Browsing articles in "Weekly Market Update"

Auf Wiedersehen Beetle

Jul 12, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

It was a good week for stocks with the Federal Reserve all but assuring investors it will lower interest rates at its next meeting at the end of this month.  With little in the way of company news, and before the start of earnings announcements next week, investors hung on every word from two days of Congressional testimony regarding monetary policy.

If one thing is clear from his testimony, Chairman of the Federal Reserve, Jerome Powell is concerned about the heightened degree of uncertainty present today.  In his opening statement, he uttered the phrase no less than twenty-six times.  But perhaps the most telling line was when Mr. Powell refused to call the market “hot.”  “To call something hot, you need to see some heat,” he said referring to inflation which has been below expectations for some time despite low unemployment.   With his testimony, he paved the way for at least one rate cut in a couple weeks’ time.  The markets reacted accordingly.

In other news, the Healthcare Sector had a court ruling, a reversal of policy, and a potential executive order all hitting in the same week.  A U.S. District Judge blocked a Trump administration rule requiring drug makers to put prices in television ads, which is a central part of the President’s push to lower the cost of prescription medications.  The judge ruled this would violate free speech and exceeded the Health and Human Services Department’s statutory authority.  The second item is the White House reversal of policy on its plan to end drug rebates.  Pharmaceutical distributors collect the rebates and, in theory, pass along the cost savings to consumers.  While the White House has backed down on this plan, it is suggesting a new executive order to lower drug prices may be forthcoming.  This new plan will tie Medicare and Medicaid reimbursement for drugs to the lowest prices paid internationally.  This latest plan has the potential to save the U.S. government billions annually, but will undoubtedly face stiff lobbying efforts and is likely to end up in the courts if it is ever signed into law.

In company news, it was announced this week that Procter & Gamble plans to roll out a line of household insecticides safe for pets and people.  The new Zevo brand is the first creation to hit stores from P&G’s Ventures unit and one of the bigger launches in general since Tide Pods in 2012.  Also worth noting, the last Volkswagen Beetle has rolled off the assembly line in Mexico, serenaded by a mariachi band, and surrounded by proud factory workers.  The iconic car has been around in one form or another since 1940, but failed to navigate the current swerve in consumer tastes to SUVs.  If you have ever wanted to buy a new Volkswagen Beetle, it’s now or never.

In closing, I want to pass along a bit of information that I somehow missed.  Gas taxes were raised in 12 U.S. states as of 7/1/2019, ranging from 19 cents a gallon in Illinois and 10.5 cents per gallon in Ohio to just one-tenth of a penny in Nebraska and Michigan.  In Ohio, the additional gas tax is expected to cost a motorist who drives 15,000 miles per year and gets 25 miles per gallon an extra $63 per year.  The tax increase is expected to raise an additional $865 million in revenue, which will be split 55/45 between the state and local government and is earmarked for road and bridge repair.  The gas tax was last increase in Ohio in 2005.  Proponents cited the buying power of the tax has been eroded by inflation, Ohioans are driving more miles, and cars are more fuel efficient so less gas tax revenue is coming in per mile driven.  If you happen to drive a hybrid car or an electric car, you too will bear some of the cost.  The legislation charges electric vehicle owners $200 a year and hybrid owners $100 a year as an extra registration fee.  The good news is that starting July 2020, we are no longer required to display a front license plate in Ohio.  Now you know.

July 12, 2019

Reinventing the Gas Station

Jun 28, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Only seven days into Summer and the doldrums have officially set in.  Markets are taking a wait-and-see attitude ahead of earnings announcements coming in the next few weeks.  Expectations are for moderating growth and stable guidance.  As always, those companies meeting or beating expectations should be fine.  However, with the heightened level of trade uncertainty, we might experience more volatility that usual this earnings season.

A large part of this week’s lassitude is that investors are waiting for the outcome of President Trump’s meeting with President Xi on Saturday.  Some have called it a “drive-by” meeting in the sense that not much is expected to be accomplished other than an extension of trade negotiations to the end of this year.  In a sense, that would be a victory.  In recent weeks, the President has threatened adding tariffs on an additional $300 billion of Chinese products, essentially taxing everything coming into the United States from China.  Delaying further tariffs will be a win, and should give both countries time to hammer out an agreement over the next six months.

In company news, Boeing can’t seem to catch a break.  While the company is in talks to reimburse airlines for the grounding of the 737 Max since March, a pilot’s class-action lawsuit, and liability over the two crashes earlier this year, it was announced the FAA has discovered another “potential risk” in the plane’s software that will likely ground the plan for longer than expected.  Talking about breaks, Citigroup is breaking with tradition and rolling back credit card perks on many, if not most, of its credit cards.  Among those perks being eliminated are price-protection guarantees, free trip insurance, and car-rental and lost-baggage insurance.  The company claims these rewards saw low utilization rates.  If you are a member of Costco and signed up for the Citi Costco Visa Card, this applies to you too.

If you have been car shopping lately, you might have experienced sticker shock.  The average price of a “light vehicle” (read: not a truck) today is $37,500.  What may be even more shocking is the average price of a full-size pickup truck is $48,000 as of last year which is a 20% increase in just the last five years.  Considering the acceleration of automotive pricing, I was surprised when I read this week that General Motors is eyeing the first $100,000 pickup truck.  It is in the process of rolling out a new version of its heavy-duty Chevy Silverado that could become the first to list for six-figures.  Ford’s Limited-Edition F-Series Super Duty truck can run at $95,000 when fully loaded.  With large margins, and a consumer willing to pay for the creature comforts, it is no wonder Ford and GM are pushing the boundaries with pickup trucks.

In closing, I often talk about ways in which the world is changing or has changed.  As people have become busier over time, convenience has grown.  For example, twenty years ago you might have laughed if I suggested a food delivery service like DoorDash or Grubhub.  So keep an open mind when I tell you the latest service being marketed as a convenience: a gas station on wheels.  Booster, a 4-year old company, delivers millions of gallons per month in twenty cities, using purple-branded trucks to fill up tanks on corporate campuses.  Fortune 500 companies such as eBay, HP, and Cisco user Booster to provide a fueling perk for employees.  Users can request gas from an app on their smartphone and a Booster truck shows up soon after to refuel the vehicle.  The kicker is the price paid is comparable to prices offered at local gas stations, and in many cases, is even less expensive because of its low overhead and lack of physical locations.  The day will soon be here where you can hit a button on our phone and the gas station will come to you.  That day is already here for some.  Now you know.

June 28, 2019

Is the Fed Getting Ready to Surrender?

Jun 21, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

With only one week to the end of the second quarter, we couldn’t be more pleased with how Q2 is shaping up.  The big news this week came out of the Federal Reserve (Fed) after its meeting on Wednesday.  The Fed’s statement was a clear signal it is now moving closer to easing interest rates which investors took very positively.  With only a week left in the quarter, money flowed into the markets driving prices higher.

Stocks (and more broadly “risk assets”) continue to rise after the Fed kept rates unchanged but hinted it could ease policy in the months ahead.  While not saying outright that a cut was ahead this year, the Fed dropped the word “patient” from its statement and said it would “act as appropriate” to sustain the economy.  The Fed’s interest rate projections indicate that half the FOMC members anticipate two rate cuts this year.  This comes as a bit of a surprise since investors had expected only one rate cut in December.  Two rate cuts with one possibly happening next month sent a jolt through the markets, driving investors back into stocks.  You might remember the same thing happened earlier this year when the Fed signaled it was done raising interest rates.  Whether because the Fed is concerned with a slowing economy or perhaps is feeling the pressure from President Trump, who this week threatened to fire the Chairman of the Federal Reserve, it is evident the Fed is now fully committed to economic accommodation and easing interest rates in the months ahead.

In company news, Boeing and Airbus are going head-to-head at the annual Paris Air Show.  In its first day, Boeing received absolutely no orders which created considerable concern.  However, by the end of the week it looks like both Airbus and Boeing logged $35 billion each in commitments.  Perhaps the big surprise was that Boeing scored a stunning order of 200 737MAX planes from British Airways which was an absolute rout for Airbus.  Also reported this week, and perhaps poor timing in my opinion, Boeing announced it is looking to speed up testing for new aircraft by easing requirements.  It looks to reduce the scope and duration of certain costly physical tests to certify its new aircraft.  Specifically, it looks to cut hours off airborne testing by using computer models to simulate flight conditions, and then present the results to the FAA as part of the basis for certification.  I’m not sure many will find this solution palatable given recent events.

In other news, Discover Financial announced it is eliminating all deposit account fees.  This move applied to customers with checking, savings, money market, or CD accounts with Discover Bank.  In addition, there will be no fees for monthly maintenance, checkbook orders, replacement of debit cards, insufficient funds, excessive withdrawals, falling below minimum balances, and stop-payment requests.  What makes this remarkable is that banks make a considerable amount of revenue from these fees.  We hope other banks take notice and adopt similar practices.

Also interesting, Amazon announced it is offering a new surveillance service.  While we all joke Alexa is secretly spying on us (and there is evidence to suggest this could be true), Amazon wants to help protect your property while you are away.  The company wants to use its network of delivery drones to keep watch over customers’ houses by forming a flying Neighborhood Watch program.  Customers could request that Amazon’s drones visit their property hourly, daily, or weekly, while the drones would look for signs of a break-in, such as broken windows, doors left open, and intruders lurking on the property.  This sounds a bit far-fetched but this is the future we’re hurtling toward.

In closing, I wanted to share a mystery that has been bugging art aficionados for some time.  In 2017, Christie’s broke a record by selling a work by Leonardo da Vinci for $450 million.  The work entitled “Salvator Mundi” thought to be the only remaining work by Leonardo da Vinci in private hands, disappeared shortly after its sale.  The purchase was made anonymously leaving many wondering who purchased the artwork and where it might be.  It turns out leaked information leads us to Saudi Crown Prince Mohammed bin Salman, one of the richest men in the world.  The Saudi family has an estimated net worth of $1.4 trillion.  And in case you’re wondering, the painting resides on his $500 million superyacht floating somewhere in the Mediterranean.  Now you know.

June 21, 2019

Leaning Pillars

Jun 14, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

I do my best each week to keep you informed on the latest developments in the market.  Sometimes it is a piece of economic data which surprises to the upside or downside and moves the markets.  Other times, it is geopolitical events which take center stage and drive investors one direction or another.  Frequently, there are unexpected company announcements which make headline news and drive stocks higher or lower.  However, sometimes I like to take a step back and reflect on the bigger picture.  This week is one of those weeks.

There are four pillars of government policy that effect the economy.  Those pillars are monetary policy, fiscal policy, trade policy, and regulations.  The two which get the lion’s share of both media and investor attention are monetary and fiscal policy.  Monetary policy is controlled by the Federal Reserve and, as of last week, appears to be moving toward a more accommodative position (lowering interest rates).  Fiscal policy is controlled by Congress and for some time has been quite accommodative, to the point that we’re generating on the order of a trillion-dollar annual deficit.  However, it is the final two pillars I want to talk about today.

Trade policy often takes a back seat to the more headline-grabbing monetary and fiscal policy.  However, we find ourselves in a period of significant uncertainty, mainly due to trade skirmishes on many fronts.  Whether we’re looking at China, or Mexico, or Canada, or Europe, it seems we’re on the brink of a full-blown trade war on any given day.  While this strategy, and it is a strategy, may make sense in keeping our trading partners off balance, it also has the consequence of keeping companies off balance.  Decisions on capital expenditures, like building new manufacturing plants or hiring additional employees, becomes very difficult.  No one wants to be the executive to expand at exactly the wrong time.  Not only that but companies that produce abroad, whether we’re talking iPhones in China or automobiles in Mexico, are faced with difficult challenges in supply chain management not to mention margins and profitability.  The uncertainty creates doubt, which creates inaction, which leads to slowing economic growth.

Regulations can be implemented for many purposes but also serve to slow growth.  In some cases, this is a good thing, i.e. regulations on pollution or dumping chemicals.  In other cases, it is a bit murkier, i.e. blocking mergers or acquisitions that are viewed as creating an anti-competitive environment.  There are two large mergers that have stalled and a third that is likely to face stiff headwinds.  CVS agreed to acquire Aetna over a year ago and won Department of Justice approval last fall.  However, a federal judge looks to block the merger which would be unprecedented.  Another example is Sprint and T-Mobile which has the blessing of the Federal Communications Commission (FCC) but is being sued by no less than nine state attorneys’ general.  Lastly, there is the recently announced merger between Raytheon and United Technologies which ran headfirst into President Trump’s concern over consolidation in the defense sector.  While it is understandable and often necessary to regulate industries for the greater good, sometimes that regulation is capricious and arbitrary.

Two sectors that have a cloud hanging over them are the Healthcare and Technology sectors.  The former has profited from the exponential increase in drug prices, and is blamed for the opioid crisis.  Health insurance companies and pharmaceutical distribution companies face many regulatory and legal hurdles in the months and possibly years ahead.  More recently, technology companies have come under scrutiny for their privacy practices, i.e. Facebook, monopoly issues, i.e. Google, and anti-competitive business models, i.e. Apple & Amazon.  Despite recent moves to deregulate some industries, like energy, it appears there is a strong appetite on both sides of the aisle to regulate others.

While the media and analysts focus on the Federal Reserve and interest rates, or conversely, Congress and rising budget deficits, we should pay equal attention to the other pillars that go unmentioned.  Trade and regulation are critical components of economic growth and for the better part of this year have been used as a negotiation strategy at the expense of corporations and the economy alike.  The U.S. economy remains on solid footing and despite the trade rhetoric and regulatory hurdles, continues to grow.  Just think how much better off we would be if these headwinds abated and the markets were allowed to grow unhindered.  Now that’s something to think about.

June 14, 2019

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