The uncertainty regarding healthcare reform, infrastructure spending, and tax reform took on new dimensions this week. Geopolitical risks took center stage this week. From the terrorist attack in Paris on the eve of their presidential election to the continued risks in both Syria and North Korea, investors are understandably reluctant to keep driving the market higher. It looks like we’re headed for a period of consolidation while these various issues are resolved one way or another. In the meantime, we remain invested but diversified.
It was a light week for economic news, however, first quarter earnings announcements began to dribble in. Some of the largest Dow 30 companies reported this week including popular names such as American Express, Visa, Verizon, and General Electric. Having a difficult time are the largest banks whose stocks are basically flat for the year. The energy sector is also having a tough time as oil prices have stalled around $50 per barrel with pressure to the downside. The energy sector is down 9.8% for the year. However, there are bright areas of the economy which include technology, consumer discretionary, and healthcare. In fact, technology is the clear winner up almost 10% this year. It seems people are still spending money on appliances, automobiles, entertainment and dining out.
In other news, let’s turn to France. Voters will be going to the polls on Sunday to choose their next president. It is a close race between the four frontrunners, which include independent Emmanuel Macron, far-right Marine Le Pen, conservative Francois Fillon, and far-left Jean-Luc Melenchon. Since an outright majority is unlikely, a run-off between the two leading candidates is expected on May 7. Security fears have re-emerged in the run-up to the election after an ISIS gunman killed one and injured two on the Champs Elysees this week. This is the sixth terror strike on Paris in three years. France is the second largest economy in the Eurozone and its president holds enough power to influence the country’s economic and political path. Both Marine Le Pen and Jean-Luc Melenchon have proposed, via different routes, taking France out of the euro and, like Britain, out of the European Union (EU). All eyes will be on France this weekend.
The brief respite we receive this week was after Treasury Secretary Steve Mnuchin let slip that President Trump is working on an enormous tax reform proposal that may come as early as next week. In an Associated Press interview, President Trump promised a “massive” cut for both businesses and individuals. It is expected on Wednesday or shortly thereafter, in time for what looks like an important self-imposed 100-day deadline for President Trump. His administration will release the plan for cuts that are “bigger I believe than any tax cut ever.” At this time it is unknown whether the proposal will be deficit neutral but either way it could have large implications on the economy.
In closing, I appeal to all the data junkies out there. I came across a new organization funded by none other than Steve Ballmer (ex-CEO of Microsoft) called USAFacts. According to the website, “USAFacts is a new data-driven portrait of the American population, our government’s finances, and government’s impact on society. We are a non-partisan, not-for-profit civic initiative and have no political agenda or commercial motive. We provide this information as a free public service and are committed to maintaining and expanding it in the future.” So why is Ballmer doing this? The project grew out of his conversations with his wife, Connie, about their philanthropic initiatives. One of his theories was that government was best-positioned to handle many of the issues most important to them — education, poverty, inner-city youth — and so perhaps they didn’t need to worry so much, as long as they paid their taxes. Connie Ballmer challenged him on that point, which led Steve Ballmer to look for the kind of report on government that he would have sought when trying to analyze a company as an investor. When he couldn’t find one, he set out to build it himself. USAFacts.org is the result of several years of hard work in partnership with Stanford University, the Wharton School of Business, and $10 million of Mr. Ballmer’s own money. If you have a moment, it is worth a look. Now you know.
April 21, 2017
In a win of sorts, the market went sideways this week. Considering the United States launched missiles into Syria, the Senate changed long-standing rules to confirm a Supreme Court nominee, and a much weaker than expected jobs report was announced, we should be happy with how the markets held up.
I’ve noted in recent weeks companies that have filed for Chapter 11 bankruptcy. This week we learned Payless Inc., the shoe company, is the latest to suffer from a shift in consumer preferences. The disruption occurring in the retail industry is on a scale not seen in decades. The shift to online sales steadily sped up in recent years with brick-and-mortar retailers having to rethink their business models. Perhaps first to fall was Barnes & Noble, which admittedly still exists but with a rapidly declining footprint. Some of the largest retailers are spending furiously to build an Internet presence, including Walmart, Kohls, and Target. An ancillary industry that is also feeling the pinch are the mall operators themselves. It is estimated more than 10 percent of U.S. retail space, or nearly 1 billion square feet, may need to be closed or converted to other uses. Even a trip to the supermarket looks different these days. If you haven’t tried Kroger’s new ClickList you owe it to yourself.
Before you say good riddance to the omnipresent strip mall, consider the toll on jobs. We learned today that only 98,000 jobs were created in March. This came as a big surprise since 180,000 were expected. Some of the shortage can be attributed to the 30,000 positions retailers cut in March. However, there’s the other side of the coin to consider. 153,000,000 Americans were employed in March, setting the second consecutive monthly record with only 7.2 million people currently unemployed. The unemployment rate fell to 4.5%.
As for company news, we learned Panera is being acquired by JAB Holdings, a privately held German company which owns Keurig, Caribou Coffee, Stumptown Coffee, Einstein Bagels, and Krispy Kreme Donuts. Starbucks was rumored to be a suitor, but may now need to reconsider its options. In other news, Coca-Cola struck a deal with Major League Baseball, so expect to see more soft drink commercials this summer while rooting for the Reds! And something more unusual, it seems Warren Buffet has given permission for his image to appear on cans of Cherry Coke in China. The Chinese apparently really like Mr. Buffet, and his company, Berkshire Hathaway is one of Coca-Cola’s largest shareholders with 9% of the company. Now that’s thinking outside the box.
While on the subject of a changing landscape, it was announced this week that Tesla’s market capitalization has exceeded both Ford and General Motors. That’s not to say they produce more cars than Ford or GM because they clearly don’t. Last count Tesla produced 83,000 vehicles last year. For reference, General Motors sold almost 10 million vehicles globally in 2015. However, what this does suggest is that investors believe electric vehicles are the future and as such, have bid up the price of Tesla’s common stock price to an astronomical level. Lest we forget, GM, Ford, BMW, Toyota and virtually every other car manufacturer is also working on producing electric vehicles, and in some cases, are already ahead of Tesla. Having said that, Tesla does have a lot going for it most especially its very enthusiastic and loyal customers.
It seems the theme this week is about change. Along those lines, we may all benefit from this story. Scientists are developing a contact lens that tells you when you’re sick. Imagine a biosensing contact lens that can tell when your blood sugar is getting too low, or if there’s something wrong with one of your organs. By leveraging the power of ultra-thin transistor technology, researchers at Oregon State University have taken us a step closer to achieving that goal. At the moment, a lab-tested prototype can only detect blood glucose levels, but the hopes for this technology are far reaching. Now you know.
April 7, 2017
It is hard to believe the first quarter just ended. It was a quarter which saw stocks rise but one that also experienced an increase in uncertainty and volatility. President Trump was in no small part responsible for both the appreciation and the uncertainty. While his timeline has certainly changed, it appears his goals remain intact. We anticipate the economy will continue to grow modestly in the second quarter as gridlock in Congress takes hold.
There is quite a lot to talk about this week. I’ve mentioned the issues surrounding the Department of Labor’s Fiduciary Rule August 2015 and again November 2016. Without getting too far into the weeds, the Fiduciary Rule was originally proposed in 2010 as part of sweeping financial reforms. However, it was pulled from the bill and brought back in 2015. In essence, the fiduciary rule is about putting clients’ interests first. For clarity, Harvest Financial Advisors already abides by the fiduciary rule while the brokerage and insurance industry does not. Though this should not be a controversial topic, it gets to the heart of how brokers are compensated in the financial services industry. Upon taking office, President Trump ordered a review of the rule at the behest of the world’s largest asset managers who control America’s $16 trillion retirement industry. Among those are Blackrock and Vanguard, two of the largest and most trusted names in the industry, who are concerned the new rules “risk confusing investors and adding unnecessary costs for the financial industry.” I’ll let you draw your own conclusion.
Another topic that frequently comes up is automation and its impact on jobs. This is a theme I anticipate will grow in the years and decades ahead. Ford announced this week it will invest $1.2 billion to expand SUV and truck capacity at three separate Michigan plants. This is fantastic news and was quickly pushed by the White House as “making America great again.” However, reading a little further, one would notice that this rather large expenditure is expected to add or retain only 130 jobs. The moral of the story is automation could lead to greater productivity at the expense of labor.
So I’ve touched on regulation in the financial industry and jobs in manufacturing. The only thing left to discuss is climate change. This week Exxon Mobil urged President Trump to keep the United States in the 2015 Paris climate agreement, calling the accord “an effective framework for addressing the risks of climate change.” So what’s up with the world’s largest fossil fuel company pushing for climate change regulation? As with the financial industry above, it is important one considers the motivation. Exxon Mobil says in its letter that, “there are several reasons for the U.S. to stay in the Paris pact, including the opportunity to support greater use of natural gas, since it creates lower carbon emissions than coal when used for power generation.” You’ll never guess who has been investing heavily in natural gas the past few years.
And lastly, if you thought privacy was essentially dead, it is now officially dead. Both the House and the Senate voted this week to repeal regulations governing consumer privacy protection at Internet service providers. When the president signs this legislation, the repeal will allow service providers to sell consumer information including browsing history without customer consent. Major providers that will benefit from looser rules include AT&T, Comcast, and Charter Communication. Your web browsing patterns contain a treasure trove of data, including your health concerns, shopping habits and visits to personal sites. ISPs can find out where you bank, your political views, and sexual orientation simply based on the websites you visit. The fact that you’re looking at a website at all can also reveal when you’re at home and when you’re not. Welcome to the 21st century.
In closing, I came across a story about Fitbit for cows. Cows? It seems the tags which most cows have in their ears are going high tech. The new ear tags will monitor each cow’s heart rate, body temperature, and location. It will also store the animal’s date of birth and vaccination history. A rancher will be able to access this data using Bluetooth-enabled devices, essentially creating “smart cows.” Not unlike precise crop management, this will usher in the era of smart herd management. Now you know.
March 31, 2017
While Monday marked the first week of Spring, green failed to materialize in the markets. Sentiment soured a little for the first time on President Trump’s ability to accomplish his promised pro-growth policies of tax reform and stimulus. Also, health care reform appears to have met an impasse in the House, and a lot of investors are waiting for the next catalyst.
At issue, the growing doubts that tax reform, infrastructure spending, and deregulation will take longer to pass than initially thought. Optimism after the presidential election led markets higher on the premise that a lot of what the President campaigned on could be implemented quickly. Markets shot higher, and valuations became stretched. However, opposition within the President’s party was not fully appreciated, and President Trump’s strong-arm business style flies in the face of the long-standing tradition of “horse trading” otherwise known as politics.
President Trump wasn’t the only one having a difficult week. Sears stock declined over fifteen percent as the company warned it might not continue to be a “going concern.” While this doesn’t come as a surprise, it is unusual for a company to make such a statement unless there is a good cause. It should be noted Sears still retains 15-20% of the appliance market and 10-15% of the tool market. Continued declines at Sears could be a win for the likes of Home Depot and Lowes. On another note, Google had a difficult week after several large advertisers, including Verizon, AT&T, Johnson and Johnson, and JP Morgan, announced they are freezing advertising on non-search properties of Google. Apparently, ads from these companies were placed next to content promoting terrorism and hate on YouTube (which is owned by Google). Google issued a mea culpa and promised to give companies more control over where their ads appear.
Not to be forgotten, England is still in the process of decoupling from the European Union. Prime Minister Theresa May will formally write to the European Union next Wednesday to announce Britain’s withdrawal from the bloc. If all goes according to the two-year negotiations set out in the official timetable, Brexit should happen in March 2019. Also on the radar, Greece is set to miss yet another deadline for unlocking bailout funds, edging closer to a repeat of the 2015 drama that pushed Europe’s most indebted nation to the edge of economic collapse. So if it makes you feel any better, the United States, while undergoing some dysfunction, remains the best place to invest.
In closing, I discovered I’ve been doing something wrong for a long time. In fact, I’d bet many of you may be as surprised as I was upon learning that you should never put two spaces after a period. How can it be wrong when we were taught this so many years ago? You can blame it on the electric typewriter (yes, that dates me). As typesetting became more widespread in early 20th century Europe, its practitioners adopted best practices. Among those was the use of a single space following a period. Every major style guide – including the Modern Language Association Style Manual and the Chicago Manual of Style – prescribes a single space after a period. Most people would know the one-space rule if it weren’t for a quirk of history. It comes down to the electric typewriter circa 1950. Electric typewriters used monospace type – that is, every character occupies an equal amount of horizontal space. This is in contrast to proportional type which typesetters used. Monospace type gives you text that looks “loose” and uneven. Hence the adoption of the two-space rule. On a typewriter, an extra space after a sentence makes text easier to read. Here’s the thing, Monospaced fonts went out in the 1970s. While I intellectually understand the rule, this habit thirty years in the making may be hard to break. Please don’t fault me. Now you know.
March 24, 2017