The General Market
Wall Street Reacts to U.S.-China Trade War
The week ended with the financial markets being rattled by the reality of a trade war between the United States and China. U.S. President Donald Trump announced on Friday the imposition of tariffs on $50 billion worth of Chinese imports. China’s Ministry of Commerce responded swiftly saying they will launch tariffs on American goods in “equal scale and equal strength.”
Peter Boockvar, chief investment officer at Bleakley Financial Group, said, “Now, we are in an official trade war with China.” But Mr. Boockvar was quick to correct the term. He would prefer to view it as a tariff reality rather than a trade war.
Main U.S. Benchmarks
- After ending in green territory on Monday, the Dow Jones Industrial Average ended in the red in each of the succeeding four-day On Friday, it dropped 84.83 points (-0.34%) to finish 226.05 points lower compared to the previous week’s ending. The blue-chip index is up 1.5% year-to-date.
- The broader S&P 500 index went down by -2.83 points (-0.1%) while the tech-heavy Nasdaq Composite Index lost -14.66 points (-0.19%) to end the week. For the week, the Dow fell 0.9% while the Nasdaq rose 1.3%. The S&P 500 just barely ended in positive territory, up 0.01%. Still, the S&P 500 and Nasdaq managed to advance for a fourth straight week.
U.S.-North Korea Historic Summit
The historic summit between the United States and North Korea took place in Singapore on Tuesday, June 12. American president Donald Trump and North Korean counterpart Kim Jong Un pledged to work toward complete denuclearization of the Korean peninsula.
The two leaders issued a joint statement at the end of their meeting. The statement read, “President Trump committed to providing security guarantees to the DPRK and Chairman Kim Jong Un reaffirmed his firm and unwavering commitment to complete denuclearization of the Korean Peninsula.”
Federal Reserve Raise Interest Rates
As expected, the Federal Reserve increased the benchmark short-term interest rate by a quarter percentage point, bringing the rate target to 1.75% to 2%. The U.S. central said that because the U.S. economy is currently growing at a pace above 4.0%, it is fitting to raise interest rate once more on Wednesday. The Feds also cited the low unemployment rate and higher inflation as contributing factors to making the decision.
U.S. Net Neutrality Rules Expire
The U.S. open internet rules expired on Monday to hand over sweeping new powers to internet service providers (ISPs). The Federal Communications Commission (FCC) repealed the 2015 Obama administration’s landmark net neutrality rules last December.
ISPs can slow, block or offer “paid prioritization” to some websites as long as they disclose the practices. According to FCC Chairman Ajit Pai, the new regulations will ensure more investment by providers and will ensure “better, faster, and cheaper Internet access and more broadband competition to the American people.”
AT&T-Time Warner Merger Gets the Green Light
Judge Richard Leon of the U.S. District Court for the District of Columbia found no compelling reason to block AT&T Inc.’s (T) planned acquisition of Time-Warner Inc. (TWX). On Tuesday, the federal judge approved the $85 billion deal and ended the six-week antitrust trial in which the U.S. Department of Justice filed a case to thwart the merger.
The court ruling paves the way for Comcast Corp. (CMCSA) to pursue its all-cash offer to acquire some of the assets of Twenty-First Century Fox Inc. (FOX) despite the pending all-stock offer of Walt Disney Co. (DIS).
AT&T’S main rival, Verizon Communications Inc. (VZ), could also bid for media company UBS’ Hodulik in case the company drop plans to partner with independent media companies.
Consumer Discretionary Sector Highlights
Netflix Inc. (NFLX) – Causing the Merger of Media Companies
- Shares of Netflix Inc. climbed 3.4% on Thursday from $379.93 to $392.87 to register a new all-time high. Media companies went into a frenzy after a federal judge approved the $85 billion AT&T Inc. (T) and Time-Warner Inc. on Tuesday.
- Observers are guessing who will acquire what company next. It appears as though media companies are looking to merge every month. Many CEOs of these legacy companies believe the future of pay TV is getting dimmer and dying because of online streaming giant Netflix Inc.
- Media companies are intimidated or frightened by the power of the online streaming giant. More and more people worldwide are using the internet as a means to watch movies and TV shows and every time Netflix spends to add content, the more the company shares go up.
- The greatest advantage of Netflix and why it is it rules is because of global viewership. Most of the media companies don’t have global subscribers. The strength of Netflix lies in the continuous growth and increasing number of these subscribers.
Twenty-First Century Fox Inc. (FOX) – A Winning Stock
- Investors’ interest on 21st Century Fox has increased tenfold since AT&T’s acquisition of Time-Warner Inc. The battle for the assets of FOX just got more exciting with Comcast Corp. (CMCSA) formalizing its $65 billion all-cash offer to acquire some assets of It is also a challenge to the outstanding $52.4 all-stock deal offer of Walt Disney Co. (DIS).
- The share price of FOX is seen to gain more now that the bidding war is between two deep-pocketed rivals. FOX closed at $39.92 on Monday and finished the week 11.62% higher at $44.56.
- Although Fox remains subject to the terms of the Disney Merger Agreement, the company would “carefully review and consider” Comcast’s offer. The ball is with Walt Disney Co. and investors expect a counteroffer after being outbid by Comcast. Until the counteroffer comes, FOX shareholders should hold on to their shares.
- Regardless of the winner and after the deal closes, a “new” Fox will emerge. The spinoff remains formidable. The eventual remaining assets would include Fox News Channel, Fox Business Network, Fox Broadcast Company, Fox Sports 1 & 2, Big Ten Network, and around 28 local TV stations.
- Disney or Comcast will get Fox’s movie studios, networks Nat Geo and FX, Asian pay-TV operator Star TV, and stakes in Sky, Endemol Shine Group, and Hulu, as well as regional sports networks.
Comcast Corp. (CMCSA) – Fox’s Board to Discuss Comcast Offer
- Comcast has already submitted its unsolicited, written proposal to Twenty-First Century Fox, Inc. (FOXA, FOX) to acquire the same entertainment assets that Walt Disney Co. (DIS) has previously offered to buy.
- Bloomberg reported that Rupert Murdoch and the board members of 21st Century Fox Inc. board will meet on Wednesday, June 20. They will discuss how to proceed with the $65 billion offer of Comcast Corp. to purchase some of the company’s businesses.
- The Fox board agreed to sell the assets to Walt Disney Co. in late 2017. They will only begin negotiations with the largest U.S. cable television company once they deem the proposal to be the superior offer. Fox might also ask Walt Disney Co. for a waiver to begin discussions with Comcast.
Biotechnology Sector Highlights
SPDR® S&P Biotech ETF (XBI) – Signs of a Biotech Breakout
- Biotech stocks are nearing a big break out as measured by the SPDR S&P Biotech ETF. The fund is doing better than the sector in general and silently outperforming the S&P 500 Index. But a change is forthcoming that biotech stocks might be the most talked stocks over technology and consumer stocks when the breakout comes.
XBI vs. Biotech / S&P 500 YTD Chart
Ultragenyx Pharmaceutical Inc. (RARE) – To Lead the Breakout
- Ultragenyx is a biotech company that engages in the identification, acquisition, development, and commercialization of novel products for the treatment of serious rare and ultra-rare genetic diseases. Its product includes Mepsevii and Crysvita.
- RARE is appears headed for a breakout. The stock registered an all-time high of $81.56 on Thursday then broke the record again to close at $82.72 on Friday. Towards the end of May, RARE breached the $70 mark for the first time. In about half a month on June 14, the price climbed above the $80 mark.
- Again, technical analysts are confident that with RARE going above the technical resistance level around $77.60, the next technical resistance level would be $89 or a 7.59% increase from the current price of $82.72.
SAGE Therapeutics Inc. – The Stock is beginning to Sizzle
- The shares of Sage Therapeutics Inc. (SAGE) are starting to sizzle. SAGE rose 110% over the past year and appears to be trying to break out. According to technical analysts, by crossing a technical downtrend that has been in place since January, the stock could rise to about $195 or a jump of 18.22% from Friday’s closing price of $164.94.
- Analysts view SAGE as a “strong buy” which was validated by its performance this week. The stock closed $146.93 on Monday then jumped 19.62% on Tuesday to $175.76. SAGE tapered off and finished the week at $164.94.
- This clinical research-based biopharmaceutical company develops drugs for the treatment of life-threatening central nervous system disorders such as Parkinson’s disease and postpartum depression. A SAGE breakout is inevitable in the weeks ahead.
Automotive Sector Highlights
Tesla Inc. (TSLA) – Musk is Putting his Money on the Line
- Tesla Inc.’s CEO Elon Musk purchased 72,500 shares of his electric car maker company Tesla amounting to around $25 million early in the week. He bought the shares between the price range of $342 and $347. His purchase of additional TSLA comes on the heels of a 9% cut in its salaried workforce outside vehicle production or about 46,000 employees.
- The information regarding the purchase was contained in an SEC filing. With this latest purchase of shares, Musk now owns around 19% of all outstanding shares. Earlier this year, The CEO purchased 33,000 shares worth around $10 million last May and the shares were trading slightly below $300 at that time.
- CNBC quoted financial analytics firm, S Partners when it said, “Tesla is the most shorted US equity with $12.82 billion short exposure. This is a staggering 22% of all outstanding shares. Just to offer a perspective, Apple, Amazon, and Netflix are the second, third, and fourth most shorted US stocks respectively.”
- Nonetheless, it was a good week for Elon Musk’s company this week. TSLA is on an upswing. The stock price jumped 4.55% on Monday to $332.10 from the previous week ’s closing of $317.66. TSLA climbed in each of the succeeding four trading days to end higher at $358.17on Friday.
- Tesla Inc. hopes to raise capital and that would mean elevating its stock price. The insider buying, particularly from the automaker’s CEO helps to bolster Wall Street’s confidence on Tesla. If Elon Musk is putting his own money on the line, investors might have little or no issue buying Tesla shares.
- The focus of Musk and his management team is for Tesla to achieve cash-flow positive status and become profitable in the third and fourth quarter. If they are able to produce 5,000 Model 3s per week, that would certainly boost margins.
The Week Ahead
The decision of the Trump administration to engage China in a genuine trade war dampened investor sentiment at the week’s end. It has created “a confluence of headwinds to offset the tailwinds of an economy that’s good” according to Peter Boockvar, chief investment officer of Bleakley Financial Group.
Investors will focus now on interest rates and trade negotiations which will be the major factors that could drive market volatility for the rest of the year. However, when inflation and interest rates start to rise from low levels, stocks can also continue to benefit from better economic and earnings growth.
A positive sign is the University of Michigan’s report that shows consumer sentiment rising to 99.3 in June. There is a growing confidence in the economy with the unemployment rate at an 18-year low.
The economic reports next week will be on Housing. Housing data is set for Tuesday to be followed by existing home sales on Wednesday. On Thursday, the FHFA home price index is set for release.