Browsing articles in "Weekly Market Update"

Back to the Future

Aug 18, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Traditionally, summer is the period of the year during which the market becomes quiet.  We usually see trading volume dwindle and volatility slow.  However, the month of August has proven to be anything but ordinary. Between the riots in Charlottesville and the traditional Friday firing of an administration official, not to mention the media’s need to sensationalize every news story, we’re living in a polarizing time.  While the economic data hasn’t changed much, it seems investors patience and tolerance are waning thin.

More recently, it has become hard to report on the news from the week, because these days are so political.  I try to tread a fine line, knowing that this weekly recap is read by people across a wide spectrum of political beliefs.  However, it is sometimes difficult to avoid since politics often has a way of impacting both the stock market and the economy.  If I seem partial to one side or another, know that it is not intentional and just a reflection of what is being reported (for better or worse).  Having said that, let’s move on to nonpolitical stories this week.

Procter and Gamble has been under siege lately by activist investor Nelson Peltz.  This week the company fired back in a letter to shareholders asking them to vote against the bid by Trian Fund Management to land a board seat.  It states, “Mr. Peltz does not bring any new or needed skills to our Board.  We believe that adding him to the Board would derail the very significant value creation progress we are making.”  Kudos to P&G for not mincing words.  The company’s annual shareholder meeting is scheduled for October 10, 2017.

In other company news, Costco was ordered to pay $19 million after losing a recent lawsuit.  A federal judge ruled that Costco owes Tiffany & Co. damages for selling engagement rings with the Tiffany name.  Costco argued that its use of the name “Tiffany” referred to a generic style of ring, and not the luxury retailer itself.  However, using the name Tiffany is different than using the phrase “tiffany setting” which is synonymous with a solitaire style setting which is considered the classic engagement ring style today.  Unfortunately for Costco, they only sold 2,500 “Tiffany” rings with a profit of $3.7 million.  While this won’t have a significant impact on the company’s earnings, it is worth noting semantics matter.

This next story made me a little nostalgic.  While I don’t remember the authentic wood paneled station wagons of the 1950’s, often referred to as “Woodies”, I do remember the faux wood paneled station wagons of the 1970’s.  Over time, car manufacturers have sought out weight savings first in the use of aluminum and then with the use of carbon fiber.  With the push toward electric vehicles, slimming down cars takes on an even greater importance.  It seems the push to make lighter vehicles is leading some Japanese suppliers to turn to wood.  Denso and DaikyoNishikawa say cellulose nanofibers made from wood pulp weight just one fifth of steel and can be five times stronger.  While nothing compares to those faux wood paneled station wagons of yore, I am cautiously optimistic we’re moving back to the future.

In closing, we sometimes talk about patterns in the market.  For example, this is only the fourth calendar year in history (since 1926) that the first seven months of the year were all positive.  The other three years in which the first seven months were all positive were 1954, 1964, and 1995.  The average full year return for those three years was +35.56%.  However, these patterns are typically just anomalies which is why most small print disclosures usually say something to the effect of past performance does not guarantee future returns.  So when Liz Ann Sonders, chief investment strategist at Charles Schwab, made the following statement this week I had to chuckle.  She said, “there’s a seasonal thing we all need to be mindful of right now.  Many viewers may not be familiar with an effect that comes into play in years ending in seven.  If you go back all the way to 1900 and you use the Dow, for a variety of reasons, maybe some of which are mystical, years ending in seven have notoriously brought corrective phases.”  That’s not to say that we aren’t going to have a pullback this year, but “mystical” reasons are not generally at the top of my list.  Now you know.

August 18, 2017

Controversy in Wisconsin

Aug 11, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

After a streak of nine consecutive record high closes, the Dow Jones Industrial Average closed lower on Tuesday.  Stocks have largely drifted in recent sessions with trading volumes near their lows for the year as second quarter earnings season has wound down, while the S&P 500 has failed to post a 1% daily move in either direction since the middle of May.  Stocks finally dipped into the red after President Trump warned that North Korea will be “met with fire and fury like the world has never seen.”  The market took notice.

It is hard to discuss this week without talking about the escalation of tensions between the United States and North Korea.  Although you’ve likely heard much of what I’m about to say it bears repeating.  North Korea is explicitly examining a strike on the U.S territory of Guam.  Furthermore, intelligence reports now suggest Pyongyang has successfully developed a miniaturized nuclear weapon and has up to 60 nuclear weapons in its arsenal.  The last time the U.S. went to war was 2003 when we invaded Iraq to topple the Saddam Hussein regime.  In that case, the market pulled back in the months prior to the start of the war, only to recover its losses and go on to exceed its previous high over the following twelve months.  The point I’m making is that the market usually moves ahead of the triggering event but typically recovers in the months that follow.

On to more “normal” news.  You know the kind of stories that pit politicians against one another.  You might have heard that Foxconn, the large Chinese manufacturer that is among those that make Apple’s iPhone, is planning on building a $10 billion research and development plant in Wisconsin.  The focus of the plant will be on autonomous driving which is another topic I seem to be discussing more and more these days.  However, recent reports suggest it is far from a done deal.  Wisconsin’s republican-led state senate could vote against republican Governor Scott Walker’s efforts and reject the plan.  At issue is an estimate that the state wouldn’t break even on the project for 25 years if it gives Foxconn the negotiated $3 billion in tax subsidies.  And that’s still assuming that Foxconn actually creates the 13,000 jobs it claimed it might create, at the average wage — just shy of $54,000 — it promised to create them at.  In fact, the plant is only expected to start with 3,000 jobs; the 13,000 figure is the maximum potential positions it could eventually offer. If the factory offers closer to 3,000 positions, the report notes, “the breakeven point would be well past 2044-45.”

While this one isn’t about autonomous cars, it is about pilotless planes.  According to new research by UBS, pilotless planes could not only be the future method of transport, but an “economically-beneficial one too.”  The report believes there may be a material profit opportunity of more than $35 billion per year for the aerospace and aviation industry.  It states commercial aircraft already use computers and technology on-board to assist in a number of functions, including the autopilot system.  Would you buy a ticket for a pilotless fare?  More importantly, will we still have to pay baggage check fees?

In closing, we turn to the theme of unintended consequences.  Sometimes the best of intentions can backfire in their outcomes.  In a surprising twist, Philadelphia’s tax on soda has made these carbonated beverages more expensive than beer in the city.  A new study from the nonpartisan Tax Foundation found that the 1.5-cent per ounce tax has fallen short of revenue projections and has forced some Philadelphians to drive outside the city to buy groceries.  Philadelphia’s tax on soda is 24 times higher than its tax on beer.  The irony is that the study found consumers facing taxes on sugary drinks are more willing to substitute alcoholic beverages in place of soda, mitigating the original reason for the tax, the reduction of caloric intake and perhaps creating new issues in the process.  Now you know.

August 11, 2017

Is Yellen on the way out?

Jul 28, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

From news on tax reform to the failure of an Obamacare repeal, this week was full of consequential news.  Add to that, the busiest week for earnings announcements this quarter and you have the makings of a very crazy week.  I’m happy to say the markets look to close higher despite the wide variety of good and bad news.  I use the word “bad” loosely because it is such a subjective word.  At the moment, investors have a high tolerance for political uncertainty and appear optimistic for the second half of this year.

Let’s start with the Federal Reserve Open Market Committee (FOMC) meeting this week.  To nobody’s surprise, the Fed announced it is holding pat on interest rates.  The difference between the last meeting and the current meeting boils down to about fifteen words.  The Fed’s statement makes clear job gains in June were solid but that inflation is below its two percent target.  The language on both items is stronger than the previous statement.  With regards to its balance sheet it went on to say, “for the time being the Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee currently expects to begin implementing its balance sheet normalization program relatively soon.”  It was the relatively soon part that got people’s attention.  It is unclear whether the Fed will let its holdings mature, actively sell its holdings on the open market, or some combination of the two.  As a reminder, the Fed’s balance sheet swelled from roughly $800 million before the financial crisis in 2008 to roughly $4.5 trillion today.

While we’re on the subject of the Federal Reserve, it should be noted that Janet Yellen’s term as the Chairperson is set to expire in January 2018.  It is up to the president to decide whether to keep or to replace her with a new appointee.  The Fed has been slowly transitioning from a more accommodative to a less accommodative policy regarding the economy, which may work against the current administration’s desire to keep its monetary foot on the gas pedal.  The latest reports suggest that Gary Cohn is the leading contender to replace Janet Yellen.  If appointed, Cohn would be the first Fed Chairman who isn’t a trained economist since Jimmy Carter’s appointment of G. William Miller.  Mr. Miller lasted all of seventeen months before being replaced by Paul Volker in August 1979 due to runaway inflation.  Some of you may remember those days.

In other news, a new study out this week suggests the mortgage interest tax deduction has no effect on home ownership.  I should admit I am skeptical of these findings but believe it will be used in the upcoming tax reform debate.  As reported by the Wall Street Journal, it shows the popular U.S. tax deduction, a “sacred cow” of the country’s tax code, just isn’t very effective.  The study was put together by scholars from MIT, Princeton, and the University of Copenhagen.  Ironically, the study centers on real estate data from Denmark in the ‘80s.  It concludes the deduction reduces government tax collections by $72 billion per year.  This report comes during speculation over the final shape of the administration’s tax cut proposal.  Without savings from the attempted Obamacare repeal, the GOP will have to come up with other ways to cut expenses in order to keep their proposed tax reform deficit neutral.  Another idea being floated is to increase the top marginal tax rate to 44% on those earning above $5 million.  It seems implausible that Republicans will go for that option.

In closing, I turn to speeding tickets.  At some point, virtually everyone will be pulled over for exceeding the speed limit.  Urban legend suggests that the color of the car is a major determinant.  Most people believe the color red gets pulled over more often, but red actually comes in second to white.  So when I came across a non-scientific piece this week that asked which vehicles get the most traffic tickets I was intrigued.  Is it BMWs or perhaps Corvettes?  I figured a sports car would top the list.  I was wrong.  Top of the list is the Lexus ES 300.  To be fair, the remainder of the top ten was, in fact, sports cars.  But Lexus?  To read the results and see where your car ranks check out this website (not an endorsement of insurance.com).  Now you know.

July 28, 2017

Monkey Business

Jul 21, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

The focus this week turned to earnings announcements. Although it is still early, many of the companies reporting this week beat analysts’ expectations and were generally optimistic regarding the remainder of the year. The earnings announcements in the coming weeks will help determine what the second half of the year will look like. Despite an inability to pass legislation to spur the economy, we believe economic growth will continue at a slow but consistent 2% to 2.5% pace.

Outside of earnings announcements, there was a lot of company news this week. Let me highlight a few of the notable stories:

  • Procter & Gamble is perhaps the largest company ever to face a proxy fight. Nelson Peltz’s Trian Fund Management plans to battle for a board seat at P&G in an effort shake up its “slow-moving and insular” culture. Peltz is not seeking a breakup of the company at this time.
  • What not to say as CEO – At the National Governors Association meeting this past weekend, Elon Musk made some news saying (again) that Tesla’s stock price is too high. He realized his mistake when the stock price fell sharply the following day and took to Twitter to say the price is high based on past and present, “but low if you believe in Tesla’s future.” Nice save.
  • Facebook announced it is doubling its investment in New Mexico with plans that include a $500 million data center expansion. The company broke ground on the first building, to cover an area equal to 17 football fields, that should go live in late 2018. Construction on the second building should run through 2020.
  • McCormick announced it is acquiring Reckitt Benckiser’s food business in a deal worth $4 billion. It apparently beat out several competitors including Unilever and Hormel, Financial Times reports. Reckitt’s food business includes French’s mustard and Frank’s RedHot sauce.

In other news, it finally happened this week. It took seventeen years, but the S&P 500 information technology sector has finally recovered from the dramatic collapse of the dotcom bubble. The index closed at 992.99 on Wednesday, breaking the record of 988.49 set on March 27, 2000. The gradual recovery spanned the rise of social media, the revolution in cloud computing, and the invention of smartphones.

Perhaps a little sobering is the news that the number of Americans renting hit a 50-year high. The percentage of households renting rose to just under 37% last year, according to Pew Research. That’s vs 31% in 2006, and just under 37% seen all the way back in 1965. While the groups that have historically tended to rent – young adults, non-whites, and the lesser educated – continue to do so, Pew found rising rates among traditional buyers likes whites and middle-aged adults. Some of the reasons given for the shift include rising home prices, stagnant wages, and overwhelming student loan debt.

For the story of the week, I return to a piece I first mentioned back in 2014. It is the story of a selfie taken by a macaque monkey and the legal question of who owns the photo. The case has bounced through the court system these past three years and now finds itself in Federal court. Here’s a quick recap – a curious monkey with a toothy grin and a knack for pressing a camera button took a particularly good picture of himself. The photo went viral and the photographer, David Slater, asked for the image to be removed on the grounds that the websites didn’t have the right to publish the image without his consent. People for the Ethical Treatment of Animals (PETA) is suing Slater and the self-publishing company Blurb for copyright infringement, on behalf of the macaque monkey who “took” the photo. It seeks to administer all proceeds from the image to a wildlife reserve in Sulawesi, Indonesia. A federal judge ruled against PETA last year, saying it lacked the right to sue because there was no indication that Congress intended to extend copyright protection to animals. The 9th U.S. Circuit Court of Appeals in San Francisco heard the appeal this week. Perhaps the best line is, “Monkey see, monkey sue” is not a good law under any federal act. Blurb’s attorney wondered at the possibilities if they do not prevail. “Where does it end? If a monkey can sue for copyright infringement, what else can a monkey do?” The outcome has not yet been decided, but rest assured we’re on it. You can see the picture the monkey took and read the original story by clicking here. Now you know.

July 21, 2017

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