Browsing articles in "Weekly Market Update"

Brexit: Season 3

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

As far as weeks go, this one was fairly quiet.  In the run up to earnings season, there is usually a lull in both market news and volatility as investors eagerly await earnings announcements. Boeing and General Electric continue to be a drag on the Dow Jones Industrial Average while JP Morgan gave the markets a lift today.  Earnings announcements will begin to dominate the news starting next week.

Despite the dearth of economic news, there were some corporate announcements worth mentioning.    Novartis (NVS), the world’s fifth largest independent biotech company by market cap, finalized the spin-off of its Alcon division.  Shareholders of Novartis received one share of Alcon (ALC) for every five shares of Novartis held on April 8th.

Chevron (CVX) announced today it plans on acquiring Anadarko Petroleum (APC) in a stock and cash transaction valued at $33 billion.  The merger will shore up Chevron’s upstream operations (the finding and producing of oil and natural gas) by strengthening its shale, deepwater, and natural gas resources.  Management anticipates annual synergies of approximately $2 billion, and expects the deal to be accretive to free cash flow and earnings in one year.

In other corporate news, we learned that Tesla will begin leasing its Model 3.  However, unlike a more traditional lease, customers will not have the option to buy their cars at the end of the lease as Tesla intends to use the vehicles for its long-planned Tesla Network ride sharing program.  If you’re in the market for a Model 3, a 36-month lease will start at $504 per month with $4,199 down.  The downside to leasing a Tesla is that the company gets the federal tax rebate of $3,750 per car plus any state incentive that your state may offer.  For Tesla it is a great deal.  For the lessee, not so much.

In recent weeks we have mentioned the rising minimum wage and its potential strategic benefit.  This week Amazon’s CEO, Jeff Bezos, challenged its competitors in its annual letter to shareholders.  He said, “Today I challenge our top retail competitors to match our employee benefits and $15 minimum wage.  Do it!  Better yet, go to $16 and throw the gauntlet back at us.”  Perhaps not too surprising, those competitors had a few things to say.  Walmart’s Dan Bartlett said, “How about paying your taxes?”  Amazon paid $0 in federal taxes on more than $11 billion in profits last year.  Macy’s CEO, Jeffrey Gennette responded, “We decided to put [tax savings] back into the community” while eBay CEO Devin Wening fired back, saying, “We don’t compete with our sellers.  We don’t bundle endless services to create barriers to competition.”  Sounds like the war of words is just heating up.

As for Brexit, the drama continues.  On Wednesday, the European Union (EU) voted to allow for an extension whose deadline was today.  This brings us to Season 3 of Brexit Forever, which raises the plot of whether Theresa May (Prime Minister) and Jeremy Corbyn (Leader of the Labour Party) will honor the will of the voters.  The new extension gives the UK until October 31st with certain conditions.  However, it is likely that a six-month delay gives the Conservative Party enough time to contemplate a change in leadership, i.e. Theresa May exit stage left.  In such a case, we could be talking about Brexit until the proverbial cows come home.

In closing, I came across a practice in South Korea that is unusual by Western standards.  In S. Korea, babies become 1 on the day of their birth and then get an additional year tacked on when the calendar hits Jan 1.  “Just two hours after Lee Dong Kil’s daughter was born on New Year’s Eve, the clock struck midnight, 2019 was ushered in, and the infant became 2-years old.  Every baby born in South Korea last year become 2 on January 1st.  It is unclear how this tradition started but some attribute it to the time babies spend in the womb, or to an ancient Asian numerical system that didn’t have the concept of zero.  It seems most South Koreans are simply accustomed to living with two ages.  Now you know.

April 12, 2019

Ciao! Keebler Elf

Apr 5, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

It was a week chock-full of good economic news and the markets reacted accordingly.  The Dow Jones Industrial Average looks to close almost 500 points higher on the week, continuing the upward trend which began earlier this year.  Furthermore, the bar for first quarter earnings has been set fairly low.  While a few companies will report earnings next week, the bulk will begin the following week.

The best news of the week was announced today when the March nonfarm payroll report indicated that 196,000 had been created in the month.  You’ll remember that just one month ago we were shocked when the February number came in at only 20,000.  As many suggested at the time, the month of February was an anomaly with a return to more normal job creation returning in March.  Adding weight to this data point, March’s ISM manufacturing index improved and February construction spending rose more than expected.  Fortunately, we have strong enough growth but not necessarily enough to force the Federal Reserve (Fed) to become more hawkish.  This week’s news will allow the Fed to retain a patient stance with interest rates.

While the economic news has been good of late, it hasn’t stopped the President from a new offensive.  President Trump’s relationship with Fed Chair, Jerome Powell, has been rocky from the start despite Mr. Powell being the President’s nominee to head the Federal Reserve.  The President believes if not for the interest rate hikes, economic growth and the stock market would be higher, and the trade deficit wouldn’t have swelled as fast.  He’s not wrong.  However, interest rates which were dropped to previously unseen levels after the financial crisis, never really regained historic norms.  Lowering them again at a time of 2% economic growth and low inflation could be like pouring gasoline on a fire.  Sometimes too much of a good thing can do more harm than good.  While it may be good for the President politically, it almost certainly wouldn’t be good for the economy in the long-run.

In company news, it seems the Keebler Elf will soon become an expat.  It was announced this week that Ferrero SpA acquired a number of cookie brands, fruit snacks, and pie crusts from Kellogg for $1.3 billion.  Aside from Keebler cookies, Famous Amos and cookies manufactured for Girl Scouts of the U.S.A will also be moving across the pond.  While we’re on the subject of food it seems Burger King is testing a new plant-based meat substitute in select markets.  If you happen to be in the St. Louis area, you will be able to test The Impossible Whopper which will be flame grilled like a regular Whopper but contain no meat.  Burger King has partnered with Impossible Foods on the burger initiative with a market for meat-free substitutes growing to an estimated $1 billion in coming years.  Not to be outdone, Nestle plans on bringing its Incredible Burger to Europe this month followed by North America by the end of the year.

Last week I noted that McDonald’s will no longer be fighting against raising the minimum wage and even speculated that this could be a strategic move by the company to put pressure on smaller chains and mom-and-pop alternatives.  It seems McDonald’s isn’t alone in its thinking.  This week Target announced it too will be dropping its fight against lower wages.  The company plans on raising its starting wage to $13 per hour with an incremental plan to hit $15 per hour by the end of 2020.  This puts it right smack in the middle of the minimum wages at Amazon ($15/hr) and Walmart ($11/hr).  It does appear the tide is turning.  The question is how long before these higher wages translate into higher prices and an increase in inflation?

In closing, I bring you more unusual news.  What I thought was an April Fool’s story turned out not only to be true but also somewhat disturbing.  It seems in the Soviet Union there was a candy bar by the name of Hematogen that was a favorite among children.  It was a chocolaty, chewy snack with an oddly metallic aftertaste.  It was made with beet sugar, condensed milk, and sugar syrup but also had a secret ingredient: cow’s blood.  It seems this treat was created as a kid-friendly iron supplement at a time when food scarcity was an issue.  A generation of children came to love the candy bars which were cheaper and more accessible than candy.  Now, these same Russian adults have a soft spot for Hematogen.  You see, it is still in production and can be purchased on Amazon.  If you’re brave enough to order some, you’ll have to let me know how they taste.  Now you know.

April 5, 2019

Innovation: Not Just an Idea

Mar 29, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Today was a great end to a great quarter.  The gains experienced in the S&P 500 in the first quarter are among the best in the past decade.  The quarter certainly benefited from an oversold bounce back, after the fourth quarter’s heavy 14% slump, but analysts still see a positive year ahead.  While there could be some bumps in the second quarter as the market struggles with earnings growth and a slower economy, positive U.S. China trade talks and investment sentiment could propel stocks higher.  Here’s to wishing for a repeat.

Before I get to the fun stuff, let’s talk numbers.  In 2018, U.S. companies repatriated $664.8 billion of offshore profits to the U.S.  While this is a significant amount of money, it is far less than the $4 trillion that had been expected as a result of the 2017 tax reform.  That’s not to say that the tax reform wasn’t successful.  In 2017, U.S. companies repatriated only $155 billion.  To some extent, the tax on this repatriated money was included as an offset to the decrease in tax revenue due to the corporate tax cuts.  With repatriation falling well below estimates, we have yet another puzzle piece as to the reasons for the record setting monthly deficits and quickly rising national debt.

In company news, we learned this week that Apple is expanding its service offerings.  This move will help it diversify away from hardware, i.e. iPhones.  Among its new offerings were four major categories: Apple TV+ (new original content), Apple TV Channels (channel aggregation), Apple Arcade (online gaming), and Apple Card.  Of the four, the Apple Card is the real innovation.  The company plans on issuing a credit card with no number or name on its face and no magnetic strip on its back.  It will be made of titanium and have an embedded chip for credit card readers.  MasterCard sees banks following Apple’s lead to increase security.

We also learned this week that Johnson & Johnson had positive results from two Phase 3 clinical trials evaluating its investigational antihistamine-releasing contact lens.  Patients wearing the contact lenses experienced significantly lower itching within fifteen minutes of lens insertion and lasting up to twelve hours.  This is potentially big news for those who suffer from seasonal allergies but choose to wear contact lenses.  Since these lenses are in clinical trials, it is unknown when they will become available for purchase and there is no mention of the price premium these lenses will certainly carry.

Another company that continues to push the technology envelope, which may come as a surprise, is McDonald’s.  Its recent acquisition of Dynamic Yield is expected to give it the ability to vary electronic menu boards based on time, weather, and regional factors.  It could allow McDonald’s to respond to customer preferences in real-time.  Naturally, this reminds me of Uber and its dynamic pricing model.  But also interesting is the about-face the company has taken regarding the movement to raise the minimum wage.  Once a stalwart opponent of legislation to hike the minimum wage, it will no longer take part in efforts to lobby against it.  In fact, I can’t help but wonder if its push to utilize technology, i.e. cashier-less kiosks, will result in fewer employees in the long run and a significant competitive advantage versus its peers, especially given a higher minimum wage.  Sneaky?  Maybe.  Strategic?  Definitely.

In closing let’s talk about trying to time the market.  I’m sure you all know that this is not only difficult but also impossible to do over the long-run.  An investor needs to be right twice, correctly predicting when to move out of and then when to move back into the market.  To that end, I received an email from Wells Fargo this week that demonstrated this reality in a way that is hard to ignore.  It looked at market returns over the last thirty years (1998-2018) and found that if one were fully invested over the entire time period, the annual return was 7.61%.  Missing the ten best days out of the thirty years (10,950 days) resulted in an annualized return of 5.16%.  Missing the thirty best days gave a return of 2.07%, and missing the fifty best days resulted in a loss of -0.47%.  The takeaway is that missing even a handful of days when the stock market experienced its best gains can dramatically reduce returns.  Statistically speaking, it’s best to stay the course.  Now you know.

March 29, 2019


Mar 22, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Despite today’s pullback, the market had a fairly normal week ending only modestly lower.  Headline news dominated market movements with issues in Europe taking center stage.  As mentioned last week, we can expect geopolitical news to drive investors ahead of earnings announcements mid-April.  While today was a bit of an anomaly, we should expect volatility to remain heightened given the sustained uncertainty that has grabbed hold.

The biggest news this week was the announcement out of the Federal Reserve (Fed) that it intends to raise interest rates only once this year.  It had previously stated that no less than three rate hikes were on tap for 2019.  This newfound dovish attitude sent the opposite signal to investors than the Fed had hoped.  Investors took this announcement as a sign the economy had slowed more than anticipated and that perhaps the Fed knows more than it is letting on.  Whether pressure from the White House or weakness in the economic indicators, it seems almost inconceivable that the Fed will raise rates in this environment.

Speaking of this environment, it should be noted that the yield curve inverted today for the first time since 2007.  While today’s inversion is the spread between the 3mos and 10yr yield, it is more typically the 2yr and 10yr treasuries that are compared and at the moment that spread is still positive by 11 basis points (.11%).  Regardless, today’s pullback was a reaction to this event which historically signals a recession in the coming 12-24 months.  While this news may be jarring to many, it is not a big surprise as analysts and economists have been stating this likelihood for some time now.  As we’ve noted several times this year, economic growth is slowing both in the U.S. and abroad.  Since the fourth quarter of 2018, we have been making changes to our models to adjust for a slowing economy and the possibility of a recession next year.

In company news, it seems Intel and the Department of Energy are working on building the world’s fastest supercomputer dubbed Aurora.  Currently the two fastest computers are in the United States with the third and fourth residing in China.  The goal is for this to be the first supercomputer with a performance of one exaflop, which is one quintillion calculations per second.  To put that in perspective, if every person on Earth did one calculation per second, it would take everyone over four years to do all the calculations that Aurora could do in one second.  A supercomputer with such capabilities could be used to safely simulate and test new weapons, design better batteries, wind-powered systems, or nuclear reactors.  On the health front, it could be used for research on cancer, cardiac issues, traumatic brain injuries, and suicide prevention.  One thing is certain though, it still won’t be able to predict the weather in Ohio.

In other company news, it seems Anheuser-Busch InBev has teamed up with Keurig to bring us a new type of cocktail machine.  The Drinkworks machine adds water, carbonation, and flavored alcohol pods to create cocktails such as Moscow Mules, Old Fashioneds, mojitos, or gin and tonics.  The companies are still testing different price points and are in talks to license known alcohol brands.  Another innovation comes from JP Morgan which announced a new type of “checkless” bank account this week. It gives customers access to mobile apps, branches, and ATMs.  You may be wondering, “what’s the innovation?”  Well, they plan on charging $4.95 per month for the benefit of you depositing your money with them.  That to me is not the kind of innovation I like.

In closing, I bring you the lawyers that once sued and beat Big Tobacco.  A new class-action lawsuit takes aim at real estate agents and the tools they use to do business.  The suit was filed in Chicago on behalf of anyone who sold a home through one of 20 of the largest listing services in the country over the past five years.  The suit alleges the National Association of Realtors has conspired to require anyone selling a home to pay the commission of the broker representing the buyer “at an inflated amount,” in violation of federal antitrust law.  If this case were to prevail, it could revolutionize the way Americans buy and sell the biggest asset they’ll ever own.  Now you know.

March 22, 2019


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