Tuesday, August 14, 2018

Markets bounce back after Turkish lira strengthens

Dow shot up 112, advancers over decliners 5-2 & NAZ rose 51.   The MLP index rose 2+ to the 287s & the REIT index was even in the 353s.  Junk bond funds inched higher & Treasuries were sold.  Oil slid lower in PM trading & gold crawled up 2 to a very depressed 1201.

AMJ (Alerian MLP Index tracking fund)

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McDonald’s (MCD), a Dow stock & Dividend Aristocrat, announced its $6B planned US restaurant modernization, which will include updating dining rooms & digital self-order kiosks, among other changes.  Earlier this year the company announced that it would invest some $6B over the next few years to accelerate the overhaul of US outlets & the digitization of its restaurants when releasing its Q4 results.  MCD will modernize its dining rooms with globally & locally inspired decor, install new furniture, refresh exterior designs & digital self-order kiosks, remodel counters to allow for new table service, add digital menu boards inside & at the drive-thru, designate parking spots for curbside pickup through mobile order & pay & expanded McCafé counters with larger display cases.  The chain has also recently introduced McDelivery with Uber Eats at more than 5K US restaurants.  The investments will take place in 2018 & 2019.  The stock went up 2.46.
If you would like to learn more about MCD, click on this link:

McDonald’s details $6 billion US restaurant modernization

China & the US are engaged in a tit-for-tat trade war, but if economic health is the biggest bargaining chip, then it seems as if the US is poised to win.  While the US economy is firing on all cylinders with a blockbuster earnings season wrapping up, low unemployment & solid GDP growth, China's economy appears to be stuttering.  Data released today showed that spending on fixed assets such as factory machinery & public works projects fell to its lowest level since 1999.  Fixed-asset investment expanded by 5.5% in the Jan-Jul period & Beijing cracked down on local gov borrowing to finance projects.  Industrial output was also a miss, due to pollution curbs & an uncertain trade outlook.  This comes after the country's stock market has taken a hit, with the Shanghai Composite falling into a bear market in Jun.  Major US stock market indices are hovering near record highs.  Another round of tariffs will go into effect on Aug 23, when both countries will apply 25% tariff on $16B worth of imported goods.

China feeling the brunt of trade war

The man at the center of Turkey's currency crisis & feud with the US — Pres Recep Tayyip Erdogan — is unleashing the same combative rhetoric that powered him through other grave challenges in his 16 years as the increasingly authoritarian leader of a key NATO ally.  But Erdogan is also a pragmatist who badly needs a way out of a standoff that threatens his outsized ambitions for the once-thriving Turkish economy.  The interplay between Erdogan's 2 sides could determine how a country that strategically spans the Asian & European continents, & shelters several Syrian refugees in a deal with the EU, will handle a cascade of problems: high inflation, foreign investor flight & a plunge in the value of the Turkish lira.  The question is whether the pres will stick to his unwavering public position, or assign aides to soften it in order to stabilize an economy that he grandly said would be one of the world's most powerful by 2023, the centennial of Turkey's founding.  And if he does seek compromise, analysts wonder, will it be too late to undo the economic damage?  The pres, whose longtime electoral domination has been sullied by concerns about basic freedoms & a crackdown on opponents, delivered a vintage performance at a speech on today.  He said Turkey was under attack, invoking the memory of the Jul 15, 2016 attempted coup by some military units that left nearly 300 people dead.  "We stood tall before tanks, cannons and planes," said Erdogan, a brash, former footballer & ex-mayor of Istanbul.  "And have no doubt that today, we stand before the dollar, the exchange rate, the inflation and interest rates. We stand before them with the same determination."  His message was that Turkey is again under siege from shadowy conspirators, a message that has historically played well among many Turks since foreign powers carved up the remains of the Ottoman empire around the time of its collapse in the early 20th century.  Erdogan talked about "economic hitmen" & a "deeper operation conducted against" Turkey, which is also coping with its own divisions, between pious Muslims & secular citizens, minority Kurds & the state, and those for & against the polarizing pres.  But many economists suggest Turkey's problems stem primarily from mismanagement on the watch of the pres, who for years championed a development boom fueled by low interest rates & the amassing of high foreign currency debt.  There are also doubts about the independence of Turkey's central bank from Erdogan to raise interest rates & support the currency.  Erdogan also unnerved investors when he appointed his son-in-law as finance minister in his new Cabinet after he was elected pres in Jun.

Turkish leader talks big, but can be pragmatic in crises

US economic growth will probably accelerate this year before slowing in 2019 to well below the administration's 3% target as a fiscal stimulus fades, congressional researchers projected.  In an updated economic outlook, the nonpartisan Congressional Budget Office (CBO) projected that inflation adjusted or real GDP would grow 3.1% this year, exceeding 2.2% growth in 2017 due to lower income taxes, increased gov spending & private investment.  The gov slashed corp & personal income taxes in Jan in a $1.5T package & Congress passed a $1.3T spending bill in Mar.  This has buoyed consumer and business spending as well as gov, which combined with accelerated soybean exports to lift the economy to a 4.1% annualized rate in Q2 (the highest in nearly 4 years) from a 2.2% pace in Q1.  But the CBO said it expected growth to slow in H2 as jolts to consumer spending & agricultural exports either fade or reverse.  For instance, some Q2 soybean exports were aimed at beating Chinese tariffs that took effect in Jul & cut future shipments.  "In 2019, the pace of GDP growth slows to 2.4 percent in the agency's forecast, as growth in business investment and government purchases slows," CBO director Keith Hall said.  Reps have said the tax cuts, which increased the nation's debt, would pay for themselves thru strong economic growth.  The Trump administration has said the economy can sustain 3.0% growth over the long term, an assertion that some have disputed.  The CBO also cautioned that trade tensions could make a bigger dent on GDP growth than anticipated.  An escalating US-China trade war could result in tariffs on all goods traded between the world's 2 largest economies.  There are also has trade tariffs with the EU, Canada & Mexico.  "When CBO completed this economic forecast in early July, the agency estimated that the macroeconomic consequences of the U.S. tariffs and foreign retaliatory tariffs that had been implemented at that time would be small," Hall added.  Tariffs then "affected goods that accounted for less than 1.5% of the total value of US trade."  However, trade policy has already changed since early Jul  may continue to evolve, so the effects of new tariffs may become more substantial and have a larger effect on the economy than CBO accounted for in its current projections."  From 2023-2028, the CBO forecast the economy growing by about 1.7% each year.

US economy is expected to accelerate this year, then slow in 2019: CBO

Home Depot (HD), a Dow stock, reported Q2 earnings & sales that far surpassed expectations, reaping the benefits of a warmer start to the summer.  The home improvement retailer, which had a rocky spring season, also raised its outlook for revenue & same-store sales for the full year, saying the number of customer transactions jumped during the qtr & shoppers were spending more at its stores.  The company reported:
  • EPS: $3.05 vs. $2.84 expected
  • Revenue: $30.46B vs. $30.03B expected
  • Same-store sales: up 8% globally vs. an increase of 6.6% expected
Spring was chilly in much of the US, prompting many homeowners to push back their gardening & remodeling projects into summer.  Despite the headwinds, consumers are still investing in their properties to see prices appreciate.  Sales on a per-square-foot basis climbed 8.6% during the qtr.  It also said the average shopper's ticket jumped 5%  to $66.20 & customer transactions were up 3.1% overall.  Sales have accelerated more broadly thanks to a strong housing market in the US & economic tailwinds.  Consumer spending on home improvement items hasn't fluctuated as much as on apparel, for example.  The retailer is focused on growing its professional homebuilder business & believes that by bolstering its delivery platform it will be able to take a larger share of this market.  The company plans to spend $1.2B during the next 5 years to bulk up its supply chain, with the goal of getting online orders to shoppers more quickly.  EPS of $3.05 compares with $2.25 a year earlier.  Revenue climbed 8.4% to $30.46B from a year ago & that included online sales growth of 26%.  In the US, same-store sales climbed 8.1%, again beating the expected 6.4% growth.  "As expected, the majority of seasonal sales we missed in the first quarter were recovered in the second quarter," CEO Craig Menear said.  "Customers continue to respond to ongoing investments and enhancements we are making in support of the customer experience."  Looking to the full year, HD expects revenue to climb roughly 7%, compared with a prior forecast of 6.5% growth.  Same-store sales should be up about 5.3% in fiscal 2018, up from a previous target of 5% growth.  In keeping with a $15B share buyback plan announced in Dec, HD will buy back $6B worth of stock this year.  Good was not good enough & the stock lost 50¢.
If you would like to learn more about HD, click on this link:

Home Depot crushes Wall Street expectations, raises full-year outlook

The Dow rose at the start & remained higher all day.  The buyers continue to like earnings & are not overly bothered by the chaos in Turkey.  There may also be a feeling that even with some trade wars, the US economy will not be badly hurt by them.  But tomorrow is a new day that will bring new stories to drive the stock market.

Dow Jones Industrials

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