The shutdown happened Friday night as the Senate failed to pass the budget, however, the stock market rallied into Friday’s close despite this looming situation. Did the market get it wrong or does it not care? Shutdowns are temporary political situations and this one is over immigration. There is a March 5th deadline on DACA (Deferred Action for Childhood Arrivals) so we could see the government shutdown until this deadline but I think some kind of deal happens sooner. It will be an interesting to see how both sides negotiate in the coming weeks as it may provide foreshadowing to the issues and policies voters will contemplate for the 2018 mid-term elections later this year. The markets have seen this dance with Washington before and are more interested in what corporate America has to say bout the outlook for 2018 and beyond.
Maybe we begin a pullback on this news but the markets have been behaving nicely with shallow pullbacks and more sectors contributing to the advance higher. The tech stocks will likely hand-off their leadership to other sectors in Q1 so that would be a nice change for 2018. Earnings season is here and we will see a significant uptick in releases in the coming week (s). The large banks have largely released good earnings with a write-down of deferred tax assets on their balance sheets which is caused directly by a reduction in tax rates (a one-time hit). Their stock prices looked past the hit to the balance sheet and moved higher across all names as good bank earnings is interpreted as a symptom of a good economy.
If the stock market can look through hits to the balance sheet because of the new tax law then it can look past the government shutdown. Earning will continue to drive the bus so watch earnings and what CEOs tell us about their business prospects for this year.
Chart of the Week!
Hate your state? This graphics shows the percentage of people that describe their state as the “Worst Possible State to Live”. Maybe we should all move to Montana.
Economic & Central Banking Snippets
- One notable piece of economic data this week is out of China. The Chinese economy grew 6.9% in 2017, the fastest since 2015 even as policymakers made headway towards curbing financial risk from excessive debt growth. The country’s 6.8% year on year growth rate for the fourth quarter locked in China’s first yearly gross domestic product acceleration since 2010! The annual figure overshot the government’s full year target of “around 6.5%”.
- Do we have inflation? The Fed has a 2% inflation target but we all know that inflation reduces purchasing power and is a bad thing. If economic activity causes GDP to trend above 3% then you will see the velocity of money increase and bring back inflation to the system. Has this process already started? Perhaps, the chart below is giving us a clue. It is something to think about in the coming 1-2 years, at the very least.
- Data released NEXT Friday is expected to show that economic growth in the US cooled in the final three months of 2017. Economists polled by Thomson Reuters estimate GDP expanded at an annualized 3% rate in Q4, down from 3.2% in Q3. However, the Atlanta Fed’s GDPNow model forecasts Q4 growth of 3.4% per cent while the New York Fed’s Nowcast model projects a 3.9% expansion.
Market Snippets
- Citigroup reported a loss of $18.3 billion for the fourth quarter, its earnings wiped out by a $22 billion charge related to the new tax law. While the law is expected to help Citigroup and other large U.S. banks over time, it is obscuring results for the recent quarter at many banks with large one-time costs. Without the tax charge, the bank would have earned $1.28 per share, beating the $1.19 expected by analysts. Its stock rallied higher on the news.
- General Electric’s is considering breaking apart after disclosing more problems buried in one of its major insurance units. John Flannery, who took over as CEO last summer, said the company was exploring separating its major divisions into individually traded units. Stay tuned.(FT)
- Goldman Sachs took a $4.4bn charge for the effects of the new tax bill that forced the bank to report its first quarterly loss since 2011. Excluding the tax hit, earnings per share for the period came to $5.68, up 12% from the same period a year earlier, and better than analysts’ expectations of $4.90. Revenue came to $7.83bn for the quarter, ahead of estimates of $7.63bn. The bank has suffered in its bond trading unit as big structural shifts in regulations and a move to electronic trading platforms have changed the business. At its peak in 2009, Goldman’s bond business produced more than $23bn of net revenues – more than the rest of the bank combined. For the whole of last year, this unit made $5.3bn of revenues, or less than 17% of the 2009 total. (FT)
- Apple Inc. said it would make a one-time tax payment of $38 billion to repatriate overseas cash holdings and also ramp up its spending in the U.S., as it seeks to emphasize its contributions to the U.S. economy after years of taking criticism for outsourcing manufacturing to China. The tech giant said Wednesday it plans $30 billion in capital spending in the U.S. over five years that will create more than 20,000 new jobs. (FT)
- Dunkin’ Donuts’ newest location in Quincy, Massachusetts, is what the company is calling its next generation concept store. It features a modern design, drinks that come out of “beer-like” taps and has a mobile order drive-thru lane that customers can use with its status board app. Dunkin’ hopes to open 50 such stores across the nation in 2018. (Seeking Alpha)
- Wall Street’s top regulator all but shut the door to approving exchange-traded funds that hold bitcoin and other cryptocurrencies, questioning whether the products could comply with rules meant to protect mom-and-pop investors.
- International Business Machines Corp’s revenue rose for the first time in 23 quarters! The company forecast stable margins and revenue for 2018, buoyed by growth in its newer businesses such as cloud computing and security services.
International Snippets
- Norway’s $1.1tn oil fund has sold out of UK defence group BAE Systems and eight other companies as well as banning them from its portfolios in the latest in a series of high-profile ethical investment decisions. The world’s largest sovereign wealth fund said on Tuesday that it had excluded BAE, Aecom, Fluor, and Huntingdon Ingalls Industries as well as maintained an earlier ban on Honeywell due to their involvement in the production of nuclear weapons. The oil fund has also banned from its portfolios Evergreen Marine, Korea Line, Precious Shipping, and Thoresen Thai Agencies because of “risk of severe environmental damage and serious or systematic violations of human right”.
- Dubai’s Emirates Airline has signed an initial agreement to buy 36 Airbus A380 aircraft, including 20 firm orders and the option for 16 more in a deal valued at $16bn. The deliveries will start in 2020 and will guarantee production of the struggling super-jumbo jet for at least another decade. The aircraft manufacturer had been close to shutting down the line after years without a new order.
That is all for now until next week’s Market Update. If someone forwarded you a copy of this report, you can sign-up directly at www.kiscocap.com.
Good luck out there!
-Paul