THE GENERAL MARKET
Winning Streaks End, New Record Highs Set
Wall Street witnessed for the first time this year the S&P 500 and the Nasdaq Composite closed lower. On Wednesday, the six-day winning streak of both indices snapped. The newsflash that the United States is likely to pull out of the North American Free Trade Agreement (NAFTA) drove the indices down. It also drove the currencies of Canada and Mexico lower and impacted on their respective stock markets.
Canada is increasingly getting concerned although nothing is definite has come out from the United States. Still, the Canadian government is preparing for several scenarios for such eventuality. The sixth and penultimate round of negotiations among American, Canadian, and Mexican officials is scheduled in Montreal from Jan. 23-28. Time is running for the three countries to resolve their major differences.
What added to the decline was the news that China is rethinking its position on purchasing and acquiring U.S. Treasury bonds and debt. The government in Beijing thinks U.S. debt is becoming less attractive compared to other assets. They also cited the increasing trade tensions between the two countries as a justifiable reason to slow down or stop the purchases.
S&P 500 – 2,786.24 as of 01/12/2018 (+4.21% YTD)
Last week’s close: 2,743.15
Although the S&P 500 edged lower on Wednesday, the index recovered and rose sharply to set record highs anew. It posted new highs in the next two trading sessions and finished the week at an all-time high of 2,786.24.
Nasdaq Composite Index – 7,261.06 as of 01/12/2018 (+5.18% YTD)
Last week’s close: 7,136.56
The Nasdaq Composite Index also managed to recover from the mid-week drop, rising to 7,211.78 on then to 7,261.06 to close the week at a fresh high.
Dow Jones Industrial Average – 25,803.19 as of 01/12/2018 (+2.33% YTD)
Last week’s close: 25,295.87
The blue-chip index made it a triple whammy as it also closed at a new all-time of 25,803.19 on Friday. Boeing Co. (BA), the single best performer in the Dow Jones Industrial Average, continued its active rise. The BA stock rose to its highest to finish the week at $336.21. Boeing’s return year-to-date is now at 14.0%.
All three benchmarks finished at all-time highs on Friday. After the end of the second week of equity trading in 2018, it has been the best start to a year since 2003 for the Dow Jones (+4.4% rise) and the S&P 500 (+4.2% rise). For the Nasdaq, the 5.2% advance so far this January marks the best start to a year since 2004.
BANKING SECTOR HIGHLIGHTS
JPMorgan and Wells Fargo Kick-Off Earnings SeasonA
JPMorgan Chase & Co. (JPM) $112.67 as of 01/12/2018 (+5.36% YTD)
JPMorgan is currently the biggest player in the U.S. banking industry. On Friday, the bank reaffirmed its leadership position. JPM reported reasonably good quarterly earnings that topped Wall Street’s expectations. The numbers already included the one-time charges and gains related to the tax law.
The shares of JPMorgan are up 31% in the last 12 months. JPM closed at an all-time high of $112.67 on Friday. The bank disclosed the one-time charge amounted to $2.4 billion in the fourth quarter. On an adjusted basis, JPM’s summary performance came out this way:
- Adjusted EPS of $1.76 vs. $1.69 expected (Thomson Reuters)
- Revenue of $25.45 billion vs. $25.15 billion expected (Thomson Reuters)
CEO Jamie Dimon had favorable comments about the bill despite the one-time charges. “The enactment of tax reform in the fourth quarter is a significant positive outcome for the country. U.S. companies will be more competitive globally, which will ultimately benefit all Americans,” Dimon said. “The cumulative effect of retained and reinvested capital in the U.S. will help grow the economy, ultimately growing jobs and wages.”
Wells Fargo & Co. (WFC) $62.55 as of 01/12/2018 (+3.10% YTD)
Several years back, Wells Fargo was the acknowledged leader of the banking sector. JPMorgan now holds that shining reputation. Wells Fargo also reported its quarterly earnings on Friday. Just like JPMorgan, the bank’s report included the one-time charges and gains related to the new tax law. The key takeaways for Wells Fargo are as follows:
- Adjusted EPS of $1.16 vs. $1.07 expected (Thomson Reuters)
- Revenue of $22.05 billion vs. $22.38 billion expected (Thomson Reuters)
The bank’s after-tax benefit amounted to $3.35 or 67 cents per share. With the new tax bill, there’s a $3.89 billion estimated tax benefit from the reduction to net deferred income taxes. Also, WFC reported a tax gain from the sale of Wells Fargo Insurance Services.
On Friday, WFC also announced that plans to close down 800 more bank branches by 2020 as a cost-cutting measure. However, analysts think the move is related to soaring litigation expenses because of the recent scandal on fictitious accounts. In the last quarter, the bank’s litigation expenses more than tripled to $3.3 billion.
The bank already closed more than 200 branches in 2017 but still ended the year with more than 5,800. That’s the most in the United States. Wells Fargo executives reasoned that the branch closings are also due to the increasing preference of clients for online and mobile banking.
Wells Fargo plans to cut $2 billion in expenses in 2018 and another $2 billion in 2019.
AUTOMOTIVE SECTOR HIGHLIGHTS
GM & Ford in the Headlines
Two prominent U.S. automakers were in the headlines for the most part of the week. The stocks of both are worth watching in 2018 as they are prepared to introduce new products and innovative vehicle upgrades to perk up sales.
General Motors Co. (GM) $44.07 as of 01/12/2018 (+7.51% YTD)
General Motors opened the week with a major announcement. Chief Executive Mary Barra made a bold promise to investors that the company will make money selling electric cars by 2021. However, no details were given as to how the Detroit-based automaker intends to do what no major automaker has done.
GM shares started the week on a downward trend, falling to a flat $43.00 by mid-week. The stock rose by 2.76% to $44.19 before ending Friday at $44.07.
The U.S. automaker made another announcement at the end of the week. General Motors is seeking government approval for a fully autonomous car – one without a steering wheel, brake pedal or accelerator pedal – to enter the automaker’s first commercial ride-sharing fleet in 2019. If approval is granted, the market will be introduced to the “no pedal to the metal” self-driving Cruise AV car.
Ford Motor Co. (F) $13.23 as of 01/12/2018 (+5.92% YTD)
Since last week, shares of Ford were trading heavily, breaching the $13.00 mark last January 5. The uptrend continued as trading volume hit above 56 million on Wednesday and Friday. F finished the week at a fresh high of $13.23.
Ford Motor is looking to gain a marketing edge over its main rivals by introducing more efficient pickups this spring. Ford will offer a diesel engine version of its best-selling F-150 pickup truck.
Company’s executives are confident the F-150 diesel model will be welcomed by customers because of fuel efficiency. It features a 10-speed transmission that is capable of achieving 30 miles per gallon highway fuel efficiency. That is a level comparable to some midsize cars. The price tag will be between $2,400 and $4,000, depending on the specific model.
In an effort to catch up with industry rivals, Ford announced on Thursday that automatic emergency brakes shall be standard features on two of their key 2019 models. The No. 2 U.S. automaker is offering this new technology designed to help vehicles avoid collisions.
Ford will install the special brakes on its redesigned 2019 Edge midsize crossover vehicle and its new 2019 Ranger midsize pickup. They intend to compete with the Chevrolet Colorado and Toyota Tacoma later this year.
Other Auto Headlines
Fiat Chrysler Automobiles announced on Thursday that it will shift production of Ram heavy-duty pickup trucks from Mexico to Michigan in 2020. The transfer will include a$1 billion investment in the plant and the creation of about 2,500 jobs.
The move is intended to lower the risk to the automaker’s profit should President Donald Trump pull the United States out of the North American Free Trade Agreement (NAFTA).
Toyota Motor and Mazda Motor
Japanese automakers Toyota Motor and Mazda Motor are announced on Wednesday plan to set up a $1.6 billion assembly plant in Huntsville, Alabama. It’s going to be a huge win for U.S. President Donald Trump who made a campaign promise to add manufacturing jobs in the auto industry.
The plant is projected to generate and employ 4,000 workers and build approximately 300,000 vehicles of Toyota Corollas along with other models.
INFORMATION TECHNOLOGY SECTOR HIGHLIGHTS
The Undisputed Star at the 2018 CES
NVIDIA Corp. (NVDA) $222.98 as of 01/12/2018 (+15.24% YTD)
NVIDIA Corp. stole the thunder from the rest of the presenters at the Consumer Electronics Show (CES) in Las Vegas on January 10. The company unveiled two pioneering products that would change the landscape of the tech world.
The world’s leading visual computing company unveiled the NVIDIA DRIVETM, its AI autonomous vehicle platform. Visitors and guests at the annual event were impressed at the functional safety architecture of the ground-breaking platform. NVIDIA uses redundant and diverse functions to enable vehicles to operate safely, even in the event of faults to the operator, environment or systems.
The architecture of NVIDIA DRIVETM will allow car manufacturers to build and deploy self-driving cars and trucks that are functionally safe. The vehicles can be certified to international safety standards such as ISO 26262.
According to Jensen Huang, founder, and CEO of Nvidia, safety is the most important feature of a self-driving car. Nvidia believes their investment into the functional safety platform is worth it. They’re adding a critical ingredient for automakers to bring in self-driving cars to the market. The company is now working with more than 320 partners who would use the technology to power their vehicles.
What also made Nvidia stand out above the rest and become the talk of the 2018 Consumer Electronics Show is the launching of a gaming monitor the size of a television, creating a new class of large-screen devices with the refresh speed required for professional gaming.
These new hardware pieces represent new areas of growth in two of the company’s most important revenue streams, gaming and automotive. While the company was built on gaming hardware, CEO Huang sees automotive chips as a huge area for future growth. In 2019 and beyond, Huang expects that the bulk of chips used for self-driving cars will be put into data centers to simulate how the cars will drive. The sale of in-car chips will follow as the demand for autonomous vehicles will likely increase.
Nvidia also released the GeForce Now. It’s a new PC beta of its service for streaming games to low-speed computers. The service was previously available only for Mac users, as hardware for Apple typically isn’t used for high-end gaming. While other rivals are also aiming to be the Netflix or Spotify of gaming, Nvidia has the edge. They have access to data center hardware and possess the expertise to optimize that. Other companies would need to put in a large amount of investment to proceed.
58.com is Off to a Great Start
58.com Inc. (WUBA) $81.98 as of 01/18/2018 (+14.55% YTD)
Last December 12, 2017, the stock price of 58.com Inc. was at $68.93. On Friday, a month later, WUBA closed at $81.98 or a jump of 18.93%. 58.com, China’s largest online marketplace for classifieds, is having a great start in the New Year.
WUBA traded at a high of $85.04 at one point on Tuesday then closed at an all-time high of $84.91 on the same day. On the first trading day of the year, trading volume reached 1.7 million. The volume was only 276,500 at year-end 2017. Since January 4 this year, average volume is above 1 million.
Before 2017 ended, Chairman and Chief Executive Michael Yao joined China’s Cheetah Mobile (CMCM) as a member of the board of directors. It was part of CMCM’s shake-up at the top. Cheetah added Microsoft’s (MFST) voice-activated digital assistant to a mobile app too. As a result, Cheetah Mobile is also having a great start in 2018.
THE WEEK AHEAD
The stellar performance of the U.S. stocks provided Wall Street solid gains for the second week in a row. The returns are now above 4% year-to-date. While the U.S. markets posted weekly gains of more than 1% in about 10 times last year, the markets have achieved twice this number to begin 2018.
Further, U.S. stocks have not recorded two consecutive weeks of 1% returns since July 2016. The week also signaled the start of the fourth quarter’s earnings season. The stream of earnings reports will intensify next week and investors will see the effects of the tax cuts in most of the companies. It can also trigger volatility in individual stocks.
On the economic front, during the holiday-shortened week, data on industrial production and capacity utilization will be released on Wednesday. The housing data report is expected to be released on Thursday while the consumer sentiment data will be on tap Friday.