- Standout earnings… so why’s Wall Street waffling?
- Trump’s Fed failure prompts a mean (currency) tweet
- Looming global aluminum crisis, now averted?
- Eurocrats bungle internet privacy
- Readers’ adventures in self-employment
Hmmm… As we write this morning, shares of Google parent Alphabet are down nearly 5%… because Wall Street “professionals” can’t make up their minds about what they want.
GOOG delivered its quarterly numbers yesterday after the close. The headline figures were great. Profits jumped 73% from the same quarter a year ago. Advertising revenue grew 24% — the fastest growth since 2011, when the company was half its current size.
But the Street is fretting about Alphabet’s cash burn. The company spent down a ton of its cash hoard on YouTube, cloud computing, “smart” appliances, artificial intelligence…
Never mind that GOOG is still sitting on a staggering sum of cash — $102 billion. Never mind that Amazon, by contrast, takes nearly every penny of profit and immediately plows it into new ventures, and Wall Street applauds.
But Alphabet gives the slightest nod toward Amazon’s business model and traders can’t wait to hit the “sell” button this morning. Crazytown.
We bring up the subject this morning because we’re on the verge of launching a one-of-a-kind service. It aims to profit not from earnings season, but rather the reaction to earnings season.
Sounds odd, we know. But when penny stock guru Tim Sykes explained it, it all started making sense. And it could prove very profitable for you by week’s end. Keep an eye on your inbox for a note from us later today. The subject line will read, “Tim Sykes sent you a thank-you gift.”
The rest of the stock market, you wonder? Going nowhere fast. The Dow and the S&P 500 are nearly pancake-flat at last check. The Nasdaq is down half a percent, Alphabet helping drag down the tech sector as a whole.
But the big news is in the bond market. The yield on a 10-year Treasury crested 3% this morning — a level last seen in early 2014.
It was the approach toward 3% that the mainstream told us tanked the stock market last Friday. (“OMG, borrowing costs for companies will rise!”) But now that we’re there, the major U.S. stock indexes aren’t moving much at all. (“Meh, the economy is strong enough to handle higher rates.”) Ain’t market psychology something?
The big economic numbers of the day both have to do with housing. New home sales leaped 4% last month — way more than expected. Perhaps homebuilders are starting to catch up with demand. Meanwhile, the Case-Shiller home price index jumped 0.8% for February — also way more than expected. Year-over-year growth works out to 6.3%.
Donald Trump blew his chance to remake the Federal Reserve, in the estimation of Jim Rickards.
“Trump came into the White House,” says Jim, “with an opportunity to have the greatest impact on the Federal Reserve Board at one time of any president since Woodrow Wilson in 1913.”
That’s the year the Fed was created, as it happens.
“When Trump came into office,” Jim explains, “there were three vacancies on the seven-member board.” That quickly became five as Vice Chairman Stanley Fischer took early retirement and Trump decided not to reappoint Chairwoman Janet Yellen. “Trump owned the Fed and could make sweeping changes in policy and personnel if he wanted.”
Instead, “Trump played it safe,” Jim says.
The president promoted existing board member Jay Powell to chairman. In addition, “Trump nominated Randy Quarles, Marvin Goodfriend, Richard Clarida and Michelle Bowman to fill four of the five vacancies.
“Quarles is a regulatory expert and won’t have much to say on interest rate policy. Bowman takes a seat reserved for community bankers, and likewise won’t be a voice on monetary policy. Clarida and Goodfriend are both mainstream Ph.D. economists who won’t rock the boat.”
Then there’s the spot on the Fed’s board reserved for the president of the New York Fed — who’s chosen not by the president but by the New York Fed’s member banks. The replacement for Bill Dudley of edible iPad fame is San Francisco Fed president John Williams. “Williams is another Ph.D. economist,” says Jim, “and what the elites call ‘a safe pair of hands.’
“Trump’s new Fed board is old wine in new bottles. Trump shows little knowledge of the minutiae of monetary policy. It seems the elites circled the wagons to influence the White House to insure nothing really changed at the Fed. It worked.”
All the president can do now is issue passive-aggressive tweets… which brings us back to this one we mentioned last Wednesday…
As we said at the time, the Chinese currency has been rising for nearly a year now… and the ruble has tanked in recent days only because of U.S. sanctions.
It’s Jim’s opinion that Trump’s real target in that tweet is the Fed. “When Trump says, ‘…the U.S. keeps raising interest rates’ that’s obviously a slap at the Fed. This tweet should be seen for what it is: an attack on Fed independence and a plea for a slower pace of rate increases and a weaker U.S. dollar.
“The Fed is on track to hike rates in June, but they may be overdoing it and growth may slow significantly by the late summer. In that case, the Fed may take another ‘pause’ in rate hikes in September. If that happens, the dollar will weaken and gold prices will soar.
“Presidents tend to get the kind of dollar they want. Trump wants a weaker dollar and the Fed is beginning to get the message.”
In the meantime, however, the dollar remains as strong as it’s been anytime in the last three months — with the dollar index holding steady just below the 91 level.
That dollar strength translates to gold weakness. The Midas metal still languishes near $1,327.
A crisis in global aluminum supply might be over, mere days after it began.
Those aforementioned U.S. sanctions against Russia? One of the biggest targets was Rusal, the world’s second-biggest aluminum producer.
“The sanctions,” according to The Street, “essentially boxed Rusal out of the $140 billion global aluminum industry by making it impossible for the company to do business in U.S. dollars, which are the de facto currency in most commodities markets.” Aluminum prices leaped to their highest levels since 2011.
Now the feds might be changing their tune. Said Steve Mnuchin yesterday: “Rusal has approached us to petition for delisting. Given the impact on our partners and allies, we are issuing a general license extending the maintenance and wind-down period while we consider Rusal’s petition.”
So there’s a grace period now, in which cooler heads might prevail and a supply squeeze would be averted. Aluminum prices tumbled 8.3% on the day…
“U.S. sanctions have brought one of Russia’s industrial titans to its knees,” is Bloomberg’s spin on what changed since the sanctions were announced April 6.
More accurately: The “titan” behind Rusal was brought to his knees…
Billionaire Oleg Deripaska owns 48% of the aluminum producer Rusal.
“In just one day [April 6]… Deripaska lost almost 15% of his net worth, about $1.1 billion,” Bloomberg says. “That’s harsh — and if the U.S. regulator’s goal is to hurt Putin’s cronies, it’s also hard to understand.”
Deripaska built his empire under Boris Yeltsin, not Vladimir Putin. His policy under Putin has been to keep his head down and maintain amicable — but not overly involved — relations with the Kremlin.
“He was never a Putin crony, a participant in his hockey games, a judo sparring partner, a fellow KGB veteran,” says Bloomberg.
But the U.S. Office of Foreign Assets Control maintains “Deripaska was sanctioned for reasons including the threatening the lives of business rivals, bribing government officials and links to organized crime.”
Now the feds are signaling that the sanctions will be waived as long as Deripaska gives up control of the firm and sells his stake. We’ll see what shakes out…
From the “Now they tell us” file, two clippings from the front pages of America’s “prestige” newspapers today…
A month from now, European Union bureaucrats will implement sweeping new “privacy” regulations on the internet. As The Wall Street Journal tells it, “Brussels wants its new General Data Protection Regulation, or GDPR, to stop tech giants and their partners from pressuring consumers to relinquish control of their data in exchange for services.”
But both the Journal and The New York Times anticipate a boomerang effect. The new rules might well “serve to strengthen Facebook’s and Google’s hegemony and extend their lead on the internet,” says the Times.
As the Journal’s tag-team article explains, FB and GOOG “are leveraging their vast scale and sophistication as they seek consent from the hundreds of millions of European users who visit their services each day. They are applying a relatively strict interpretation of the new law, competitors say — setting an industry standard that is hard for smaller firms to meet.”
Say it ain’t so! Regulations work to the advantage of entrenched incumbents, while throttling upstart competitors? Who’da thunk it?
Sometimes the entrenched incumbents work hand-in-hand with the bureaucrats, although that doesn’t appear to be the case here. No, the Eurocrats appear to have butt-fumbled their way into this one on their own…
Our mailbag yesterday on the travails of self-employment and startups in these United States brought several responses…
“Once upon a time I did some serious consulting as a professional engineer,” a reader writes. “Mostly I did it as a favor to a local business that I hoped would grow the local economy. After that gig I stopped doing consulting since my taxes on consulting (which was in addition to my ordinary job) were about 16% for Social Security and Medicare, about 3% to the state, 1% to the locality and about 28% to the IRS. I worked extra, and the gubmint took almost half. I decided it wasn’t worth the trouble.”
“Just a quick note from someone who runs a small company organized as an LLC,” writes a second. “The pass-through section of the new tax law was ‘written so hastily and sloppily’ that not even well-qualified tax professionals I have consulted can confirm whether or not our business qualifies.”
“There still are clear advantages to self-employment overall,” says a third. “For one it’s a myth that employer-paid health insurance is free. Look at your W-2 form to see how much that insurance cost your employer, on average $18,000-plus. Theoretically your compensation could be that much higher if the employer didn’t have to bear the cost of it. If you are young and healthy, you could find coverage for less than that (before Obamacare) and make use of a health savings account for tax preferences to boot.”
The 5: Of course your compensation would be higher if the employer didn’t shoulder part of the insurance cost. But the cost wouldn’t go away. And the overall insurance cost is still lower than if you went out on your own and ventured into the individual market/Obamacare “exchanges.”
As for health savings accounts… yes, they’re a good thing in that they’re “triple tax-free” — that is, your contributions aren’t taxed, the interest and capital gains aren’t taxed and your withdrawals aren’t taxed as long as you spend them on “qualified” health care expenses.
But the feds can and have changed what constitutes a “qualified” expense. Remember when you could use HSA money to buy over-the-counter meds? That went away with Obamacare, and it didn’t change with the Trump/GOP tax law.
And while we’re at it… we still see “conservative” think tanks spewing garbage about how HSAs and the high-deductible plans that come with them encourage consumers to “shop around” for the “best deal.”
You know what? I’ve tried that for a somewhat pricey diagnostic test I get every two or three years. But there’s so little “price transparency” within the health care cartel that it’s not remotely worth the effort. It really is like the blogger Karl Denninger’s analogy: You pull up to a gas station, and learn what the price is only after you’re done pumping… and that price could vary wildly depending on who provides your auto insurance.
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. OK, maybe a 3% rate on the 10-year Treasury is freaking out the market again: As we get closer to virtual press time the Dow is down nearly 300 points on the day. We’ll unpack it tomorrow…
