Podcast: Play in new window | Play in new window (Duration: 13:15 — 7.6MB)
DOW + 56 = 20,663
SPX + 8 = 2365
NAS + 43 = 6055
RUT + 5 = 1361
10 Y + .02 = 2.23%
OIL – .01 = 49.34
GOLD – 14.10 = 1247.80
On Wednesday the stock market had a little panic attack. As is often the case, these things pass. Therefore, it is important to see confirmation of a major move.
Yesterday we did not see confirmation. Equities did not take kindly to news of Trump influencing or impeding an FBI investigation. The S&P 500 closed at the lows, down 1.8%, and the Nasdaq wiped out 18 days of gains in one session.
So, Wednesday was not insignificant, but looking back over the last half year, it is not enough, in and of itself to change the trend, which is still up.
The news of the week is important, and it was a catalyst for the big sell-off on Wednesday, but while the term ‘impeachment’ may appear more frequently in the press today, the process is initiated by a vote in the House, where Republicans hold a 45-seat majority.
A House impeachment of President Trump would look unlikely. But that doesn’t mean Trump’s problems have been resolved, just slow-tracked. Late yesterday, a special prosecutor was named – former FBI Director Robert Mueller – and whatever the outcome of his investigation, nothing will happen immediately.
Meanwhile, Rep. Jason Chaffetz said yesterday that he will resign from Congress next month, a move that calls into question the future of the House Oversight Committee’s investigation of President Donald Trump and his campaign’s ties with Russia.
Washington can make a slug look like a speed demon. Nothing is imminent and so the markets rebooted. Traders bought the dips. That said, this is proving a distraction from the president’s agenda, including what should be a more detailed budget released next week.
After months of major stock markets posting record highs and historically low volatility across a range of asset classes, something was bound to snap and nobody knows whether it was a one-off or an omen. We’ll get clues in the days and weeks ahead, but a day like yesterday should jolt us from our lethargy and remind us that volatility hasn’t died.
The VIX index was jolted from its slumber Wednesday and chalked up its seventh-biggest rise in percentage terms since its launch in 1990. This is an appropriate time to look at risk levels and reassess where we are as investors.
The dollar, two- to 10-year Treasury yield curve and yields on 10-year Treasury Inflation-Protected Securities (TIPS) are all back where they were before Trump was elected in November. The spread between two- and 10-year Treasury yields is its smallest since before the presidential election.
This so-called yield curve flattening suggests investors are losing faith in the economy’s ability to withstand higher interest rates. Money markets have slashed the probability of the Federal Reserve raising rates next month to less than 60 percent from over 90 percent last week.
The U.S. economy is already into its third-longest expansion ever, and a recent fall in the U.S. economic surprises index suggests it is running out of steam. That does not mean a recession is in the offing but it might point to slightly slower growth.
Any time we see a shift, the fast money will look for fresh opportunities. The gap between the U.S. and European surprises indexes is the widest in two years, U.S. corporate earnings growth is double-digit but still lagging the euro zone, and the political turmoil that was supposed to beset Europe this year is concentrated in the United States.
Wednesday was not enough to push investors to cash or run scared but yesterday many investors reconsidered their tactical positions, and rethink their appetite for risk.
Earlier in the day yesterday, the Philadelphia Federal Reserve said business activity index rose in May after declining for two months. Weekly unemployment data also pointed to strength in the labor market.
Brazilian markets took a big hit, the benchmark Bovespa dropped about 9%. One of the country’s largest newspapers reported that a secret recording exists of President Michele Temer approving a payment to Eduardo Cunha, the former House speaker and mastermind behind last year’s impeachment of former President Dilma Rousseff.
The tape was submitted to the Supreme Court by two senior executives from meat-packing giant JBS as part of a plea bargain deal, according to O Globo newspaper, in which information is offered in exchange for reduced sentences. Though the president’s office confirmed the meeting between Temer and a JBS executive took place in March, it denied Temer asked for payments to silence Cunha.
Temer is far from the only politician to be tied to the corruption scandal, dubbed “Operation Car Wash,” which has implicated nearly all of Brazil’s political class, including every senior member of the ruling party.
Earnings reports from major brick and mortar retailers have been a long list of disappointments, with the occasional exception of Home Depot (HD) or Target (TGT), and yesterday Walmart (WMT) reported. Wal-Mart said sales at U.S. stores open at least a year rose 1.4 percent, better than estimates. Investments to bring more customers into the discount retailer paid off and a bigger push into e-commerce boosted online purchases.
Online sales rose 63 percent in the first quarter, which was higher than 29 percent growth in the fourth quarter and 20 percent in the third quarter. Walmart said it is benefiting from a $2.7 billion investment to increase entry-level wages and enhance the training of its workforce, which has led to better stocked shelves and cleaner stores.
Walmart earned $1 per share, topping estimates of 96 cents. Consolidated net income fell to $3.04 billion from $3.08 billion due to a higher tax rate. Revenue rose 1.4 percent to $117.5 billion, slightly lower than analysts’ expectations of $117.7 billion due to a stronger dollar, which reduces the value of overseas sales. Revenue grew 2.8 percent on a currency neutral basis.
Walmart shares flirted with 52-week highs.
Alibaba Group (BABA) beat first-quarter revenue forecasts but fell short of earnings estimates. The Chinese company, which is targeting new business lines such as cloud computing, big data, entertainment and offline retail as it expands beyond e-commerce, also announcing it will buy back $6 billion shares over the next 2 years.
Salesforce.com (CRM) reported better-than-expected earnings and raised its full-year revenue guidance. The cloud-software company reported a net loss of $9.2 million on revenue of $2.39 billion for its fiscal first quarter. After adjustments for stock-based compensation and other effects, the company claimed a profit of 28 cents a share, which topped estimates.
Facebook (FB) celebrates its fifth anniversary as a publicly traded company. The IPO was 5 years ago, and it was a mess, but since then the stock is up 279%.
The Telecommunications Services sector was the S&P’s biggest percentage gainer with a 1.2-percent rise. The Federal Communications Commission has officially begun undoing net neutrality rules the agency passed two years ago. The FCC voted 2-1, along political party lines to begin a rule-making process to replace the Open Internet order, or net neutrality rules, adopted in 2015.
The rules won’t disappear overnight but FCC chair Ajit Pai has made it clear that, barring a successful legal challenge, the agency will give up its authority to enforce net neutrality regulations. The rules, first passed in 2015, ban internet service providers from blocking, slowing down, or otherwise discriminating against lawful content.
Without these rules in place, your home internet provider would be free to slow down your Netflix connection to try to keep you paying for cable TV. Your mobile carrier would be allowed to block Skype to promote its own voice plan. Naturally, the country’s largest broadband providers say you have nothing to worry about.
In fact, the industry now claims to love net neutrality. But what the industry is calling “net neutrality” doesn’t really fit the full definition. It’s a version of net neutrality that doesn’t cover the loopholes internet providers have already discovered. If the FCC decides to drop its own protections, you probably won’t wake up one day to find YouTube or Slack blocked. But the principles that made the internet what it is today could still erode over time.
We are already seeing a “toll road’ version of internet service. AT&T (T), for example, allows users to watch as much video as they want from its own DirecTV Live streaming service without having it count toward their data caps. Competing services like Dish’s Sling, on the other hand, will count against those caps unless the companies behind them pay AT&T to “sponsor” that data.
Verizon (VZ) has a similar system in place. These data exemptions, known as “zero rating,” may sound innocent enough. Everyone loves getting free stuff. But critics argue that they will end up harming competition.
Although the telecommunications industry group US Telecom sued the FCC to try to reverse its net neutrality protections, most big internet providers say they support net neutrality in principle. Their beef, they say, is just that the FCC went too far in reclassifying broadband access as a “Title II” common carrier service, much like telephone services.
The telecoms say they don’t mind a little regulation if there are great big loopholes. The problem is that without Title II, the FCC won’t be able to enforce net neutrality. And that means that the big, beautiful, collaborative mosaic of the internet could soon be missing many of the smaller tiles that add so much color to the overall picture.
