Browsing articles in "Weekly Market Update"

Zero or Lower

Sep 13, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

The momentum continued this week with rumors of a trade breakthrough and a delay of new tariffs on Chinese goods.  In addition to what appears to be positive developments on the trade front, the Federal Reserve is up next week with the highly anticipated next round of interest rate cuts.  Given this backdrop, the markets look to continue the upward trend started a few weeks ago.

While data for the United States remains stable, that coming out of Europe shows weakness persisting.  With this information in hand, the European Central Bank (ECB) announced this week it is further cutting its interest rate.  While this is not unlike what is happening in the United States, what is different is that their deposit rate is now -0.50%.  The outcome is that the $27.8 trillion of non-U.S. dollar investment grade global debt is collectively yielding just 0.11%.  Of all global investment grade debt delivering any yield, 95% is from the United States.  This will likely continue to put pressure on U.S. interest rates as foreign investors look abroad, specifically to the United States, for credit opportunities.  Naturally, President Trump further reiterated his displeasure for his choice of Federal Reserve Chairman, Jerome Powell, and insists that the Federal Reserve should lower interest rates to zero or lower immediately.

Last week I posed the question whether corporate debt is the next big bubble.  Given the demand for a positive yield in investment grade paper, U.S. companies have been more than happy to oblige.  The downside is that increasing levels of corporate debt could lead to credit downgrades.  Well, not a week since I wrote about this, we learned that Moody’s credit rating agency has cut its rating on Ford to junk status citing concerns over the automaker’s balance sheet.  The company no longer carries an investment grade credit rating as Moody’s cites weak earnings and cash generation as the company pursues a lengthy and costly restructuring.  While Ford may be the most recent example of what I am talking about, I suspect it won’t be the only one or the last one in the years ahead.

In other news, the U.K. remains a bit of a basket case with Brexit still up in the air.  A lot of political maneuvering is happening between the various political parties without a clear idea of an endgame.  The British courts have ruled Boris Johnson’s shutdown of parliament as unconstitutional, yet the ambiguity of the situation remains intact.  For now, it appears the British government is gridlocked and potentially sidelined until October 15th, just two weeks before the Brexit deadline.

As for company news, there was quite a bit this week.  Apple held an event during which it introduced its latest iPhones and an updated Apple Watch.  There weren’t any huge innovations, unless you count the addition of a new ultra wide-angle lens.  5G capability was absent this year and could diminish some consumers desire to upgrade in favor of waiting until next year when this will undoubtedly be available.  Toyota reported it is testing a solar-powered Prius that was inspired by new ultra-thin solar panels developed for satellites.  The electricity from the panels goes directly to the drive battery, so the Prius can charge while moving or when parked.  On a good day, the charge can be sufficient for up to 35 miles of travel.  Perhaps closer to home, we learned this week that Fifth Third Bank has been approved for a national charter.  In his statement, CEO Joseph Otting said a national charter and associated regulatory framework would make it easier for the bank to successfully conduct business across the country.  Implicit in that statement is “across the country.”  It seems a nationwide expansion is in order.

To close out this week let’s talk about traffic.  The kind of traffic that seems to grow with each passing year and clog our highways and major thoroughfares.  No matter how many lanes are built, it never seems to be enough.  In fact, it seems to invite more traffic.  This week I read an article about a Chinese company taking an interest in a German flying taxi start-up named Volocopter.  If anyone can pull this off it is the engineering of the Germans with the manufacturing prowess of the Chinese.  Maybe we’ve been looking at this wrong the whole time.  Instead of laying down more pavement, maybe we should be looking to the skies?  Volocopter looks to bring its VoloCity all-electric aircraft to commercial launch within the next three years.  Now you know.

September 12, 2019

Stand United

Sep 6, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Stand United

What was shaping up to be a difficult week turned out to be somewhat different.  As of September 1st, the U.S. and China began imposing new tariffs on each other’s goods and the U.S. reported its manufacturing sector contracted in August.  However, as the week continued there grew a quiet optimism first with trade talks set to resume between the United States and China and then with predictions for another Federal Reserve (Fed) interest rate cut in September.  The political winds seem to change direction often and in seemingly random ways.  This week they appear to have moved in our favor.

According to the Federal Reserve’s Beige Book, the economy plugged along at a “modest” pace through the end of August.  This language matches with the pace described in the July report.  However, manufacturing activity was down slightly from the previous report and agricultural conditions remained weak.  If a silver lining was to be found, it is in the fact that the majority of businesses remain optimistic about the near-term outlook.  The key takeaway from the report was “modest” in almost every way.

Several Federal Reserve governors went on record this week.  The consensus is that the economy is in a good place, but not without risk and uncertainty.  New York Fed President, John Williams, points to the recent downward revision for GDP growth and sizable downward revision to payroll employment for 2018.  One implication of these revisions is that the economy’s underlying momentum was already somewhat less robust than previously thought.  Based on his, and others recent commentary, the market is now looking for one rate cut in September (in less than two weeks) and another in late October.

In company news, we have a few bits of information to pass along.  On the back of a wildly successful opening in Shanghai last week, Costco has already made plans to open its second store in China.  Considering the demand, this appears to be a significant growth driver for the company.  Walmart announced it will discontinue the sale of some rifle and all handgun ammunition when its current inventory runs out.  This is a big stand by the largest retailer in the United States and could mark a turning point.  Amazon is pushing the boundaries of technology with the advent of a hand scanner.  The company is testing scanners that can identify individual human hands as a way to ring up store purchases.  And not to be left out, Kellogg unveils a new plant-based product line.  My first reaction was, “but isn’t cereal already plant based?”  Then I remembered the company also owns MorningStar Farms which sells processed meat in various forms.

One last thing before we get to the story of the week.  A consequence of this historically low interest rate environment is that companies have been issuing debt in record numbers in lieu of raising capital by selling additional shares.  Increasing the number of shares dilutes existing shareholders and generally brings on the ire of investors.  However, generating additional debt for non-productive uses, i.e. buying back shares, is also viewed with a heap of side-eye.  This week we learned Apple is issuing $4-5 billion in bonds, and while no one will question its ability to pay back this debt, most companies don’t have that kind of free cash flow or cash on the books.  Issuing debt for non-productive uses has long been debated but more recently has become de rigueur in C-suites across the country.  It is hard to make a blanket statement on the practice; however, it is worth questioning when taking on debt crosses the threshold from a corporate strategy to reckless behavior.  Is corporate debt the next big bubble?  Perhaps not today when rates are pushing the zero-bound, but this won’t always be the case.

To close out this week, I have to admit I got a bit of a chuckle out of this next story.  I don’t think anyone enjoys paying income tax.  However, as more jobs are being replaced with automation, it seems the IRS fears fewer will be paying an income tax.  Oh, the irony.  However, it’s a brave new world and the IRS is now considering taxing robots.  With fewer workers, it stands to reason that there would be less income tax going into the government coffers.  If a robot replaces a factory worker who produces say, $50,000 of work annually, the IRS is considering the idea that the company should be taxed at the same level to offset losses in income and Social Security.  Perhaps the day will come when we don’t view automation as a threat, but will instead stand with our robot brethren against the tyranny (said tongue in cheek).  I just wanted to bring this current situation to your attention.  Now you know.

September 6, 2019

 

A Cornucopia of Corporate News

Aug 30, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Sensing the heightened level of uncertainty, and no doubt watching the market volatility pick up last week, the President walked back a lot of his bluster with regard to China and tariffs this week.  Not that tariffs are off the table, but that China “wants to make a deal very badly” and is willing to hold off on imposing further tariffs on the United States.  At this point who knows what is truth and what is spin, all I know is that the markets felt a little more reassured that a deal will eventually be reached and reacted accordingly.

Since I seem to talk more about economics and geopolitics lately, let’s talk about company news for a change.  Costco opened its first store in China with crowds reportedly waiting in line for upwards of six hours to have a chance to shop.  The crowds apparently got so rowdy, with fistfights breaking out, the store had to limit the number of customers in the store to 2,000 at a time.  I can only imagine how big this store must be.  In other news, Boeing was hit with its first lawsuit from a 737 MAX customer.  I’ve been wondering for some time how long it would take for the airlines to want compensation for the grounding delay and lost income.  A Russian aircraft leasing company has sued Boeing for a breach of contract.  It expects a return of the $35 million it paid Boeing with interest, plus $75 million in “lost profit,” and $115 million in compensatory damages, as well as punitive damages.  I wonder if others will follow suit?

Another bit of company news is that Philip Morris is in talks to merge with Altria.  You may remember, in 2007 Philip Morris spun off Kraft Foods.  In 2008, it spun off Altria in an attempt to unlock value by splitting the company into a domestic tobacco company and an international tobacco company.  It came as a surprise this week when we learned that the parent company wants to once again combine the companies into the largest global tobacco company under one corporate structure and management team.  The company cites benefits of scale and geographic reach.  But also, the company has expanded outside of tobacco in recent years to include its purchase of Juul for $12.8 billion in 2018 , the leader in vaping, and a $1.8 billion 45% stake in Cronos Group which is in the nascent cannabis industry.

Here’s an interesting development.  Like Canada’s oil sands and the North Sea, Alaska is receding into a second-tier oil producer as field depletion, cost-cutting, and the rise of shale diminish their appeal.  BP announced this week it plans on completely pulling out of Alaska after a 60-year presence.  The company has estimated its net oil production from the state this year will average 74K bbl/day.  At its peak, Alaska once pumped 2M bbl/day of oil, enough crude to rival some OPEC members, but it’s now only the sixth-largest producing state in the United States behind Texas, North Dakota, New Mexico, Oklahoma, and Colorado.

I had mentioned a few weeks ago that Fifth Third Bank raised its minimum wage to $18 per hour and wondered if other banks would follow suit.  It didn’t take long.  This week we learned that Citigroup has quietly raised its minimum wage to $15 per hour.  It seems last year JPMorgan raised its starting pay to $18 per hour and Bank of America plans to boost its minimum to $20 per hour over the next two years.  It seems the arms race in the banking industry has run to new heights.

Also worth mentioning, for those so inclined, Fifth Third Bank sees achieving 100% renewable power three years ahead of its original 2022 target.  The company opened a solar facility in North Carolina last year.  The solar farm is expected to generate clean power that is more than or equal to the amount Fifth Third uses in a year and will be resold at market rates into the local electricity grid.  Built by solar developer SunEnergy1, the solar farm consists of over 350,000 solar panels and covers 1,400 acres.  I know we have some clients who are more environmentally mindful and I just wanted to let those clients know there are alternatives.

In closing, I turn to the rising cost of college and more importantly, how to make the value proposition pay off.  Each year a report is generated which highlights those majors which are most valuable and those which command much lower salaries.  I’m not suggesting that money should be the determining factor when choosing a major and career path.  However, it doesn’t hurt to know which majors lead to higher salaries and less unemployment.  Among the top 100 majors, it seems engineering comes out solidly on top.  Eleven of the top twenty-five majors involve some discipline of engineering.  However, others in the top twenty-five include genetics, materials science, applied mathematics, computer science, meteorology, and rounding out the list nursing.  If you have children or grandchildren, you may want to share this information with them.  To see the full report, click on the following link.  Now you know.

August 30, 2019

Where Did the Jobs Go?

Aug 23, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Stocks powered broadly higher with the S&P 500, Dow, Nasdaq, and Russell 2000 all climbing this week.  Reports of stimulus efforts in China and Germany helped ease worries about a global economic downturn and investor sentiment got a boost from impressive quarterly results from Target and Lowe’s.

Perhaps helping matters is the distinct possibility the Federal Reserve (Fed) will continue to lower interest rates into the end of this year.  Additionally, President Trump floated the idea of a temporary payroll tax as a way to offset the economic slowdown.  There is a precedent for this idea in that President Obama cut the 6.2% payroll tax to 4.2% to encourage consumer spending during his presidency.  That relief lasted until 2013 at which point the payroll tax was reset to 6.2%.

Speaking of public policy, it seems the President got himself into somewhat of a pickle this week.  A couple weeks ago the Environmental Protection Agency (EPA), at the behest of the White House, granted 31 waivers exempting refiners from the requirement to blend corn-based ethanol into gasoline.  Within 48 hours the biofuel industry had delivered a detailed letter to the White House demonstrating the damage these waivers would cause.  Farmers, which are seeing crop prices hit hard by a trade war with China, are struggling with the timing of this decision.  This pits two conservative constituencies against one another just in time for election season.  Who will win?  The heartland or the oil industry?

In other news, it turns out hiring wasn’t nearly as strong in 2018 and early 2019 as the government initially reported – by about a half-million jobs.  The economy had about 500,000 fewer jobs as of March 2019 than the Bureau of Labor Statistics initially calculated.  That’s the largest revision since the waning stages of the Great Recession in 2009.  The newly revised figures indicate the economy didn’t get a huge boost last year from the tax cuts and higher federal spending.  On the flip side, this could give the Fed even greater reason to cut interest rates in September.  The average 223,000 monthly increase in jobs in 2018, could be trimmed to around 185,000 economists estimate.

In company news, you might have noticed I don’t often talk about Tesla.  While this company’s products are viewed by many as the best on the market, the cult of personality around it’s CEO makes it hard to speak about this company objectively without drawing ire.  Well, this week Walmart announced it is suing Tesla after the latter’s solar panels atop seven of the retailer’s stores caught fire.  Previously, we only knew about its cars catching fire.  The lawsuit alleges breach of contract, gross negligence, and failure to live up to industry standards.  The company wants Tesla to remove solar panels from more than 240 stores and pay damages related to the fires.  If you’re in the market, I know where you can get a “hot” deal on solar panels.

To wrap up this week, let’s talk about returns under the various presidents.  Presidents almost always  take credit when the economy is going strong and the stock market goes up.  In reality the president has limited ability to affect the stock market, although greater ability to affect the economy through policy.  During President Trump’s presidency, the S&P 500 has gained 29% from inauguration day through August 13th.  How does that stack up against other modern presidencies?  Ronald Reagan +23%, George H.W. Bush +36%, Bill Clinton +29%, George W. Bush -26%, and Barack Obama +46%.  While these numbers are mostly meaningless, picture each president sitting in his library, cocktail in hand, thinking about how well he did for the stock market, economy, and prosperity of the country.  Well, all except for George W. Bush who endured the dotcom bust and the 9/11 terror attacks.  He’s probably just happy to forget about the difficulties during his presidency.  Now you know.

August 23, 2019

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