Browsing articles in "Weekly Market Update"

Let’s Give Her the Royal Treatment

Apr 20, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

We may be heading into the end of the week on a sour note, but generally speaking it was a pretty good week.  Issues with Syria don’t seem to have escalated and there was surprisingly little new news regarding President Trump, his cabinet, or any of the various ongoing investigations.  Fortunately, earnings announcements are coming along well, in large part due to the tax reform enacted late last year.

I won’t dive into the details of earnings announcements because they tend to be about as fun as reading the telephone book.  My goal isn’t to put everyone to sleep.  Instead let’s focus on company news that is relatable and may have a more direct impact on our lives.

For starters, the Supreme Court heard oral arguments this week regarding the online sales tax.  The case delves into constitutional arguments over whether the high court should overturn precedent and require online retailers to pay state sales taxes.  As is often the case, Justice Anthony Kennedy is seen as the swing vote on whether to collect taxes on Internet sellers without a physical presence within the state’s borders.  Reuters is reporting that several justices would prefer if Congress passes a law that settles the issue, but that seems unlikely.  What is clear is that President Trump is onboard, if his recent Tweets regarding Amazon’s failure to collect state sales tax are any indication.

In other news, there’s a new “Buy American” campaign starting up, but it’s not the one you’re thinking of; A “Buy American” initiative for the weapons industry is being prepared.  No, not that the U.S. military should buy American weapons, but instead that foreign countries should buy weapons from American companies, i.e. Lockheed Martin, Boeing, General Dynamics, etc.  The initiative is aimed at allowing more countries to buy more and bigger weapons, and artillery, and everything in between.  An administration source is quoted as saying, “This policy seeks to mobilize the full resources of the United States government behind arms transfers that are in the U.S. national and economic security interest.”  Seems like a great opportunity for our defense contractors.

I mentioned last week that crude oil has pushed higher in recent weeks and the price of gasoline is at the highest level since 2015.  Doubling down on their argument, some analysts insist that the OPEC production cuts are to blame.  However, a new theory is materializing which suggests Saudi Arabia is to blame.  In a new report by Reuters, Saudi Arabia may seek to push crude oil prices to $80 or even $100 per barrel ahead of its planned IPO sale.  The country has been working on selling Aramco, which is currently a government owned company.  If it goes public, it is expected to become the world’s largest company with a market capitalization of between $2 trillion and $10 trillion.  So perhaps there is another agenda pushing the price of oil higher?  Either way, we can expect gas prices to climb as we head into summer.

In company news, Procter & Gamble announced it closed a deal to buy Merck’s Consumer Health Division for $4 billion.  This acquisition will add vitamins and supplements to the company’s over-the-counter medicine business according to the Wall Street Journal.  This division generates about $1 billion in annual sales from a portfolio of ten core brands including vitamins, supplements, women’s supplements, cod liver oil, and nasal decongestant.  Let’s hope this move works out for P&G.  In other news, General Motors has been playing hardball with South Korea.  It failed to reach an agreement with the union representing workers in South Korea and has threatened to file for bankruptcy.  In response, the South Korean government has offered $470 million to keep General Motors in the country but it is unclear if GM will accept the offer.

In closing, I learned this week that gender-neutral baby names are on the rise.  It seems names such as Royal, Charlie, Salem, Skyler, and Oakley are becoming increasingly popular among new parents.  The Social Security Administration puts out a top ten list of popular baby names every year based on its registrations, but also keeps track of names that are rising quickly.  Name-watchers said these neutral names haven’t overtaken the top spots but are more heavily represented, especially among millennial parents.  While there may be many reasons for the shift, some choose this path because of the hurdles women face across so many areas of life.  Names that skew a little masculine, or less feminine, are perceived as stronger.  In a few countries, unisex names are forbidden by law: Portugal, Denmark, and Iceland.  Now you know.

April 20, 2018

Rocket Mortgage Blasts Off

Apr 13, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

The Dow Jones Industrial Average gained over 500 points this week after having been on a bit of a roller coaster ride these past few weeks.  Between a potential trade war with China and Russia and escalating tensions in Syria, it’s no wonder the market has been all over the place.  As long-term investors, we know times like these can feel very uncomfortable.  However, it is prudent to stay invested during these periods and not try to time the market.  Easier said than done, it is essential to keep our focus on our long-run goals and not concentrate too much on the drama du jour which has become a staple of the news cycle.

With that aside, let’s focus on what is important.  First quarter earnings announcements will begin in earnest in the coming weeks.  The volatile stock market will see a major test as traders size up the first-quarter results.  Tax cuts should help corporate America show its biggest quarterly profit growth in seven years, with S&P 500 profits expected to rise 18.4%.

In economic news, it seems gas prices may be heading higher just in time for summer.  The average gas price reached $2.70 a gallon last week to mark the highest level seen since 2015, according to data from the U.S. Energy Information Administration.  Economists say the higher gas prices in the U.S. are a consequence of the OPEC decision in 2016 to cut back on oil production.  I don’t happen to agree.  To cut back on emissions, oil refineries are required to switch to a summer formulation each year around Memorial Day.  This summer blend of gasoline costs more to produce and thus the price of gas typically rises just in time for summer vacation.  While I may be wrong, the recent price increase may have more to do with rising tensions in the Middle East rather than output cuts instituted two years ago.  One thing we can agree on is that the level of gas prices isn’t considered quite high enough yet to cut significantly into spending by U.S. consumers.

In company news, we learned Sears is shutting down its last store in Chicago, marking the end of an era.  The company has been based in Chicago for more than 100 years.  The company shed more than 50,000 jobs in 2017 and has racked up more than $10.8B in losses over the past seven years.  On a more positive note, local company Kroger, is set to hire an estimated 11,000 positions in its supermarket division, including 2,000 management positions.  This follows hiring 10,000 employees in 2017 and 12,000 in 2016.  Over the last decade, Kroger has added 100,000 new jobs in communities across America.  Also noteworthy, Johnson & Johnson won FDA approval to bring to market the first contact lens that automatically darkens when exposed to bright light.  After more than a decade of development, this new style of contact lens should come to market in the first half of 2019.

On a less positive note, it appears subprime lending is back in an albeit somewhat different form.  The large banks are no longer loaning thousands directly to subprime borrowers but instead lending indirectly through nonbank operators who make the loans.  Bank loans to nonbank financial firms are up six-fold since 2010 to $345B.  Amongst the largest lenders to nonbank financial firms are Wells Fargo, Citi, Bank of America, and JP Morgan.  You may be surprised to learn that the largest mortgage lender in 2017 was Rocket Mortgage a division of Quicken Loans, a nonbank lender.  It closed on over $96B in loans in 2016.  As of 2018, Rocket Mortgage replaced Wells Fargo as the top U.S. retail mortgage lender.

In closing, I’d like to turn your attention to one of my childhood heroes.  Some of you may remember the tennis player Bjorn Borg.  He’s widely considered to be one of the greatest in this history of the sport and was the first to man to win 11 Grand Slam singles titles between 1974 and 1981.  Since then he’s embarked on a totally different career as a fashion and sportswear retailer in Sweden.  But here’s the interesting part.  For more than two years the company has made on-the-job exercise mandatory.  The current CEO is on record saying, “If you don’t want to exercise or be a part of the company culture, you have to go.”  Can you imagine a movement like this occurring in the United States?  No? I can’t either.  Now you know.

April 13, 2018

The 40% Rule

Mar 16, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

With another shakeup in President Trump’s cabinet, the markets started the week on shaky ground.  Fortunately, the economic data proved enough to buoy investor sentiment and while the market will close slightly lower this week, it ends on a good note.

It is the end of an era.  After six decades of rule by the Castro’s, Cuba went to the polls last Sunday to select ruling party candidates.  The members will choose a successor to President Raul Castro when he steps down next month.  Perhaps this will signal a new chapter as this country moves on.  Similarly, ending a chapter is China which amended its constitution removing presidential term limits and paving the way for President Xi to remain in power indefinitely.  Much like Putin’s grasp on power in Russia, a consolidation of power in China could change the nature of our relationship, especially as the U.S. threatens tariffs on its largest trading partner.

Talking about ousters, we learned this week that Secretary of State, Rex Tillerson, no longer has a position in President Trump’s Cabinet.  The announcement was made on Twitter where Mr. Tillerson first learned of the news.  He is replaced by CIA Director, Mike Pompeo, who was a member of the House of Representatives from Kansas not long ago.  The move comes ahead of what could prove to be difficult negotiations with North Korea in the weeks ahead.  Along similar lines, it now seems H.R. McMaster may be next in President Trump’s crosshairs.  He currently serves as the President’s National Security Advisor but has been at odds with the president over strategy in recent months.

In economic news, the February Consumer Price Index was in-line with consensus estimates and eased some of the recent anxiety over the growth of inflation.  Similarly, the February Producer Price Index rose in-line with expectations.  Given the recent economic releases, both Goldman Sachs and JPMorgan economists expect continued job growth of more than 200K per month for the next couple of years, which will take the unemployment rate below 3% – a level the economy has not experienced in 65 years.  In light of the consistent job growth and rising wage pressure, many on Wall Street are beginning to agree that four rate hikes are coming this year as opposed to the previously expected three.

Pressing for fewer rate hikes is Mr. Lawrence Kudlow who was announced as Gary Cohen’s replacement on the President’s economic council.  Mr. Kudlow last served in the Reagan administration as head of the Office of Management and Budget (OMB).  As a proxy for the President, he quickly went on the offensive explaining that the President’s positions on tariffs is “not what people think.”  He defends the President’s position that China has not been playing by “the rules.”  Later in the week, he went on record pressing the newly appointed head of the Federal Reserve, Jerome Powell, to leave the economy alone by not raising interest rates.  He said, “the market is going to take care of itself.  The whole story’s going to take care of itself.”  The Fed has long been an independent agency, however, with these latest appointments it is to be seen just how independent it remains.

In company news, Exxon announced this week that it has formed a partnership with Synthetic Genomics for the purpose of advancing biofuels made from algae.  The company now believes biofuels could grow rapidly in the late 2020s and are aiming to set up one or more demonstration plants by 2025 to produce 10K bbl/day of diesel and jet fuel from genetically modified algae.  Electric vehicles may have some competition after all.  Microsoft made a breakthrough of another type this week.  It announced the company has created the first machine translation system that can translate sentences of news articles from Chinese to English as well as a person.  Researchers believe the system has achieved human parity in translations.  This is a big step and another breakthrough in artificial intelligence (AI).

In closing let’s talk about pundits.  You know, the people you see on TV channels such as CNBC, MSNBC, and the like?  Do you ever wonder how pundits never get it wrong?  I learned this week that the trick is called the 40% rule.  It is a forecasting tactic that makes a bold call without being too bold.  The nice thing about 40% is that you never have to say you were wrong.  If the prediction comes true you look smart, but if it doesn’t then we can say the odds were against it.  The nice thing about the 40% rule is that you never have to say you were wrong.  With that in mind, I believe the Dow Jones Industrial Average has a 40% chance of hitting 30,000 before year-end.  Now you know.

March 16, 2018

Steeling the Spotlight

Mar 2, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

The week started off on the right foot with strong economic numbers buoying optimism and anticipation of Jerome Powell’s first public statements as head of the Federal Reserve.  However, not a week goes by these days without a fear event shaking investors’ confidence and this week it presented in the form of a tariff.  Sparse on details, this topic quickly overtook the airwaves with experts from every walk of life opining on the consequences such a policy.  Who you believe will partly be a function of who you listen to, watch, and read.  Hopefully, you’ll weigh what I say below and reconcile some of these ideas with your own beliefs.

Let’s talk about the big news.  President Trump announced his administration will impose a 25 percent tariff on imported steel and a 10 percent tariff on imported aluminum, on the grounds that other countries’ trade practices endanger our national security by undermining domestic production.  While this goes against the bedrock Republican principle and conservative ideology of free trade, President Trump appears to be rebuffing those in his party who are imploring him to change his mind.  American steel and aluminum companies have long complained of unfair practices by overseas competitors, especially Chinese subsidies, which flood the global marketplace and depress prices making American production less economical.  The big winners are the U.S. steel and aluminum industries.  The most immediate losers are the industries that rely on steel and aluminum which account for such a large part of the U.S. economy.  Some examples include the nation’s biggest industries: the automobile industry; aerospace; heavy equipment; and construction.

Does this matter for the economy?  In a nutshell, this action may create some jobs in domestic metals-producing companies, cost some jobs in a field where steel and aluminum are inputs, and push consumer prices a bit higher.  The U.S. economy can handle it.  The risk comes from the unintended consequences.  Affected countries may well retaliate by ordering tariffs on American goods, and they could carefully target goods to cause economic or political pain.  There are few winners in an all-out trade war.  The irony is that the aim of this administration is to punish China; however, Canada and Brazil are the top exporters of steel and aluminum to the United States.  China doesn’t even crack the top ten.  This surprise announcement seems clumsy, rushed, and extraordinarily broad in nature.  I suspect lobbyists and advisors will craft a more narrowly defined tariff before it takes effect next week.

Unrelated to the tariff news, most major automobile manufacturers reported sales were down in February.  Among those suffering the largest declines are Ford, General Motors, Honda, and Hyundai.  It appears higher interest rates and fewer discounts are dissuading customers from trading up.  Along the same lines, pending home sales declined sharply in January.  While it is too soon to say, it could be interest rates are beginning to change consumer behavior.  On the flip side, consumer confidence hit its highest level since 2000.  Jobless claims hit a multi-year low, the ISM manufacturing index expanded in February, and manufacturing PMI was the strongest in almost fourteen years.  Gains were seen in employment, inventories, backlogs, and supplier deliveries.  It appears the corporate tax break is making a difference.  Companies are in fact spending more on capital equipment.

Companies are also spending more on buying back stock.  Per Goldman Sachs, companies are poised to unleash $2.5 trillion in cash spending in 2018, of which share buybacks will total $650 billion.  The rate at which companies are buying their own stock is now more than double last year according to the Wall Street Journal.  While this doesn’t exactly help the economy, it does impact the stock market favorably.  There is vigorous debate whether companies should repurchase shares but I’ll leave that for another weekly column.  I’m afraid I’ve used my allotted space to cover just a fraction of the many news stories shaping the markets this week.  Have a great weekend and enjoy the sunny weather.  Spring is right around the corner!

March 2, 2018

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