoftBank announced a $4 billion stake in the company, sending shares climbing even higher. In the grand scheme of things, this discrepancy between large institutions and individual investors is nothing new to the stock market. Some people get drawn in by the hype and the prospect of a quick profit, while others get worried that valuations are overextended.

The United States can expect an Atlantic hurricane season with more than the usual number of storms. The season, which begins June 1 and runs to Nov. 30, is likely to produce 11 to 17 named storms.

Experts at the National Oceanic and Atmospheric Administration say as many as nine of those could become hurricanes, with winds of 74 miles per hour or higher, and as many as four could be major hurricanes with winds of 111 m.p.h. or greater, also known as Category 3 or higher.

In an average season, 12 named storms develop, and three of them become major hurricanes. The agency said there was only a 20 percent chance of a below-normal season this year. In 2016, NOAA forecast 10 to 16 named storms; fifteen storms developed, including four hurricanes of Category 3 or higher.

Phoenix is the nation’s fifth largest city. Estimates released today by the U.S. Census Bureau show Phoenix last July surpassed Philadelphia, its closest population rival, for the first time after losing the title in 2010.  The 2016 data puts Phoenix’s total population at 1,615,017.

The average 88 people per day the city added between July 1, 2015 and July 1, 2016 gives Phoenix another national distinction: It’s the fastest-growing city in the country, based on numeric increase. Phoenix isn’t the only place growing in Arizona. Maricopa County has the nation’s highest annual population increase among counties, according to recent census statistics.

Financial Review

Send in the Clowns

Sinclair Noe — May 22, 2017

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

Subscribe: iTunes | Android | RSS

DOW + 89 = 20,894
SPX + 12 = 2394
NAS + 49 = 6133
RUT + 9 = 1377
10 Y + .01 = 2.25%
OIL + .48 = 50.81
GOLD + 4.80 = 1261.40

First quarter earnings season is wrapping up, and the big-name reports are getting scarce, with this week’s heavy hitters including Best Buy, Dollar Tree, and Costco. Both the S&P 500 and tech-heavy Nasdaq composite set records early last week before worries about growing political uncertainty in Washington, which could hamper President Trump’s agenda of tax cuts and deregulation, knocked those indexes back from their highs.

On Wednesday, the Congressional Budget Office will release its analysis of the health-care bill that passed the House of Representatives earlier this month. Official Washington will comb through the score, with partisans on each side hoping it suits their talking points. The first CBO score estimated that 24 million more people would be uninsured in 2026, and that number is not expected to change substantially.

Another number could unravel the whole deal.  If the bill isn’t found to save at least $2 billion over 10 years, Republicans won’t be able to use the so-called budget reconciliation process to pass it. Under that process, 51 votes are required to pass legislation in the Senate, versus 60.

Not saving at least $2 billion would mean Republicans would have to start all over again by passing a new budget resolution.

The Trump administration today asked that a major federal court case weighing the fate of the Obamacare cost-sharing subsidies be put on hold again, leaving billions of dollars in payments to insurers up in the air for 2017 and 2018. The subsidies are available to low-income Americans who buy individual health insurance on the ACA exchanges.

In the meanwhile, insurers that are trying to set premium rates for insurance plans to be sold in 2018 are running up against deadlines and have repeatedly asked Congress to fund the subsidies during the transition.

Tomorrow, the White House is scheduled to release Trump’s first full budget. A president’s budget is a wish list, and many of the proposals in it may not become law.

Also Wednesday, the Fed will release the minutes of its May 2-3 meeting. Over the last few week, labor market and inflation data have sent contradicting signals. The labor market supports the hawkish Fed stance. Employment rose 211,000 in April from a wobbly showing in early spring and the unemployment rate dipped to 4.4%, matching the lowest level since May 2007.

On the other hand, core inflation data was soft in both March and April. Today, Dallas Fed President Rob Kaplan said he still expected two rate hikes this year. Perhaps more important than the timing of the next rate hike is what the Fed plans to do about its balance sheet. Chair Janet Yellen and other top officials have claimed for some time that they are eager to begin reducing their nearly $4 trillion in US government and mortgage debt.

And while this may be true at the margin, the truth is that though many of them may make noises about reducing the size of the balance sheet, a sizable and probably most of the Fed officials believe the massive balance sheet is here to stay — indeed, most of them schooled in the modern central banking theories believe a rather large balance sheet is now an essential part of monetary policy.

More than one Fed official has indicated that even a “normal” balance sheet as they currently envision it could total about $2 trillion worth of government and/or housing debt.

President Trump visited Saudi Arabia over the weekend and sealed $110 billion in arms deals with the Saudis, with options running as high as $350 billion over 10 years. Shares of defense firms General Dynamics, Raytheon, and Lockheed Martin all hit record highs before easing to trade up between 0.6 percent and 1.6 percent. Boeing was up 1.5 percent and the biggest boost on the Dow.

Blackstone and Saudi Arabia’s main sovereign wealth fund, the Public Investment Fund, signed a non-binding memorandum of understanding to create a $40 billion vehicle to invest in infrastructure projects, mainly in the United States. Blackstone said it expected the vehicle to have $40 billion of equity commitments, with a $20 billion anchor investment from the PIF and the rest of the money obtained from other investors.

Through this equity and debt financing, Blackstone expects to invest in over $100 billion of infrastructure projects. Today, Trump visited Israel. Next up, the Pope.

Oil prices moved higher on rising confidence that top exporters will this week agree to extend supply curbs, or even deeper cuts. However, energy companies lagged. Iraq announced this afternoon, that it will back a proposal from Saudi Arabia and Russia to extend output cuts for nine months, removing one of the last remaining obstacles to an agreement at the OPEC meeting in Vienna this week.

Iraq, the second largest producer in OPEC, has the worst record of compliance with its pledged cuts, pumping about 80,000 more barrels of oil a day than permitted during the first quarter.

The Supreme Court delivered a unanimous decision on where patent lawsuits may be filed, a setback to patent trolls, or companies that buy patents not to use them but to demand royalties and sue for damages. Such companies have often sued in remote federal courts that have a reputation for friendliness to plaintiffs.

More than 40 percent of patent lawsuits, for instance, are filed in a federal court in East Texas. In recent years, a single judge based in Marshall, Texas, oversaw about a quarter of all patent cases nationwide, more than the number handled by all federal judges in California, Florida and New York combined. The decision was a victory for big technology companies and other patent holders, which have complained about what they called forum shopping in patent cases.

The case, TC Heartland v. Kraft Foods raised the question of whether companies could sue essentially anywhere their products are sold, or in the jurisdiction where it resides.  Today’s Supreme Court decision won’t eliminate patent trolling but it will probably limit the practice.

A divided U.S. Supreme Court rejected two North Carolina congressional districts, saying Republican lawmakers relied too heavily on race when drawing them. The gerrymandered voting districts were used until the 2014 election. The case produced an unusual split: Justice Clarence Thomas, perhaps the most conservative justice, joined the court’s four liberals in the majority.

Ford Motor replaced its chief executive, Mark Fields, and vowed to catch up in the race to build self-driving cars and define a new era in personal mobility.  Jim Hackett, who had overseen the Ford subsidiary that works on autonomous vehicles, immediately takes over as the new CEO.

Fields came under fire from investors and the company’s board for failing to expand the company’s core auto business and for lagging in developing the high-tech cars of the future. But for a Ford CEO, stock price is Job One; Fields’ biggest transgression during his 3-year tenure as Ford CEO was a 40% drop in Ford’s share price.

Hackett said the board had given him a free hand to transform the nation’s No. 2 automaker, including seeking alliances with Silicon Valley firms, changing its product lineup, and divesting itself of unprofitable global operations.

US-based Huntsman Corp. and Switzerland’s Clariant are combining to create a chemical manufacturer with a market value of more than $14 billion. The deal creates a global specialty chemicals company that is 52% owned by Clariant shareholders and valued at about $20 billion when including debt. Clariant makes aircraft de-icing fluids, pesticide ingredients, and plastic coloring. Huntsman makes chemicals used in paint, clothing, and construction.

In the past 30 days, about 40 percent of the Midwest got twice the amount of normal rainfall, with soils saturated from Arkansas to Ohio. While spring showers usually benefit crops, the precipitation has come fast enough to flood some corn and rice fields and trigger quality concerns about maturing wheat. Bad conditions got worse with rain on Friday. There are lakes in some fields.

Planting was off to a fast start in the second half of April, before 10 inches of May rainfall and lower temperatures erased early optimism. Corn and wheat are headed for monthly gains on the Chicago Board of Trade while rough-rice futures are headed for the biggest such advance in six years. Even with the challenges, farmers have made speedy work of planting.

U.S. sowing of corn, soybeans and spring wheat was ahead or even with the five-year average as of May 14, while corn emergence was behind schedule.

For years, Citigroup employees suspected that millions of dollars that the bank was moving to Mexico might be suspicious. Yet the bank failed to sufficiently alert regulators or step up its monitoring for money laundering. From 2007 to 2012, the banking unit generated about 18,000 alerts of suspicious transactions among the 30 million Mexico remittances it processed, yet the bank conducted fewer than 10 investigations.

Today, Citigroup agreed to pay $97 million to settle an investigation into Banamex USA. In exchange, the Justice Department will not charge the bank criminally for the misdeeds of Banamex USA, based in California.

After 146 years, the Greatest Show on Earth, Ringling Bros. and Barnum & Bailey Circus took its final bow. An army of circus performers and technicians end a tradition that first had its roots in 1871 under showman P. T. Barnum. The circus animals, lions, tigers, and bears will be sent to sanctuaries or to work in European circuses.

And if you’re looking for the clowns, well you can find a reasonable facsimile in Washington DC.

Financial Review

More Records

Sinclair Noe — May 15, 2017

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

Subscribe: iTunes | Android | RSS

DOW + 85 = 20,981
SPX + 11 = 2402 (record)
NAS + 28 = 6149 (record)
RUT + 11 = 1393
10 Y + .01 = 2.34%
OIL + .98 = 48.82
GOLD + 2.70 = 1231.40

The S&P 500 and the Nasdaq hit record highs today. Profits from S&P 500 companies surged by 14.9% during the first quarter, the fastest rate since 2011, per CFRA Research. That’s a far cry from the earnings decline of nearly 7% experienced at the start of 2015.

Roughly three-quarters of the 450 or so S&P 500 companies that have reported results this season have beaten profit expectations, the highest rate since 2010. The S&P 500’s price-to-earnings ratio of 17.5 remains well above the 10-year average of 14, but below the 13-year highs experienced earlier in the year. The energy, tech, financials and materials sectors –  enjoyed stellar growth of 20% or more during the first quarter.

On Friday, a major piece of malware hit the web, and throughout the weekend infected hundreds of thousands of computers around the globe. The software, called WannaCry 2.0, is what’s known as ransomware. A type of malware that burrows into your computer, ransomware encrypts the files on your machine, keeping you from being able to access them. The malware’s creator then asks that you to pay a fee to unlock your data.

The first round of the WannaCry 2.0 attack seems to have passed. But chances are the creator, or some other hacker, will re-purpose the malware and send it back into the wild again. Ransomware doesn’t just pop up on your computer by magic.

You must download it. And while you could swear up and down that you’d never be tricked into downloading malware, cybercriminals get plenty of people to do just that. Beyond that, make sure your system is up to date, back up your files, don’t stay connected to the cloud or unnecessarily connected to the internet. And finally, never pay the ransom.

Major oil-producing nations have struggled of late to bolster oil prices, as inventories piled up and crimped the potential for demand. Prices dipped below $44 a barrel this month, their lowest level in more than a year.

For years, Saudi Arabia and other nations in OPEC were often able to easily prop up prices. But their clout has ebbed as new players like American shale producers came into the market and the growth in demand for oil slowed. Saudi Arabia and Russia said an agreement to cut oil production should be extended by 9 months.

Production cuts agreed by OPEC and other major producers are set to expire at the end of June. But both Saudi Arabia and Russia said they would work to convince other countries to extend the cuts until the end of March 2018.

Oil hit its highest in more than three weeks. The oil majors, Exxon and Chevron moved higher. We aren’t really seeing a significant correlation between oil prices and the broader market, but the move in oil stocks helped give a boost to an otherwise quiet market.

The 13 members of the Organization of the Petroleum Exporting Countries are due to meet on May 25 to discuss the extension. That does not mean it is a done deal. There is disagreement among the ranks. Iran and Iraq do not want to reduce their production. The Saudis will not make cuts on their own. In the short term, large amounts of crude remain unsold and in storage.

Saudi Arabia and Iran have been selling some of those stores, blunting the impact of the cuts. In the longer term, the Saudis may be making the situation easier for US shale producers by agreeing to rein in output for such a long time.

Saudi Arabia is planning to cement ties with President Trump by investing $40 billion in US infrastructure development. The kingdom’s sovereign wealth fund is set to announce the plans which may be unveiled next week to coincide with Trump’s visit to the kingdom. Trump will be making his first foreign trip since taking office on 19 May, visiting Saudi Arabia and Jerusalem then heading to Europe.

The program would potentially be worth $200 billion in direct and indirect investment in the next four years.  Trump has said he intends to push for $1 trillion in US infrastructure investments over the next decade, with $200 billion coming from taxpayers and the rest from the private sector.

The National Association of Home Builders and Wells Fargo said on Monday their index of builder confidence in newly built, single-family homes climbed to 70 points from 68 in April. NAHB said the report shows that builders’ optimism in the housing market is solidifying, even as they deal with higher building material costs and shortages of lots and labor.

Builder confidence is a reasonably good predictor of housing starts, the process of breaking ground on a home. Housing starts have run at about a 1.2 million pace for the past several months. Total starts and single-family only are about 64% of their long-run averages.

Also, the New York Federal Reserve said its barometer on business activity in New York state unexpectedly fell in May, putting it into negative territory for the first time since October.

Thermo Fisher Scientific has agreed to acquire Patheon for $35 a share, or $7.2 billion including $2 billion of net debt. Thermo Fisher is involved in research and laboratory services; they make electron microscopes and DNA sequencing machines. Patheon offers development and manufacturing services to biopharmaceutical companies; they make the drugs and chemicals. Patheon shares jumped 34% on the news.

Moody’s will buy Dutch business intelligence company Bureau van Dijk for $3.2 billion. Moody’s said the deal, which is expected to close late in the third quarter, will be funded through cash held offshore and new debt financing.

Amazon.com went public exactly 20 years ago as an unprofitable online bookstore that was just three years old. If you had invested $1,000 in Amazon, and held it, you would now hold about $638,000 worth of stock. Admittedly, it did not look like a good investment 20 years ago, and price has been on a roller-coaster.

And if you are wondering which sector Amazon will crush next, consider furniture and appliances. Amazon plans to build at least four massive warehouses focused on handling the bulky items that trucking companies sometimes call ugly freight and parcel carriers see gumming up their operations. Furniture is one of the fastest-growing segments of online retail, growing 18% in 2015, second only to groceries, and some 15% of the $70 billion US furniture market has moved online.

Players are struggling to get the market right, however. Delivering couches and dining sets is more complicated and expensive than handling conventional parcels, and that may provide a fresh challenge to Amazon’s budding self-controlled logistics network.

Sears Holdings’ CEO Eddie Lampert vowed to fight back against suppliers trying to take advantage of his company, saying that “dire predictions” about the retailer’s future have hurt its position with vendors. Lampert says Sears has been working with suppliers to ensure that their level of credit risk is “both affordable and appropriate,” but some vendors have tried to capitalize on its situation.

Driverless car maker Waymo—owned by Google’s parent company Alphabet—has shown “compelling evidence” that its “former star engineer” stole more than 14,000 confidential files. A federal judge said in a ruling made public today, that engineer, Anthony Levandowski, joined Uber last summer to lead its self-driving car efforts and he is now barred from working on “lidar” technology for Uber.

It also instructs Uber to return the “pilfered” files by May 31 at noon. Waymo sued Uber in February, alleging theft of trade secrets and its in-house lidar, the technology that allows a self-driving vehicle to “see.” It later upped the ante and said Uber colluded with Levandowski to steal proprietary information.

Meanwhile, in a separate announcement, Waymo, the self-driving car unit that operates under Google’s parent company, has signed a deal with the ride-hailing start-up Lyft. Lyft is the arch-rival of Uber, and Alphabet-Google is ticked off at Uber right now, so a Waymo-Lyft deal is a union formed out of shared loathing for Uber.

The deal calls for the companies to work together to bring autonomous vehicle technology into the mainstream through pilot projects and product development efforts. The deal was confirmed by Lyft and Waymo.

The City of Philadelphia has sued Wells Fargo, accusing the largest US mortgage lender of intentionally steering minority borrowers into higher-cost home loans than it offered white borrowers.

In a complaint filed in Philadelphia federal court, Philadelphia faulted Wells Fargo’s “long history” of “redlining” in Philadelphia, and said the bank’s practices reflected a “total breakdown of appropriate internal controls” like its recent creation over unauthorized customer accounts. The city alleges that Wells Fargo pushed minorities into riskier loans with higher rates, even in cases where the borrowers had credit profiles that would have qualified them for lower-rate loans.

The complaint charges that the problem has been ongoing since 2004 and is a violation of the Fair Housing Act, and comes in the wake of an important Supreme Court decision on the legislation. On May 1, the high court ruled that Miami could sue Bank of America for predatory lending practices that increased segregation.

Philadelphia City Council recently voted to change handlers of its $2 billion payroll account, switching from Wells Fargo to Citizens Bank.

Financial Review

Take 64

Sinclair Noe — May 4, 2017

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

Subscribe: iTunes | Android | RSS

DOW – 6 = 20,951
SPX + 1 = 2389
NAS + 2 = 6075
RUT – .02 = 1388
10 Y + .05 = 2.36%
OIL – 2.31 = 45.51
GOLD – 9.70 = 1229.00

The House of Representatives narrowly approved a bill to repeal Obamacare. More specifically the House passed the American Health Care Act, which scraps the Obamacare mandates that people buy health insurance and that employers provide it, eliminates most of its tax increases, cuts nearly $900 billion from Medicaid while curtailing the program’s expansion, and allows states to seek a waiver exempting them from the current law’s crucial prohibition against insurers charging higher premiums to people with pre-existing conditions.

The party line vote was 217-213 with 20 Republicans voting against the bill.

Conservatives complained that the bill did not fully repeal the 2010 law, while moderates blanched at its cuts to Medicaid and its weakening of its most popular consumer protections. Hardliners in the House Freedom Caucus, who had denounced the original version of the bill as “Obamacare-lite,” dropped their opposition after securing an amendment allowing states to opt out of key insurance mandates.

Moderates and even some leadership loyalists balked, but they secured an 11th hour sweetener of their own: an extra $8 billion to help people with pre-existing conditions who might not be able to afford higher premiums that insurers could charge them in high-risk pools. The modest sum was no more than a political fig leaf, as policy analysts said it would not come close to making the new insurance pools work.

What pushed some reluctant members to vote yes in the final days was the growing realization that this bill might not become law. Not as it is currently written. As many hurdles as the American Health Care Act has overcome among Republicans in the House, it faces even more among the considerably narrower GOP majority in the Senate, where party leaders must win over 50 out of the chambers 52 Republicans.

Senators will re-work the legislation, and there is no guarantee they will even vote on it. So, for now, Obamacare remains the law of the land. Senators will now wait up to two weeks for CBO to review the House-passed bill.

The CBO analysis of the first version of the AHCA showed 24 million people would lose insurance coverage over the next 8 years. A widely-cited Quinnipiac University poll in March found that just 17 percent of respondents backed its passage, and that was before Republicans amended the measure to allow states to weaken popular consumer protections.

In a sign of the challenges ahead for the legislation, nearly every major-medical group, including the American Medical Association, American Hospital Association and the AARP, strongly opposed the Republican bill. In an analysis released on Thursday, healthcare consultancy and research firm Avalere Health said the Republican bill would cover only 5 percent of enrollees with pre-existing conditions in the individual insurance markets.

Following CBO analysis, it could take several weeks to agree on revisions, or a new bill entirely, that would then either be sent back to the House or to a conference committee for more negotiations. While the bill’s fate in the Senate is uncertain, its House passage could boost Trump’s hopes of pushing through other big ticket items on his agenda, such as tax reform.

The failure of previous efforts on the healthcare legislation had raised questions about how much Republicans could work together to help Trump fulfill his campaign pledges. Repealing Obamacare is the Senate’s problem now. Many people struggling with soaring premiums, deductibles, co-pays and other onerous costs blame Obamacare for their woes. Trump will become the target of the same criticism if Trumpcare passes, and probably even if it doesn’t.

The oil rally following OPEC’s deal has disappeared. Oil futures dropped to their lowest since late November on growing signs that OPEC’s production cuts are failing to clear a surplus of crude. Oil stocks felt the pinch, with the S&P Oil & Gas Exploration and Production Index slumping as much as 4.9 percent. OPEC is widely expected to extend its production caps for another 6 months but they are unlikely to make deeper cuts.

To counter OPEC cuts, US crude output has risen to the highest since August 2015 as shale drillers add rigs every week. US crude output rose by 28,000 barrels a day last week for the longest run of gains since 2012, according to Energy Information Administration data. Crude stockpiles fell by 930,000 barrels, far less than expected.

Meanwhile on the demand side, China has hit a speed bump and the Chinese government has clamped down on financial leverage and increased regulatory scrutiny of commodity trades.

In other oil-market news: Royal Dutch Shell reported adjusted first-quarter earnings of $3.75 billion, compared with $1.55 billion a year earlier.

US shale driller Chesapeake Energy posted its first quarterly profit since 2014 and braced shareholders for a production surge in the second half of the year as new natural gas and oil wells come online. Chesapeake Energy lost as much as 9.8 percent of its value.

Pioneer Natural Resources saw as much as $1.4 billion in market value wiped out on Thursday.

California Resources, the Los Angeles-based explorer spun off by Occidental Petroleum in 2014, fell as much as 11 percent.

In metals markets, copper posted its biggest 2-day loss since 2015 as the London Metal Exchange reported a 25 percent increase in copper stockpiles. Copper down 1% today, following yesterday’s 3.5% drop.

Meanwhile, iron ore is in full retreat, trading limit down and nickel dropped to a 10-month low on the LME, down 5.3% in the past 2 days. And all this commodity action is happening as the US dollar index continues to inch slightly lower.

Tennessee-based First Horizon agreed to buy North Carolina’s Capital Bank Financial in a deal the companies valued at $2.2 billion. They said it will make one of the largest regional banks in the Southeastern US. However, investors were far from excited and both stocks slumped.

Another busy day of earnings news. Viacom, the owner of MTV, Comedy Central and Nickelodeon, reported second-quarter profit that beat estimates on Thursday, but news that Charter Communications had re-tiered five of Viacom’s flagship networks to its most expensive programming tier, a move that will likely result in lower affiliate revenue for the media company, prompted a steep selloff.

Viacom, along with its peers, is also under pressure as more viewers cancel cable subscriptions to watch content online and advertisers increasingly shift ad dollars to the web. The pay-TV industry just reported its worst-ever first quarter subscriber loss, at an estimated 726,000 subscribers, over five times last year’s loss.

CBS Corp’s quarterly revenue and profit beat analysts’ estimates as the company benefited from higher content licensing and subscription fees, led by the streaming version of its Showtime network. Shares of the most-watched U.S. TV network were up 1.8 percent.

Advertising sales, which accounts for half of the company’s total revenue, fell 23 percent to $1.6 billion from a year earlier, which included popular events such as the 50th anniversary of the Super Bowl and an extra National Football League playoff game. Revenue from the company’s content licensing and distribution segment rose nearly 16 percent, while its affiliate and subscription revenue was up 16.6 percent.

Cornflakes maker Kellogg reported a better-than-expected quarterly profit. The world’s largest cereal maker has been battling weak sales as shoppers prefer healthier options over its processed food offerings. Kellogg launched the “Project K” restructuring program four years ago in a push to drive profit by cutting jobs and optimizing production.

Net income rose to $262 million, or 74 cents per share, in the first quarter ended April 1, from $175 million, or 49 cents per share, a year earlier. The planned tax benefit resulted in a 14-cent benefit to the company’s adjusted profit per share.

Shake Shack sinks after same store sales stall. (say that 5 times fast) Comparable sales for the quarter dropped 2.5%. The burger chain also said full-year 2017 same-store sales will be flat, trimming previous guidance for 2-3% growth.

Cities can sue banks over predatory lending. In Bank of America v City of Miami, the Supreme Court considered whether Miami may attempt to recoup losses it suffered from the 2008 recession by suing Bank of America and Wells Fargo, two of America’s biggest banks, for extending low-cost loans to white people while selling black people and Latinos risky mortgages with high fees and inflated interest rates.

Miami claimed that a decade of discriminatory lending contributed to segregation and led minority borrowers to miss payments and lose their homes. Foreclosures then depressed property values, bringing boarded-up windows and dangerous street corners. This spurred Miami to spend more on policing, fire protection and other city services while its tax base withered.

The impact on the city’s finances, Miami claimed, made it an aggrieved party under the Fair Housing Act (FHA), a law passed in 1968 prohibiting racial discrimination in the lease, sale and financing of property. The swing vote was Chief Justice John Roberts.

The Commerce Department reported the trade deficit dipped 0.1% in March, even as deficits with Mexico and Japan hit an almost 10-year high. The deficit dipped to $43.7 billion in March – a five-month low. Exports slid 0.9% to $191 billion, largely reflecting fewer shipments of pharmaceutical drugs and American-made cars. Imports edged down 0.7% to $234.7 billion.

There will be six Federal Reserve officials speaking on Friday and economists will be listening for clues about balance-sheet policy. The central bank did not shed any new light on the internal discussions on its plans to reduce its $4.5 trillion balance sheet on Wednesday when it released a short statement after a two-day meeting, where they left interest rates unchanged.

Initial U.S. jobless claims fell by 19,000 to 238,000 in the last week of April. Tomorrow is a Jobs Report Friday. Last month the March report showed a weak 89,000 new jobs. The April report is expected to bounce back with about 185,000 jobs.