By Jack Kelly:
As I am writing the newsletter, about 3:00 New York time, the market is up over 200 points.
The sudden jump after some down days is due, in part, to Treasury Secretary Steve Mnuchin’s announcement that a corporate and individual tax plan is close at hand. With less money paid out to the government, both individuals and corporations will have considerably more capital to spend which should stimulate the economy.
The market has been, up until recently, on a steady growth trajectory based upon the hopes that President Trump’s pro-growth promises of tax decreases, better trade agreements, health care reform, and infrastructure projects would improve the economy and create more jobs. Anything that would derail this plan could potentially cause a big stock market correction.
So far, according to Thomson Reuters, over 80 companies in the S&P 500 have reported their quarterly earnings and 75 percent have beat expectations. Additionally, the profits of S&P 500 companies are estimated to have risen 11.1 percent in the quarter, the best since 2011.
The gains are even more impressive in light of mounting tensions between North Korea and the United States, continued uncertainly in Syria, uncomfortable relations with Russia, and the looming French presidential elections which could result in France leaving the EU.
In other good news, it was reported that there has been a drop in the number of Americans on unemployment to a 17-year low. Given that the labor market is near full employment, with a 4.5 percent jobless rate, companies are now reporting difficulties in finding appropriately skilled workers.
“Layoffs remain low and employers feel no need to aggressively trim their payrolls. As labor market conditions tighten, the pool of available unemployed skilled workers continues to dry up,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Michigan.
Goldman Sachs may have Treasury Secretary Steven Mnuchin, former COO Gary Cohn and several other alums in President Trump’s administration but even though Goldman Sachs may be currying favor in Washington, the company may be losing ground to a key rival, Morgan Stanley. Shares of Morgan Stanley rose 3% this week based on strong earnings and increased trading revenues for the first quarter.
This comes after Goldman Sachs surprisingly disappointed Wall Street with lackluster results, sending its stock tumbling 5%.
Other banks, most notably Bank of America and JPMorgan Chase, recently reported solid quarterly results too.
Morgan Stanley chairman and CEO James Gorman said it was one of the “strongest quarters in recent years” for the company and that the bank remained confident even though “the environment remains uncertain.”
This may be a first, a big bank regulator is actually faulting itself for failing to address the problems at Wells Fargo before it was too late.
Bank examiners saw sales problems at Wells Fargo as early as 2010 and met with executives but declined to investigate further, the inspector general at the Office of the Comptroller of the Currency (OCC) said Wednesday
The OCC was investigating Wells Fargo after it came to light that bank employees opened up to 2 million accounts without customer permission to meet sales goals.
“The OCC did not take timely and effective supervisory actions after the bank and the OCC identified significant issues with … sales practices,” the office’s inspector general said in its report.
According to the OCC’s report, examiners met with Carrie Tolstedt, the executive in charge of Wells Fargo’s consumer banking operations, to discuss an unusually high 700 whistleblower complaints regarding the bank’s aggressive sales practices. Tolstedt told regulators at the time that the large number of complaints was due to Wells Fargo having a culture that “encourages valid complaints which are then investigated and appropriately addressed,” according to the report.
Despite knowing about these complaints and other issues, the OCC declined to investigate further into why these whistleblower complaints existed in the first place. It also did not look into risks that could come from compensation programs like those at Wells.
The OCC’s examiners took no action against Wells Fargo through at least 2014, according to the report, which would have been months after The Los Angeles Times published its investigation in late 2013.
Virtu Financial, the incredibly successful high-frequency-trading firm, said it would buy rival KCG Holdings Inc in a $1.4 billion deal that brings together two major players in the U.S. electronic trading space.
“KCG fits perfectly with Virtu’s strategic priorities to apply our market making and technological expertise to customer wholesale order flow and expand Virtu’s growing agency execution business,” Virtu Chief Executive Douglas Cifu said in a statement.
KCG was formed in December 2012 from the merger of New Jersey-based Knight Capital Group — a pioneer of electronic market making — and Chicago-based Getco LLC.
Hedge funds have seen the biggest inflows in 20 months after badly trailing the market last year. After flocking from hedge funds in 2016, investors are beginning to find their way back.
In fact, March saw money came back into the $3.1 trillion industry at the fastest pace since August 2015 — a 20-month span that saw fund managers adjust fees and make other concessions as clients fled.
The month saw inflows of a healthy $15.7 billion, capping off a first quarter in which a fresh $21.9 billion in cash came in, according to industry tracker eVestment.
That follows a dismal year that saw $106 billion in outflows, the worst since the financial crisis, according to eVestment’s count.
The interest this year has come despite a period that was nothing special return-wise. The funds that eVestment track saw a 2.63 percent gain, well below the S&P 500’s 6.1 percent move for the first quarter. March’s jump in cash accompanied returns of just 0.33 percent.
Although New York City is perhaps better known as a financial hub, the nearby state of Connecticut is home to a number of prominent hedge funds. This may change if a proposed Connecticut 19% Hedge Fund Tax is passed by the State.
First GE left Connecticut due to claims of high taxes and business-unfriendly government, now some hedge funds have already relocated elsewhere. Prominent managers like Edward Lampert of ESL Investments and Paul Tudor Jones of Tudor Investment Corp. have moved their operations out of Connecticut and to the state of Florida for tax purposes. Now, some of Connecticut’s elected officials have stated their opposition to a proposal to increase tax levels on Connecticut-based hedge funds, saying that such a move will force out even more of the state’s financial companies.