Browsing articles in "Weekly Market Update"

Impossible but Not Necessarily Healthy

Jun 7, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

In recent weeks, we’ve watched the markets slowly sell off due to trade war rhetoric and moderating economic data.  Fortunately, investors have a new champion in the Federal Reserve (Fed) which announced this week it will do whatever is necessary to stabilize the U.S. Economy.  The market took this to mean that the Fed plans on cutting interest rates, possibly as soon as this year.  In fact, analysts put a 90% probability of a rate cut in September, rising to 97% by December.  What the Fed sees and how soon it acts remain unclear.  However, when the Fed changes policy, it is worth paying attention.

Despite further talks, there has not been any progress (at least that we are aware of) on the trade front.  The President said this week he will wait until after his meeting with Chinese President Xi, at the G20 meeting at the end of this month, to decide if further tariffs are warranted.  What’s new this week is that President Trump now appears ready and willing to impose trade tariffs on Mexico over the issue with illegal immigration.  As soon as Monday, we may hear about a 5% tariff, rising by 5% each month, up to 25% on all goods coming into the United States from Mexico.  Unlike the impasse with China, it is believed this negotiation will be resolved quickly.

I’ve talked a lot lately about how tariffs can hurt economic growth and are generally viewed by scholars and conservatives alike as a bad idea.  However, there are some who benefit from tariffs.  It appears Vietnam has so far emerged as the largest beneficiary of this trade war, gaining an estimated 8% of its gross domestic product (GDP) from new business.  Other major beneficiaries are Taiwan, Chile, Malaysia, and Argentina who have seen additional exports to the U.S. and China.

Aside from troubles with China and Mexico, Venezuela (which hasn’t been in the news lately) is teetering on the brink of insolvency.  Earlier this week, the country failed to make an interest payment on a gold swap agreement valued at $750 million with Deutsche Bank, leading the lender to take possession of the gold used as collateral.  The loan that Deutsche Bank made in 2016 was backed by 20 tons of gold as collateral.  Venezuela’s gold holdings, one of Maduro’s few sources of capital to keep his regime going and his military forces loyal, have been shrinking.  In March, Venezuela’s central bank missed a deadline to buy back gold from Citigroup for almost $1.1 billion.  And earlier, the Bank of England refused to give back $1.2 billion worth of Venezuelan gold.  This doesn’t bode well for either the government or the people of Venezuela.

Enough talk about geopolitical issues.  Let’s talk about some good news.  The 30-year mortgage fell to a two-year low this week.  The 30-year fixed-rate mortgage averaged 3.82% down from 4.54% this time last year.  With rates dropping below 4%, there are over $2 trillion of outstanding conventional mortgages eligible to be refinanced – meaning the majority of what was originated in 2018.  Also worth noting, U.S. household net worth made the biggest quarterly gain in 14 years.  U.S. household net worth rose 4.5% in Q1 2019, more than offsetting the 3.6% decline in the last quarter of 2018.  Household debt growth moderated to an annual rate of 2.3% from 2.8% last quarter, while the household saving rate improved to 6.7% of disposable personal income from 6.5% in Q4.

In closing I turn to food, which seems like a regular occurrence.  This week we learned that chicken may be the new red meat.  New research, published in the American Journal of Clinical Nutrition, is raising questions about poultry and cholesterol.  The small study found that consuming high levels of red meat or poultry resulted in higher blood cholesterol than consuming an equal amount of plant-based protein.  The main takeaway is that we should all be watching saturated fat.  Call me skeptical, but the release of this study seems extraordinarily timed with the upsurge of plant-based protein that is making headline news, i.e. Beyond Meat, the Impossible Burger, etc.  Oddly enough, while the plant-based proteins may be better for the environment, they are not exactly a healthier alternative.   An 8oz serving of Impossible meat has 28 grams of total fat (36% daily value) and 16 grams of saturated fat (80% of daily value).  To its credit, it has no cholesterol (which the study appears to have focused on).  Now you know.

June 6, 2019

Turning Water into a Lifestyle Product

May 31, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Despite an abbreviated trading week, the markets had a lot to say.  The needle ticked a bit higher on the “fear” gauge as investors moved money into fixed income driving interest rates lower.  The 10-yr treasury, that had been at 2.75% just two weeks ago, now hovers around 2.2% which represents a large move in a rather short period of time.  What’s driving volatility can be summed up in two words – trade and uncertainty.  There’s too little of the first and an abundance of the second.

Optimism, exhibited just a few weeks ago, is waning as investors and analysts grapple with the fallout of worsening trade rhetoric between China and the United States.  The hope had been that both countries could knock out a deal, perhaps not to either’s liking, but allowing each to save face and claim victory no matter how small or real the outcome.  That hope is fading as both sides appear to be digging in for the long haul.  The S&P 500 has pulled back over the past month and currently sits right at its 50-day moving average.  As long-term investors, we recognize that times like this present buying opportunities and should be viewed as part of the overall investment cycle.  Additionally, having a well-constructed portfolio that is properly diversified can help reduce some, but not all, of the volatility.  Keeping a positive outlook is vital during these rough patches.

So, what’s going on with trade that has investors troubled?  In retaliation for putting a ban on Huawei, China announced it is halting all soybean purchases and is considering putting a moratorium on the sale of rare earth elements to the U.S.  Rare earth elements, while not actually rare, are a crucial component of products that cut across the U.S. economy, not only in the tech sector but the energy, automobile, and defense industries as well.  We know agriculture is being hurt by these tariffs as demonstrated by the President’s proposal to give $16.5 billion in aid to farmers this year.  Further, over 95% of rare earth elements come from China and while it would be an inconvenience if we couldn’t buy the next smartphone, it is another matter if it impacts missile guidance systems, antimissile defense systems, and satellites.  While not impossible, it will take time for the United States to rebuild its rare earth elements industry.  That gives China real leverage for now.

In other trade news, Germany, France, and the U.K. created a workaround for those countries wishing to continue to do business with Iran in the face of U.S. sanctions.  European countries broadly oppose President Trump’s decision to withdraw from the nuclear accord.  The proposed plan would allow companies to trade with Iran without the use of U.S. dollars or American banks.  However, this proposal is drawing heat from U.S. officials, leading to a strongly worded letter issuing a threat of punishment to those countries deciding not to comply with the trade restrictions.  While it does not stipulate what the consequences would be, it is reasonable to believe that sanctions could be placed on those non-complying countries.

In company news, the New York Times reported that Google now has more temporary and contract workers (121,000) than actual employees (101,000).  Though they often work side by side with full-time employees, they are employed by outside agencies.  In response, Google CEO, Mr. Pichai announced that by April 2020 Google would commit to pay temporary staff $15 per hour and offer 12 weeks of parental leave and healthcare by 2022.  Perhaps the company cannot attract enough qualified individuals to fulfill its ranks.  On the other hand, Google isn’t the only company in Silicon Valley to use these practices.

In closing, let’s talk about water.  The bottled water industry has been on an exponential growth trajectory in recent years.  I’m going to sidestep the controversy over the sourcing of said water or even its quality.  However, let’s talk about its marketing.  This week I learned there is a startup marketing its water as “Liquid Death” and runs $21.99 for a 12-pack.  The cans are festooned with dripping golden skulls and the tagline, “murder your thirst.”  It isn’t flavored and claims no health benefits.  It is simply water with a big marketing budget.  To be fair, it isn’t the first to make such a splash.  Others include “Bulletproof FATwater” and LIFEWTR, each suggesting different benefits.  Perhaps it’s just me, but has this gone a little too far?  Now you know.

May 31, 2019

Happy Memorial Day!

May 24, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

It’s been a slow melt over the past four weeks with the market ending each week a little lower.  May has not been a favorable month for investors.  This week was no different than the last few, the driving force being a lack of progress on trade with China.  In addition, there is Theresa May’s resignation as British Prime Minister, an on-again, off-again Twitter war with Iran, and a widening dislike between the President and Democratic leadership on Capitol Hill.  To be fair, the markets are holding up well given the circumstances.

Putting the aforementioned aside, there is a lot to report on corporate news.  Despite booming pickup truck sales, Ford announced it will be restructuring (again) with the goal of saving $600 million annually.  The company reported it plans to cut 7,000 salaried jobs by August or roughly 10% of its global salaried workforce.  Ironically, Fiat Chrysler released plans to build a $1.6 billion assembly plant and invest $900 million to modernize a second plant in Detroit.  I’m not sure these two announcements cancel each other out, but it is a welcome sight to have production come back to Detroit.

The technology sector had a difficult week after President Trump put a ban on Huawei, the largest telecommunications-equipment company in the world and second largest smartphone manufacturer ahead of Apple.  Oh, and it is in China.  Technically, it is a trade blacklist that bans companies from selling components that Huawei uses to assemble its own finished products.  Those companies affected include Qualcomm, Xilinix, Broadcom, Corning, Micron, and STMicroelectronics.  So why did the President put a ban on Huawei?  That’s not as clear.  The official line is that, “Huawei’s hardware puts the U.S. at risk for espionage.”  However, there is almost certainly more to this story than we’re being told.

Boeing’s woes have temporarily subsided with the software update on its 737 MAX completed, or more specifically its MCAS system.  The FAA announced it expects the grounding to be lifted as soon as late June.  However, I say “temporarily” because China’s top three airlines have called for compensation from Boeing for losses incurred by the grounding and delayed deliveries of 737 MAX planes.  I suspect these airlines won’t be the only ones demanding compensation and your guess is as good as mine how much they will be able to extract from Boeing.  Perhaps bad timing, but Boeing’s next commercial jet design, dubbed the 797, is expected to have a cockpit that seats only one pilot, with a second ground-based pilot “monitoring several aircraft.”  I can’t imagine this is a good time to be proposing such a radical change.

In other news, Facebook reported it removed nearly 3.4 billion fake accounts from October, 2018 to March, 2019.  By its explanation, this is twice the number of fraudulent accounts deleted in the previous six-month period.  As a result, the company estimates that 5% of its 2.4 billion monthly active users are fake accounts.  This is a staggering number of fake accounts and really calls into question whether the novelty of Facebook has worn off in the face of bad actors with malevolent intent.  Could the era of social media be coming to a natural end?

In closing, let’s talk about genetically modified food (GMO) which has been around for some decades.  The goal of scientists has been to make our food more resistant to pests, help them grow faster, and make them drought resistant.  Among the many success stories are corn, soybeans, sugar beets, alfalfa, canola, and squash.  Up until now genetic modification was solely done in the realm of plant based food.  This week, AquaBounty Technologies announced the FDA has approved its request to produce genetically modified salmon in the U.S.  The genetic modification causes the salmon to grow twice as fast as those in the wild.  The company touts sustainability while its opponents call the product a “frankenfish.”  The company plans to initiate operations at its fish farm in Indiana.  Now you know.

May 24, 2019

How to Monetize a Traffic Jam

May 17, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

The markets look to close the week lower with trade woes taking center stage.  After trade talks broke down last Friday, it was hoped that both parties would come back to the table dedicated to hammering out a deal.  Instead, both China and the United States dug in for the long haul with both sides arguing they are in a position of strength.  Investors are uneasy given the economic uncertainty.  Fortunately, the effects of the tariffs won’t be felt immediately, giving both parties a bit more time to figure things out.

You might be wondering what industries will be most affected by the tariffs?  As it turns out, a lot.  The companies with the most exposure are Caterpillar, Boeing, and Apple.  However, the industries range from planes, trains, and automobiles, to agriculture and apparel.  China retaliated this week by raising tariffs on $60 billion of U.S. goods starting June 1.  Fortunately, President Trump announced he will delay a trade war with Europe on automobiles for another six months.  He also announced just two hours ago that a deal has been reached to lift steel and aluminum tariffs on Canada and Mexico.  So, while issues with China persist, there is progress being made on other fronts.

One industry hit particularly hard is agriculture and specifically farmers growing soybeans.  The Trump administration is planning on providing about $15 billion in aid to help U.S. farmers whose products were targeted by the newly unveiled Chinese tariffs.  This group has been among the hardest hit in the trade war, with U.S. soybeans falling to their lowest price in a decade and shipments to China dropping to a 16-year low.  A new aid program would be the second round of assistance for American farmers, after the Department of Agriculture’s $12 billion aid program last year.

In economic news, the May consumer sentiment reading is the highest since January 2004.  It seems people are generally happy with the economy.  Given the historically low unemployment rate and relatively high labor participation rate, it might not come as a surprise.  On the flip side, household debt rose for the 19th straight quarter, topping $13.67 trillion at the end of Q1.  This figure grew by almost $1 trillion in just twelve months according to the Federal Reserve Bank of New York.  Before you grow concerned, one metric we look at closely is the delinquency rate and as it happens, delinquencies are down slightly year-over-year.  In fact, virtually all the credit card companies reported April credit card charge-offs fell as of the end of April.  The other bit of good news is that business inventories remained unchanged in April.  This is important because as the economy slows we might expect to see inventories build as consumers slow their spending.  Inventories can be the proverbial canary in a coal mine when it comes to the economy, giving some insight ahead of the headline economic data.

In closing, I bring you news of a new fast food concept.  We’ve all heard about the crazy traffic in and around Los Angeles.  No doubt, some of you may have found yourself in it at one time or another.  Burger King wants to make your commute more enjoyable and perhaps less stressful.  They introduced the Traffic Jam Whopper this week which is a direct-to-car delivery service, which uses motorcyclists and real-time data to deliver food to those stuck on the road.  The whole thing seems borderline dystopian, as Burger King will target digital ads positioned around the biggest traffic jams and will press users to download the app to purchase burgers while stuck on the freeway.  If this works, imagine what else might be delivered straight to your car?  Imagine the possibilities.  Now you know.

May 17, 2019

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