Browsing articles in "Weekly Market Update"

Madness in the Markets

Oct 12, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

For as much volatility as we saw this week, you would think there would be a negative catalyst of some kind.  Nothing could be further from the truth.  What we actually saw this week was fear for the first time in some years.  Fear can come on quickly and is often irrational as was the case this week.  Additionally, in this day of computer trading and artificial intelligence, even the smallest ripples in the market can make significant waves.  Whether it was program trading creating a tsunami of sell orders or retail investors fearing the future, it is clear that there is an underlying unease in the markets.

Stocks were battered in two days of volatile trading amid growing concerns that rising interest rates, higher costs, and trade tensions would squeeze corporate profits.  The S&P 500 lost 5% this week which in the scheme of things isn’t as large a drop as it may feel.   For the year, the index remains up 4% (including dividends).  While this may be less than we’ve grown to expect, we should remember that the market has only been down in one of the last six years.

What made this week feel worse than it should is that the sell-off was widespread, with few areas of the market escaping unscathed.  However, the market sell-off is not a reflection of weak economic data.  U.S. economic growth, employment and wage data remain strong.  Furthermore, business and consumer confidence measures are high, and third-quarter corporate earnings are on track to post a record-setting 28% year-over-year gain.

So, what is at work here if not weak economic data?  It turns out that strong economic data, combined with the Federal Reserve’s ongoing tightening strategy, have caused U.S. interest rates to rapidly rise.  At the same time, wage growth and higher input costs suggest inflation pressures may be building, even though Thursday’s report on U.S. consumer prices came in lower than expected.  Ultimately, investors fear higher interest rates will cut into corporate profit margins.  In addition, stock investors view rising interest rates as a threat, because higher fixed-income yields may become more appealing than stock dividends.

Part of being an investor is understanding that the market can sometimes take on a life of its own regardless of the fundamental and economic data.  This week was a good example of this phenomenon.  With proper diversification, we can minimize volatility and downside risk, while allowing for the market to come to its senses.  As long as we don’t try to time the ups and downs of the market, in the long-run, we will come out ahead.  History teaches us that the key is to stay the course even when our emotions are telling us otherwise.  In fact, sometimes these events present the best buying opportunities for those courageous enough go against the tide.

In closing let’s talk about something a bit less serious.  When you think of the largest employers in the United States which ones come to mind?  For me it is General Motors, UPS, McDonald’s, and maybe General Electric.  Well it turns out the times have changed.  While I somehow forgot Walmart, which is the largest U.S. private employer with 2.3 million employees, it seems Amazon is the second largest with 541,000 employees!  Rounding out the top five are Kroger (443,000), Yum! Brands (420,000), and The Home Depot (406,000).  Would you guess that IBM comes in sixth with 380,000?  It seems the service and retail industries really have replaced manufacturing in this country.  Now you know.

October 12, 2018

Hello Fourth Quarter

Sep 28, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Investors held their breath this week as we headed into the end of the third quarter.  This period typically involves mutual funds and institutional money managers making last minute trades.  With large amounts of money shifting into and out of sectors, it is not uncommon to see large swings, however, that did not happen this quarter.  To a large degree politics took center stage with additional tariffs on China and soon Iran, the Federal Reserve’s vote to hike interest rates, and the Senate Judiciary Committee hearings on Supreme Court nominee Brett Kavanaugh.  There was enough to keep everyone occupied this past week.

It didn’t get much attention, but on Monday an additional $200 billion in tariffs were placed on China.  In retaliation, China imposed an additional $60 billion in tariffs on U.S. goods including liquified natural gas and certain aircraft.  Unfortunately, talks have broken down between our countries and each side believes it has the upper hand.  While tariffs can create opportunities and/or leverage in trade negotiations, they unfortunately also create higher prices for U.S. consumers.  We haven’t seen inflation rise sharply yet, but it is reasonable to think that if these tariffs persist, we could begin to see inflation rise next year.

Sanctions were also in the news this week as President Trump, speaking at the United National General Assembly, says the U.S. will reimpose nuclear sanctions against Iran to resume November 5th.  He spoke very directly to not only Iran, but also our European allies.  However, the EU isn’t thrilled with the new direction and is proposing a special payment channel allowing companies to legally continue financial transactions with Iran without exposure to U.S. sanctions.  The schism between the U.S. and the EU will almost certainly widen if this plan is implemented, allowing European companies to circumvent the sanctions.

An unintended consequence of these sanctions is that gas prices are creeping higher.  Prices as the pump have risen lately with a gallon of gas closing in on $2.90 locally and well over $3.00 in parts of the West.  To some extent this is due to fears regarding the Iran sanctions which mean 1.5M barrels per day of oil will be taken off the market.  Compounding the sanctions, OPEC leaders signaled they would not raise production and the Trump administration announced it has no plans to release strategic reserves to make up for the decrease in supply.  Needless to say, these events are putting pressure on oil prices which have climbed to $80/bbl and could climb as high as $90/bbl in coming months according to J.P. Morgan.

One industry whose fate rides on oil is the airlines which are beginning to feel the pinch.  Airlines had a difficult week but there was a silver lining of sorts.  The lobbying arm for the industry scored a victory in Congress as bipartisan congressional legislation dropped plans to mandate “reasonable and proportional” baggage and change fees.  Not wasting any time, many airlines raised baggage fees including Delta which now charges $30 for the first checked bag and $40 for the second.  United Airlines, Jet Blue, and American Airlines also raised fees which virtually guarantees that higher checked bag fees are here to stay.

Perhaps the biggest non-news this week is that the Federal Reserve decided to raise interest rates for the third time this year.  This was almost completely expected and therefore did not move the markets.  Based on the minutes from the meeting, the Fed anticipates hiking rates again in December, with as many as three more hikes next year.  Its goal is to bring the federal funds rate to 3% by the end of next year, but could possibly overshoot the mark a bit if the economy looks like it can handle it.

In closing, I want to talk a little bit about the blockchain.  Over the past two years you may have heard a lot about blockchain technology and not realized it.  The mathematics behind the blockchain was initially proposed by Satoshi Nakamoto (whose real identity remains a mystery to this day) and is the foundation for cryptocurrencies like Bitcoin.  However, there are real world applications for this technology that go beyond the original premise of an alternative currency.  For example, Walmart announced this week that all suppliers of leafy green vegetables to its stores will be required to begin uploading their data to IBM’s food safety blockchain by this time next year.  Doing this will make the food supply chain more transparent and traceable in the event of an illness outbreak.  What used to take over a week to trace will now take 2.2 seconds according to IBM.  While Bitcoin may be a nonstarter for most, blockchain technology will likely be widely adopted by companies in the years ahead.  Now you know.

September 28, 2018

Paging Larry

Sep 14, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Despite the would-be hurricane, it was a pretty good week in the markets.  Apple introduced its next round of product updates, Tesla looks like it just might meet its production goals, and the nastiness of politics didn’t rear its ugly head this week.  Truthfully, while mainstream media focused on Hurricane Florence, the Dow Jones Industrial Average (DJIA) quietly gained a couple hundred points.

Let’s get the economic news out of the way.  The Federal Reserve released its Beige Book this week and it showed that economy continues to expand at a “moderate” pace.  Labor markets remain tight around the country, with most districts experiencing widespread shortages of both high-skill and low-skill workers.  Wage growth is mostly moderate, but some districts are seeing big wage gains for construction workers.  I think the takeaway is that things are continuing to improve moderately.  Along the same lines, the University of Michigan Consumer Sentiment Index jumped above 100 in September which is the second strongest read since 2004.  For now, it’s full steam ahead.

In company news, Apple held its annual WWDC event during which it announces its new products.  If you’re in the market for an iPhone or an Apple Watch, you’ll be pleased by the new offerings.  I am still somewhat unhappy about the lack of a headphone jack and its push to Face ID, but truth-be-told, they make good products at a very premium price.  In other company news, it seems Larry Page, CEO of Alphabet (otherwise known as Google), has been missing for some time now.  He’s not missing in the literal sense, but it seems he has quietly stepped aside from the day-to-day operations to instead spend time on his private Caribbean island.  Sources say Page’s absence is “bordering on emeritus, invisible to wide swaths of the company.”  Mr. Page hasn’t presented at a product launch in five years or participated in a press interview in over three.  Perhaps he just needs a break, but investors are beginning to wonder.

In a bit of further intrigue, there is a possible coup afoot.  We learned this week there may be a plot to oust Theresa May, the Prime Minister of the U.K.  The BBC reports that a group of fifty lawmakers in Theresa May’s government, who oppose her proposals for a post-Brexit deal with the EU, have met to discuss how and when they could force her out of office.  A leadership contest could ensue if fifteen percent of conservative lawmakers, currently 48, demand a vote of no confidence.  Creating further intrigue, the U.K. government met yesterday to discuss the eventuality of a “no-deal” Brexit.  It is reported they are readying a second set of documents outlining further preparations in case it leaves the EU without an agreement in March 2019.  Brexit chief Dominic Raab warned that the U.K. will not pay the $51B break-up fee if there is no final Brexit deal.

In closing, let’s talk about Amazon.  The company has come under some scrutiny lately about its workplace policies and treatment of its employees.  Mr. Bezos was worth $108 billion at the end of last year and has gained over $50 billion in net worth since the start of this year.   So, we have the richest person in the world and an internet retail giant that reportedly took in $5.6 billion in U.S. profits last year.  However, it might come as a surprise, as it did to me, that Amazon paid zero dollars in federal income taxes last year.  In case you might be wondering how this is legal, it seems the company’s global headquarters is not in Seattle as you might think, but instead in Luxembourg, a country of 1,500 people.  So, while President Trump may demonize Mr. Bezos for his ownership of the Washington Post and Amazon’s use of the U.S. Postal system, it seems there could be another reason you might not like the man.  Going back to 1995, Mr. Bezos originally wanted to build Amazon’s U.S. headquarters on a Native American reservation near San Francisco to skirt U.S. federal income taxes, but California stopped the deal from going through.  Instead he made the headquarters Luxembourg.  Now you know.

September 14, 2018

Happily Ever NAFTA

Aug 31, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

The markets drifted higher again this week.  While the news out of Washington D.C. continues to play out like a bad soap opera, the economy deserves an Oscar nomination for best picture.  It seems investors aren’t getting too caught up in the daily drama, tweets, rumors, and accusations.  Investors would do well to keep their eye on the destination and not focus too much on the hurdles along the way.

So this was the week that NAFTA was going to be resolved.  A deal was reached with Mexico on Monday, but as of this writing negotiations with Canada are faltering.  The White House wanted to reach a deal by the end of today so it could send the agreement to Congress for a 90-day review required by law.  Mexico will swear in its incoming president, Andres Manuel Lopez Obrador, on December 1.  If a pact isn’t signed before then, Lopez Obrador could demand changes – and a deal that took years to negotiate could unravel.  Trade between the three countries totals more than $1 trillion annually.  As it stands, the proposed terms would strengthen North American manufacturing, along with improving intellectual property, labor, and environmental standards that could benefit U.S. companies and American jobs.

While we’re on the subject of trade, no headway was made with either the European Union or China.  In fact, both offered concessions this week and were rebuffed by the White House out of hand.  It seems the current approach is to make them sweat a little with an additional $200 billion in tariffs being proposed as early as next week.  With some U.S. farm products getting slammed by retaliatory tariffs, the Trump administration is prepared to begin its emergency plan for agriculture right after Labor Day in a “three-pronged” approach that will initially include about $6 billion in aid.  Agriculture Secretary Sonny Perdue declared this week that, “farmers cannot pay their bills with simple patriotism.”  Indeed, they cannot.

In company news, Starbucks decided to roll out pumpkin spice in its earliest debut ever for the popular fall drink.  Starbucks introduced the drink in 2003 and it is now the company’s top-selling seasonal drink.  One wonders when it will become a permanent fixture on the menu.  In other news, Tesla lost its chief people officer.  I had never heard the term nor did I know such a position existed.  Apparently, the CPO is like an HR strategist and has become an important position for many Silicon Valley companies as they each pick off talent from one another.  Another interesting tidbit on Tesla is that Volkswagen wanted to take a $30 billion position in the company, according to the Wall Street Journal, but that Musk reportedly was uninterested in giving Volkswagen such a large stake in the company.  It makes one wonder if he really intended on taking the company private after all.  That will be one for the SEC and courts to figure out.

Before I finish this week, we need to talk about artificial intelligence (AI).  Innovation is moving quickly from automation, to self-driving cars, to the latest – AI.  I am seeing more and more stories about projects and developments regarding this field that it is becoming hard to ignore what seems inevitable.  Under the Defense Research Project Agency’s (DARPA) artificial intelligence program, Raytheon is developing a first of its kind neural network that explains itself.  It aims to help humans understand, appropriately trust, and effectively manage the emerging generation of “artificially intelligent partners.”  Along the same lines, JPMorgan poached a senior executive from Google who had headed up Google’s cloud-based artificial intelligence.  He will now be head of asset and wealth management artificial intelligence technology.  And Reuters reported this week that artificial intelligence will play a key role in the advancement of diagnoses and treatments across the healthcare spectrum.  Siemens has leveraged AI to develop a digital heart that mimics the electrical and physical properties of real cardiac cells enabling surgeons to run simulations before surgery, to see if a pacemaker is appropriate for a particular patient.  A shortage of doctors in China is stoking demand for AI tools to analyze medical images.  Alibaba is one of the early leaders, using cloud and data systems to develop AI solutions to analyze CT and MRI images.  AI is making progress on many fronts and at a rapid pace.  The technological singularity may not be as far in the future as you may think.

In closing I turn to a different type of innovation.  It seems Mondelez has been burning the midnight oil to come up with new flavors for Oreos.  While only available in China (thankfully), its latest releases are hot chicken wing flavor and wasabi-flavored Oreos.  However, in the United States we have two new permanent flavors, chocolate peanut butter pie and pistachio thins and three limited addition flavors, Good Humor strawberry, peppermint bark, and rocky road trip, which should be available by the end of the year.  While technological advances are great, it is sometimes nice to look back on our childhood memories, only to have them leapfrog forward into the future.  Now you know.

August 31, 2018

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