Friday, April 27, 2018

Markets struggle as tech rally fades

Dow lost 11, advancers over decliners 4-3 & NAZ inched up 1.  The MLP index declined 1 to the 257s & the REIT index was 4 to 326.  Junk bond funds crawled higher & Treasuries rose in price, taking the yield on the 10 year Treasury down to 2.96%.  Oil was off pennies, but still above 68, & gold gained 7 to 1325.

AMJ (Alerian MLP Index tracking fund)

Live 24 hours gold chart [Kitco Inc.]

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For all the hubbub surrounding tech earnings, a company that hasn’t yet reported is the biggest drag on the sector for a 2nd straight week.  Yep, Apple (AAPL, a Dow & NAZ stock) is the primary reason the S&P 500 Information Technology sector has been in the red for the 5 days, as concern mounts that the iPhone maker will disappoint an already jittery market when it reports May 1.  Investors have been souring on the tech giant ever since Taiwan Semiconductor issued a disappointing outlook last week, heightening angst that smartphone demand has cooled.  That worry reached a fever pitch today after Goldman Sachs research suggests iPhone output numbers in Jun may be even worse than the 40M forecast made last month.  The stock dropped 1.90.
If you would like to learn m ore about AAPL, click on this link:

Apple Sours Tech Sector's Week With Earnings Anxiety

US consumer sentiment exceeded estimates in Apr on Americans' increasingly favorable views of their finances, Univ of Mich survey data showed.  The sentiment index fell to 98.8 (est 98) from 101.4 in Mar (preliminary reading was 97.8).  Current conditions gauge, which measures Americans' perceptions of their finances, dipped to 114.9 from record 121.2 in the prior month; preliminary reading was 115.  Expectations measure eased to 88.4 from 88.8 (the preliminary reading was 86.8).  Year-ahead inflation expectations dipped to 2.7% from 2.8% in prior month.  While the decline reflected negative sentiment about the effect of tariffs on the economy, consumers remained upbeat about their financial situation, partly a reflection of the recent tax legislation.  Recent income gains were reported by 25% of respondents, up from 18% a year ago.  Some 40% expected income gains, on par with the average over the past year.  Even with the cooling, sentiment remains elevated by historical standards, higher than any other annual average since 2000.  That, along with tax cuts that have boosted disposable income, bodes well for a pickup in consumer spending following a 1.1% annualized advance in Q1 reported earlier today.  According to the university, the level of sentiment is consistent with 2.7% real personal consumption in the coming year.  While consumers pulled back last qtr, solid business investment, higher employee compensation & tax cuts are expected to buoy growth in Q2, in line with the Federal Reserve's view that the factors holding back growth were transitory.  A measure of inflation in the GDP report, tied to consumer spending & excluding volatile food & energy costs, advanced at a 2.5% annualized pace, the fastest since 2011, adding to signs that price gains are picking up.  The Michigan survey showed consumers expect inflation to average 2.5% over the next 5 years.  “Overall, I still have a favorable view of how consumers are viewing the economy, though I’d like to stress again this is about as good as it gets,” Richard Curtin, director of the consumer survey, said.

U.S. Consumer Sentiment Exceeds Forecast on View of Finances

The US issued a new warning to China on its handling of intellectual property as Pres Trump prepares to dispatch senior advisers to the Asian nation to head off a trade dispute.  The US Trade Representative's (USTR) office kept China on its “priority watch list” of countries whose IP practices require monitoring.  China has an “urgent need” to fix a range of IP-related concerns, including trade-secret theft, online piracy, & forced technology transfer, USTR said in its annual report on IP protection & enforcement.  Escalating trade tensions between the 2 economies have rattled markets & sparked fears of a trade war.  Trump has proposed tariffs on as much as $150B of Chinese imports on the grounds of alleged IP theft, while Beijing has vowed to retaliate on everything from American soybeans to airplanes.  The annual list, which carries no immediate penalties, is supposed draw attention to the need for nations to address everything from copyright infringement to online piracy.  Trump said this week Treasury Sec Steve Mnuchin & other senior officials will visit China within days, adding that there's a “very good chance” the 2 countries can reach a deal.  US Trade Representative Robert Lighthizer & White House economic adviser Larry Kudlow will also be part of the delegation.  Kudlow said he expects serious negotiations on a range of trade irritants, including technology-related issues, & the US will be looking for specific actions from China.  Officials in Beijing in recent weeks have been announcing steps to further open up the economy, such as gradually scrapping foreign ownership caps on local vehicle companies.  The administration added Canada & Colombia to the highest priority watch list for IP challenges & it dropped Thailand from the regular watch list.  Canada is the only Group of Seven country on the monitoring list.  The USTR said the country has failed to resolve “key longstanding deficiencies,” including poor border & law enforcement with respect to counterfeit & pirated goods, weak patent protection & pricing for pharmaceuticals, & inadequate copyright protection.  The move comes as the US, Canada & Mexico aim for a tentative deal on a revised North American Free Trade Agreement in the coming days.  The new deal will likely include a separate chapter on intellectual property practices.

U.S. Presses China to Address IP Concerns Amid Tariff Dispute

US employment costs increased more than forecast in Q1 as worker pay & benefits accelerated, according to Labor Dept data.  The employment cost index rose 0.8% Q/Q (est 0.7%), after a 0.6% gain.  Wages & salaries advanced 0.9% Q/Q; benefits costs climbed 0.7%.  Total compensation, which includes wages & benefits, climbed 2.7% over past 12 months, strongest since Q3-2008, after 2.6% gain.  Private-sector wages & salaries advanced 2.9% Y/Y, also the largest since Q3-2008, after rising 2.8%.  The ECI data showed year-over-year acceleration in compensation in both services & goods-producing industries, underscoring widespread demand for labor.  Employers are making more generous offers as they compete for workers in a tightening job market.  Rising labor costs will help push overall inflation toward the Federal Reserve's goal.  At the same time, signs of emerging inflation pressures may elevate concern among investors that policy makers will have reason to raise interest rates more aggressively than anticipated.  The quarterly read on the ECI, covering employer-paid taxes such as Social Security & Medicare in addition to expenses for wages & benefits, offers a comprehensive look at how workers are being compensated.  The latest ECI figures may have also been influenced by several factors.  The gauge of employer costs in Q1 is prone to surprises as it includes year-end bonuses, & the volatility may have been magnified this time by one-time payouts made by companies in response to the tax cuts enacted in Dec.  Average hourly earnings, a separate monthly measure of private-sector wages that can be influenced by shifts in industry employment & hours worked, has only gradually increased.  Growth in worker pay has been slow to accelerate even as the unemployment rate has fallen to the lowest level since 2000.  Wages & salaries of all civilian workers rose 2.7% from year earlier, biggest year-over-year gain since 2008.

Higher oil prices drove Q1 profit at Exxon (XOM, a Dow stock & Dividend Aristocrat) up by 16% to $4.65B, the best first qtr in 3 years, despite falling production.  But the results fell slightly short of  expectations & the shares slid lower.  Oil prices have been rising on strong demand & an OPEC-led campaign to limit production.  US crude is up about $8 a barrel so far this year & this month prices for US & intl oil struck levels not since seen late 2014.  It is eating into corp profit at fuel-dependent companies such as airlines, leading predictions this week that travelers will soon be paying higher fares.  That is all good for XOM.  The company's US oil & gas production turned a profit of $429M, compared with an $18 M loss a year ago, as rigs kept busy in the Permian Basin of Texas & New Mexico & the Bakken shale fields in North Dakota.  However, the company still makes most of its money pumping oil & gas elsewhere in the world, & earnings in its intl production business jumped by $800M, to nearly $3.1B.  EPS of $1.09 still fell a penny of the forecast & a nickel short of expectations.  Revenue rose 16¢ to $68.21B, which easily beat projections.  CEO Darren Woods credited higher oil & natural gas prices, operating efficiencies & changes in the company's portfolio.  XOM strengthened its push into offshore Brazil & Guyana & nearly doubled its estimate of gas in a field in Papua New Guinea.  At the same time, it sold its stake in an Australian gas field.  The company had $4.87B in capital expenditures, an increase of 17% from a year ago.  Investors have pushed XOM to watch capital spending closely after they overspent the last time oil prices rose, only to be caught off guard by a price collapse that began in mid-2014.  The stock sank 3.09
If you would like to learn m ore about XOM, click on this link:

Exxon revenue takes off with oil prices, profit falls short

Amazon remained strong, finishing up 54.  But that enthusiasm did not carry the day to the rest of the stock market.  XOM was a drag on the market, helping keep the Dow modestly in the red for much of the day.  Earnings season keeps getting a mixed reception, with some of the highest profile companies disappointing.  And the Dow can't break above 24K in a meaningful way.  The bull market continues as a memory while trade negotiations continue.

Dow Jones Industrials

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