Browsing articles in "Weekly Market Update"

The Perfect Day

Jul 27, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

It was an earnings deluge this week as roughly one-third of the S&P 500 reported quarterly results.  So far, 87% of corporations that have reported earnings have exceeded Wall Street estimates, with FactSet now forecasting Q2 profits will be up 21% from a year earlier.  Having said that, investors are generally forward looking and will be watching closely for forward guidance.  As we discovered this week, those companies that reduced guidance took big hits.  One has only to look at Facebook and Twitter for the fallout.  Expect more landmines over the next couple of weeks.

Despite a few companies that had big misses, the majority are meeting expectations.  To a large extent, corporate tax reform has been a huge success in so far as companies’ earnings growth.  Second quarter Gross Domestic Product (GDP) was released today and while slightly below forecast, it came in at a sizzling 4.1% year-over-year.  For the sake of comparison, the average growth rate during an expansion is 3% which has been elusive for a very long time even during the current recovery.  This quarter benefits from a timing sweet spot, coming in after the deficit-busting cuts trickle through the economy, but before the effects of current tariffs are truly felt.  Some economists argue recent policies are simply pulling forward demand and the current growth trajectory is not sustainable.  Others argue that a rather large inventory build accounts for a disproportionate percent of the growth in Q2.  Either way, we expect Q2 to be the high-water mark for the year with GDP growth slowing to 3% in the third quarter and 2.5% in the fourth as the effect of tariffs take hold.

In other news, Boeing reported this week a growing concern over a pilot shortage.  The company projects demand for pilots will rise to 790K over the next 20 years.  Its projection is double the current workforce.  There is vigorous debate over the causes with many accusing the industry of making it increasingly difficult and expensive to become a pilot while offering entry-level pilots poverty level wages.  Ironically, the industry appears to be moving towards lowering the requirement from two pilots in the cockpit to only one, perhaps considering the dwindling number of pilots.  It should also be noted that the self-driving car movement isn’t the only form of transportation trying to remove humans from the equation.  Some airlines are now beginning to take more seriously the idea of autonomous airplane flight.  I guess time will tell.

While we’re talking about transportation, California always seems to be ground-zero with regards to new technologies and regulations.  In that vein, it had proposed increasingly rigorous fuel emission standards some years ago.  These standards went well beyond what the federal government had imposed and presented a dilemma for automobile manufacturers.  After all, it wouldn’t be practical or profitable to make one set of cars for California and another set for the rest of the country. This week the Trump administration challenged the state of California’s right to set its own fuel emission standard.  The EPA will attempt to pull back the waiver granted to California as part of the Clean Air Act and reset the standard back to the 2020 level of 35mpg per manufacturer fleet.

One last bit of news made me chuckle as it seems global commerce is not always as straightforward as one might think.  President Trump’s desire for Europe to buy more natural gas from the U.S. will face a reality test, as Russian gas is significantly cheaper and U.S. exporters may not want to rush to Europe since their gas fetches much higher prices in Asia.  One energy analysts put it this way, “Where gas goes is just dictated by dynamics of the global gas market and it’s not clear to me what any European Union policy maker could actually do to change that.”

In closing I want to share with you a study I came across this week.  The premise of the study was to discover what makes up the perfect day.  Of course, the answer can be quite different from person to person, but it sought to find out common characteristics of an ideal day for the average person.  There were plenty of characteristics, but the main ones included waking up at 8:15am with a sunny, spring-like weather forecast with temperatures reaching 74 degrees, and respondents being able to enjoy three hours outside.  They see themselves spending four hours with their family and three hours with friends, then coming home and hopping on the couch where they’d spend a few hours watching television.  When all is said and done, the perfect day would end with bed at 10:50pm.  Using these characteristics, researchers concluded the average person has only 15 ‘perfect’ days per year.  My goal is for more than the average.  How about you?

July 27, 2018

Tariffs: From Seafood to Mattresses

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

You wouldn’t know it if you weren’t paying close attention, but the market was up this week.  With all the tensions between President Trump and NATO, Theresa May, China, Mueller, etc. you’d think that things were going worse than they are.  In fact, Microsoft hit a new all-time high this week.  That’s not to say all sectors and industries are doing well, but instead to point out that there are pockets of strength that remain.  However, the big concern continues to be tariffs which now appear to be more than just a negotiating tactic but instead a policy strategy.

Let’s talk tariffs.  This week China imposed a retaliatory tariff on U.S. optical fiber products of up to 78% hitting primarily U.S. company Corning (GLW).  The White House quickly published a new list of tariffs calling for a 10% tariff on $200 billion worth of Chinese goods which will likely become official in about two months.  Ironically, fearing a trade war, exporters rushed shipments to avoid the coming tariffs and thereby pushed the June trade deficit to a record $28.97 billion giving President Trump further ammunition to use against China.  For now, financial markets so far have shrugged off the first round of tariffs, but a new list would mark an escalation.  However, the following industries have already begun to feel the heat:

  • The textile industry is front-and-center in the escalation of tariffs. As a group there have been broad declines, but companies hit particularly hard include PVH, Tapestry, Gildan Activewear, Fossil, Vera Bradley, and Skechers.
  • Also hit hard is the soybean industry. Soybean prices fell to their lowest price in nearly a decade with domestic supplies set to rise to the highest level ever on expectations that China will cut into exports.  The USDA expects soybean exports to fall 11% next year with other countries failing to offset the lost demand in China.

Looking more broadly, it appears the corporate tax reform has resulted in what many analysts had expected.  S&P 500 companies are on track to repurchase up to $800 billion in shares this year – a total that would top the 2007 record.  However, despite these record share buybacks, a full 57% of those companies are trailing the S&P 500’s YTD performance, which marks the highest ratio of underperforming stocks since 2008.  One must wonder if corporate executives are buying high, just as in the previous record year of 2007.  Among sizable repurchasers this year not seeing a very good return on investment is Oracle, McDonald’s, and Bank of America.

In company news, Starbucks has big plans to ditch plastic straws in favor or new lids and recycled paper straws.  Starbucks isn’t the first company to do this, but seems to get more than its share of attention.  The movement to reduce plastic is gaining traction.  PayPal announced it plans on spending $3 billion annually on mergers and acquisitions that enable it to acquire specific capabilities.  The company is ambitious in its plans to grow and has a healthy balance sheet to help it get there.  And lastly, P&G announced it is not immune from tariffs, but not from China as might be expected.  Instead, the company says the vast majority of its products will be impacted by tariffs in Canada after the Canadian government decided not to issue an exemption.  It seems our stalwart ally to the north is done playing “nice” guy.

In closing, I came across an article today that got me thinking.  There used to be a time when the titans of industry worked to make the world a better place.  For example, Rockefeller donated more than $500 million to various philanthropic causes.  In more modern times, we have Bill Gates and Warren Buffett who himself has given away more than $46 billion since 2000.  But it seems, imperceptibly gradual, that philanthropy has diminished over time.  There are perhaps many good reasons explaining away this observation, including the possibility that the premise is completely wrong.  However, I’d be interested in knowing your thoughts after reading the following article.   Survival of the richest: The wealthy are plotting to leave us behind.  Let me know.

July 13, 2018

Protecting Free Markets

Jun 29, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

It is hard to believe the second quarter is now behind us.  We were just celebrating the new year the other day.  How quickly the snow melts into spring flowers, and the spring flowers melt into the summer.  The big news this week had to do with tariffs and Supreme Court decisions.  There was a small uptick in volatility with the end of the quarter, but that is to be expected.

The news this week was tariffs.  What started as idle threats seem to have turned into the beginning of a trade war.  Both China and Canada have levied tariffs on U.S. products in retaliation for U.S. tariffs on steel and aluminum last month.  Our Canadian friends will impose tariffs on almost $15 billion worth of U.S. imports beginning Sunday, ranging from steel and aluminum to whiskies, mustard, toilet paper, washing machines, motorboats, and oddly enough maple syrup.  China reported it has an additional $450 billion worth of tariffs earmarked if the Trump administration chooses to escalate things further.  In economics we learned that every decision, from public policy to corporate projects, needed a cost-benefits analysis.  It’s what got Ford in trouble with the Ford Pinto and its exploding gas tank.  So where is the cost-benefit analysis in these tariffs?  I’ve yet to see who exactly benefits and who pays.  There will be winners and perhaps even more losers.

Not surprisingly U.S. auto manufacturers are crying foul.  To be taken with a grain of salt, an automotive trade group representing GM, Toyota, and Volkswagen says a 25% U.S. tariff on imported passenger vehicles, if imposed on national security grounds, would cost American consumers $45 billion annually, or $5,800 per vehicle.  They further argue, this hit alone would largely cancel out the benefits of the tax cuts.  Ironically, a couple weeks ago it was the rising price of gasoline that was going to wipe out the benefit of the tax cuts.  It seems the benefit of the tax cuts is doomed at this point.  No doubt, the proponents would argue that this gives good cause for manufacturers to build more plants in the U.S. to serve our market.  Along those lines, Harley Davidson announced this week it will shift production of motorcycles for European Union (EU) destinations from the U.S. for exactly the reason to get around EU tariffs.  So, there is a case to be made.

In other news, the Supreme Court ruled on several important cases they heard last Fall.  I won’t get into the politics of it since I’m sure there are those on both ends of the political spectrum who read this weekly email.  I will however provide links to the opinions of those cases.

And finally, you’ll be happy to know that all banks, except for one, have passed the Federal Reserve’s stress test this year.  The banks intend on increasing dividend payouts and buying back substantial shares in some cases.  Investors were pleased by the news.  The other sector that did well this week was Energy due to oil prices moving higher.  Increased demand due to the Fourth of July holiday could be part of it, however, some attribute at least some of the recent rise to the upcoming ban on all Iranian oil imports both domestically and abroad.  The White House expects not only our allies to abide by the ban, but also intends for China, Turkey, and India to follow suit.

I’m sorry I don’t have anything funny to close on, but I do want you to pay attention to one thing this weekend.  The Mexican presidential election is Sunday and it could be the beginning of a new era for Mexico.  The frontrunner, a politician named Andres Manuel Lopez Obrador (AKA Amlo), is strongly left-leaning and could present a challenge to President Trump’s agenda, i.e. immigration, the border wall, and NAFTA negations.  The populist movement that started here two years ago is burning bright across the globe, from Italy to Germany, and Mexico to Brazil.  Keep an eye on this election.  I have a feeling it will be consequential.

June 29, 2018

Innovating the Future

Jun 8, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

It was a surprisingly quiet week that saw the Dow Jones Industrial Average pick up almost 700 points.  I had to go back and double check my numbers because this stealth rise escaped even my notice.  While most of the attention is on President Trump and the G-7 meeting, there was a lot of company news that was reported this week, as well as a few other points of interest.  Let’s dive in.

It seems fast food innovation is picking up speed as these companies work hard to attract, retain, and in some cases, expand their customer base.  For example, McDonald’s has been testing self-serve kiosks allowing customers to place orders directly.  One surprising finding is that customers tend to spend more when ordering directly on a kiosk.  As a result, the company will be adding kiosks to one thousand restaurants each quarter for the next two years.  Perhaps a coincidence, McDonald’s sent an email out to U.S. employees this week stating there will be another round of layoffs announced at the June 12 town hall meeting.  Lastly, it appears President Trump and Kim Jung Un do have at least one thing in common:  They both love McDonald’s.  North Korean leader Kim Jong Un reported that he may allow McDonald’s into the nation as a goodwill gesture to the U.S.  I’m sure goodwill is his motivation.

In other food news, Kentucky Fried Chicken (KFC) is testing vegetarian options.  The company is devising a fake meat version aimed at the U.K. as part of a move by the British government to reduce calories by 20% per serving by 2025.  While I am not sure how I feel about fake meat, reducing calories is something I fully support.  And lastly, the International House of Pancakes (IHOP), which has been around since 1958, is looking to change its image.  The company announced it will rebrand soon, starting with a name change to IHOB.  Management is being coy regarding what the new name means, but many speculate the “B” stands for Burgers, Bacon, or perhaps most likely, Breakfast.  The full announcement should come soon.

In other news, IBM has once again retaken the title for the world’s fastest supercomputer.  The numbers are mind boggling.  The supercomputer dubbed Summit can perform 200,000 trillion calculations per second, or 200 petaflops.  That’s eight times more powerful than Cray’s Titan supercomputer and nearly twice as fast as the peak speed for Chinese supercomputer Sunway TaihuLight.  And some people don’t think AI is on the horizon?  The computer was developed at a cost of $200 million and will be used to apply machine learning to genetic data to find patters for treatments for Alzheimer’s, heart disease, and opioid addiction.  The next global ranking of fastest supercomputers comes June 25, but as of November, China held 202 of the spots compared to 143 for the United States.

While not all innovation is of the product variety, this innovation in marketing/sales caught my attention.  Mercedes Benz announced the launch of a new subscription service.  The services offer Signature, Reserve, and Premier tiers ranging in price from $1,095 to $2,995 per month.  Subscribers may choose from all the vehicle body styles offered in that subscription tier and may change cars as frequently as they choose.  With self-driving cars still on the distant horizon, and electric cars slowly gaining market share, it seems an expanded lease model may be an interim step toward a future in which people never really own cars like we do today.

I know I didn’t get to any economic data this week but rest assured there will be many weeks that you’ll wish I had other things to talk about.  So in closing, I want to bring you a bit of news that might just help you live longer.  Scientists from five universities have discovered that walking faster could add years to your life.  Before you scream fake news, there just might be something to this.  Walking at an average pace was linked to a 20% reduction in the risk of mortality compared to walking at a slow pace, while walking at a brisk pace was associated with a risk reduction of 24% according to the study.  A similar result was found for the risk of dying from cardiovascular disease.  Also, the study found it’s not too late to start.  In fact, the benefits were far more dramatic for older walkers.  Average pace walkers aged 60 years or over experienced a 46% reduction in risk of death from cardiovascular causes, and fast paced walkers a 53% risk reduction.  So, get out this weekend and walk a little.  It might just add some years to your life.  Now you know.

June 8,2018

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