It was a relatively quiet week as investors waited for the Federal Reserve (Fed) meeting Wednesday. At the end of last year, the Fed anticipated raising rates three times in 2017. This past Wednesday was the first opportunity to raise rates and investors took a wait-and-see approach to avoid getting ahead of the Fed’s decision. Because it was so highly anticipated, when the Fed did make the announcement to hike rates 0.25%, it was largely met with a collective yawn.
What is rather unusual is the lack of larger swings in the market. So far this year, the Dow has only closed higher or lower by more than 100 points on 13 days. If this pace keeps up, 2017 will be the year with the second least 100-point moves since 2006. For clarification, a 100-point on the Dow represents only 0.48% Dow’s value. The low number of 100-point days comes alongside a host of other stats demonstrating just how abnormally quiet stocks have been. The CBOE Volatility Index has remained anomalously low, and the S&P 500 has not fallen by 1 percent or more since early October, the longest such streak since 1995. The consensus is investors are in a “buy-the-dip” mentality since the election last November.
In other news, with tax reform looking less likely this year, U.S. companies are making overseas acquisitions now rather than waiting for tax changes later. Intel announced Monday it is paying $15 billion to buy Mobileye, and in January Johnson & Johnson agreed to buy Switzerland’s Actelion for $30 billion. In both cases, the corporations are paying for their acquisitions completely with cash they’ve stashed abroad. Publicly listed U.S. corporations have announced more than $60 billion in acquisitions of targets outside of North America this year, more than double the amount in the same period a year ago, per Bloomberg. There’s too much cash on corporate balance sheets. That cash wants to go someplace, and if it can’t go home, it will travel. Congress’s non-partisan Joint Committee on Taxation estimates that U.S. corporations hold as much as $2.6 trillion of profit overseas that hasn’t been taxed in the U.S.
While we’re on the subject of tax reform, it might be a good opportunity to review some highlights of President Trump’s first budget proposal. The good news, I suppose, is that it does not touch mandatory spending programs like Social Security, Medicare, and Medicaid (which collectively make up 75% of total federal spending). What he addressed in his budget is the 25% which is considered discretionary spending. It should come as no surprise that the areas he wants to spend more on are those he talked about on the campaign trail, while those parts of the budget he wants to cut are ones he has been most vocal about since taking office. If one were to score the agencies regarding winners and losers under the current proposal, it would look like the chart above. In a nutshell, defense spending will increase approximately 10 percent while the EPA and aid to foreign countries would take the biggest hit. While the budget will most likely be tweaked in the coming weeks, it will undoubtedly have a positive impact on some sectors while making it more difficult for other sectors. The stock market will try to anticipate the winners and losers.
For the story of the week, I turn to YouTube. By now most of your have heard of YouTube, and many may watch videos on it regularly. I count myself among the latter group. But what I came across a couple of weeks ago caught me completely off guard. As of this month, people around the world now watch more than 1 billion hours of YouTube per day! For comparison sake, viewers of regular television programming watch 1.2 billion hours per day. While many of the clips found on YouTube are short, they clearly add up. YouTube put it in further perspective, pointing out that an individual attempting to rack up 1 billion hours of viewing would have to find a playlist that was 100,000 years long. It is a huge shift and one that reflects YouTube’s ascent to a primary media distribution platform. Google owns YouTube. Now you know.
March 17, 2017
Twelve straight record closes and a move above 21,000 marks another milestone for the market this week. Much of the appreciation since the election is due to the anticipation for deregulation, increased government spending, and tax reform. Some actions have been taken, but much more are in the pipeline (no pun intended) and could be difficult to gain traction not only with Democrats but also within the President’s party itself. We continue to enjoy the market appreciation but have been taking gains as part of the general rebalancing process. Diversification means owning those positions that may not be doing well at the moment, i.e. fixed income, but whose lack of correlation to the equity markets will provide respite when the tide eventually turns. And it will.
Has the market gotten a little ahead of itself? The answer depends on whether you believe President Trump will be able to achieve healthcare reform, tax reform, immigration reform, infrastructure spending, et al. Aerospace and defense names such as Boeing and Lockheed Martin rose after Trump proposed a $54 billion boost to defense spending. His plans regarding $1 trillion in infrastructure spending helped move shares of Caterpillar and other industrial stocks. Financials continue to rank among the top performers this year on anticipation of deregulation and interest rate hikes. These areas have become ubiquitously known as the “Trump Trade” and have outsized gains. While President Trump may giveth, he can also taketh away. Sectors like retail took it on the chin this week with renewed talk about a border tax on goods produced in Mexico and China. Utilities which have been spending billions upgrading to natural gas, oddly enough, are also hurting with a renewed focus on coal.
It was a good week for investors for another reason. The major brokerage companies, starting earlier this year, decided to cut trading costs. Just one month ago Schwab announced it was lowering its trading commission on stocks and ETFs to $6.95. This week Fidelity rose to the challenge and announced It is lowering its trading commission to $4.95. The same day, Schwab announced it would match Fidelity’s rate. The new commission rate is 50% lower than that at E-Trade and TD Ameritrade. As described in an article in Forbes, investment management fees are one of the smallest headwinds investors face. In fact, trading costs and taxes eat up even greater shares of returns than fees. This week marks a small victory for investors everywhere.
Let’s switch gears for a moment and talk about TV. For years the largest players in communications industry had a stranglehold on its consumers. Whether from a lack of competition or poor service and ever rising package prices, consumers had little choice. However, things are changing. Sling TV and Hulu were early innovators in streaming TV. This week we learned Google (Alphabet) is taking it to the next level. It plans on rolling out TV service this Spring, including thirty channels, local TV, and unlimited Cloud DVR for only $30 per month. The industry, reluctant to change, is being forced into a new future of streaming media and TV on any device anywhere. Fortunately, we all have a free front row seat to this coming attraction.
In closing, I came across another story about details. Last week was about an email sent by mistake that led to a substantial lawsuit. This week, it’s a typo that shut down some of the largest websites. The problem was traced back to Amazon’s hosting platform as part of its Amazon Web Services (AWS) a multi-billion dollar division within Amazon. And you thought they only sold stuff! After recovering from the problem, Amazon put up a post explaining what happened. While attempting to fix an issue with their billing system, “an authorized team member using an established playbook executed a command which was intended to remove a small number of servers for one of its billing subsystems.” There was just one problem with this: “Unfortunately, one of the inputs to the command was entered incorrectly, and a larger set of servers was removed than intended.” If there’s a moral to this story, it’s probably that even the best and most reliable can make mistakes. The other moral is details matter. Now you know.
March 3, 2017
Today the market recorded its eleventh straight record close. Investors, fearing they’ve missed the rise in the markets, continue to put money in, pushing it to new heights. Like I said last week, let’s enjoy it while it lasts.
Earnings season is winding down, and it looks like growth was a little better than expected. Revenues grew, in aggregate, by 5% while earnings grew by 7.5% year-over-year. Optimism on Wall Street, among corporate managers, has helped boost full-year estimates for 2017. However, the recent run has led some to wonder if the market has run a little too far. One analyst is warning stocks have become pricey relative to their historical averages; the S&P 500’s 12-month forward PE ratio is at its highest level since 2004. Not to put too fine a point on it, the market hit its tenth consecutive rise this week marking the longest run of record closes since 1987.
Enough about that. Let’s talk company news. Tesla remains a market favorite despite the many challenges it faces, including the money it is burning through with reckless abandon. The company announced this week it had revenue of almost $2.3 billion in the fourth quarter. However, it posted an earnings loss of $0.69 per share. The company’s insatiable appetite for capital spending remains strong as management announced later this year it will finalize locations for Gigafactories 3, 4, and possibly 5 (Gigafactory 2 is the Tesla solar plant in New York). In other news, Unilever rejected KraftHeinz’s $143 billion bid citing the sum of its parts are worth more than what’s being offered. While this explanation makes sense, it left Unilever shareholders wondering why management hasn’t done more to unlock this value. Unilever shares fell 10% on the news but recovered roughly half by week’s end. Speculation is rampant regarding KraftHeinz’s next move. Two names that keep surfacing are Mondelez, the maker of Oreos and Cadbury, and Danone, with brands like Dannon yogurt and Evian water.
Apple’s new spaceship-looking headquarters is opening to employees in April. After six years of construction and $5 billion, the new office space is just about ready to open. It sits on 175 acres and will hold all 12,000 employees, although it could take over six months to transition the employees to the new space. The 2.8 million square foot building is ring-shaped and utilizes the largest curved glass panels in the world. For those of you who are green, the location is powered by 100% renewable energy, running 17 megawatts of rooftop solar panels. Some of the more amusing nicknames floated are SteveHenge, The Jobsite, The Glass Donut, and Appcot. Let’s hope the new headquarters inspires some innovation. To read more about how this building was designed and the insane attention to detail click here.
Without getting too much into politics, some things are beginning to shape up. Based on speeches President Trump has made in recent days, it appears his priority is first to repeal and replace the Affordable Care Act (ACA). Later this year, perhaps a lot later, he’d like to reform both the corporate and individual tax code. And infrastructure spending has been delayed until 2018. Given the atmosphere surrounding his presidency, it appears he has a lot on his plate with the ACA and likely just as much when it comes to tax reform, specifically his own party’s ideas on a border tax. My gut is telling me these issues will take a lot longer than the president expects and may require more compromise than he wants to accept.
In closing, this week’s story is about details. Everyone, at one time or another, has sent an email or a text to the wrong person. Perhaps they hit the reply all button erroneously. It seems a company providing components for Uber’s self-driving car project inadvertently copied Google engineers. The email revealed drawings of Uber’s technology including drawings of 3-D sensors. The problem is, the drawings looked remarkably like Google’s own. Shortly after receiving this email, Google filed a suit in federal court against Uber, claiming Uber stole patents and trade secrets. The moral of the story is, don’t steal. And also, check your email recipients twice. Now you know.
February 24, 2017
Major stock market indexes carved out new highs as investors relaxed some of their concerns over trade wars and instead focused on the potential for large corporate tax cuts. The S&P 500 index reached a new high of 2,351 this week and crossed over a market cap of $20 trillion for the first time. Solid gains for Apple, JPMorgan, and Caterpillar helped push the Dow Jones Industrial Average (DJIA) to a new record of 20,635. While we don’t anticipate these gains to continue forever, we should enjoy them while they last.
Last week I talked about the House GOP border tax proposal. We looked at what effect it may have on the economy and the U.S. dollar. This week the CEOs of some of America’s largest retailers, including Target, Best Buy, Gap, and AutoZone, headed to Washington to make their case that an import tax would raise consumer prices and hurt their businesses. Best Buy circulated a flyer to lawmakers, which cites an analyst forecast that a 20% tax would wipe out the company’s projected annual net income of $1 billion and turn it into a $2 billion loss. However, not everyone is unhappy. A group of major executives including Boeing, General Electric, and Pfizer has formed a coalition to support the import tax.
In company news, Delta Airlines reported this week it would pay out more than $1.1 billion in profit sharing after its record-setting 2016. On tap for 2017, employees will receive a 6% raise in base pay, resulting in a total pay rate increase of 25% in two years. In other news, Apple has reclaimed its throne as the only $700 billion publicly-traded U.S. company. It is riding high on expectations for its 10th anniversary iPhone to be released later this year. And lastly, Amazon has announced plans to shake up the video conferencing market. It is taking on Skype, WebEx, and GoToMeeting with a new service called Chime.
If you haven’t been paying attention, you might not know that the insurance industry is in chaos at the moment. With costs skyrocketing in the Affordable Care Act (ACA) marketplace, many of the largest insurers have decided to scale back or in some cases exit completely. Humana, one of the largest health insurance companies, announced it would exit the ACA Marketplace in 2018. However, there is even more going on here than meets the eye. Mergers have been underway between Anthem and Cigna, and Humana and Aetna. In recent weeks, courts have ruled against both mergers because the combined companies would be too large and could exert monopoly power. With the mergers scuttled and the ACA foundering, the insurance industry is in a tough spot.
Of mild concern is a recent report showing FHA delinquencies are on the rise for the first time since 2006. The seasonally adjusted rate rose to 9.02% in the fourth quarter, according to the Mortgage Bankers Association. What could be at work is an easing in the underwriting. The FHA’s minimum credit score is 580, but average credit scores rose to 700 in the immediate aftermath of the housing crash. They have since dipped to 675. Another area of concern is student debt. Total U.S. student debt hit a record $1.31 trillion last year, the 18th consecutive year education debt rose. Since 2008 mortgage debt is down 8%, home equity debt is down 33%, and credit card debt is down 10%. However, auto loan debt is up 46%, and student loan debt is up a whopping 105%.
In closing, I turn to a controversial topic: government spending. Each year, Senator Jeff Flake compiles a book of what he terms egregious government spending. This year it is 200-pages and includes a $450,000 grant to research whether dinosaurs could sing and $1.5 million to analyze what happens to fish if they find themselves on a treadmill. The Internal Revenue Service spent $12 million on an email archiving service despite failing to install the activation software. If you’re interested in some of the more unusual ways our government spends our tax dollars, pull up a chair and download the “2016 Wastebook: PORKemon Go.” Now you know.
February 17, 2017