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Earnings Announcements Kick Off

Jan 18, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

After a tumultuous end to 2018, investors are back with an appetite for equities.  A good portion of last year’s sell-off has now been recovered in the first couple weeks of the year as hopes for a détente between the U.S. and China take hold.  Having said that, the ongoing government shutdown will be an issue for the economy both now and potentially in the future.  The downside is, we won’t know since the agencies tasked with putting out economic data are currently furloughed.  Quite literally, the economic data investors and politicians depend on for both policy and investment decisions is missing in action.

This week started fourth quarter earnings announcements.  For the most part, this week was about the financial sector and a surprisingly large number of banks reported within days of each other.  If I didn’t know better, I might think this was intentional.  The takeaway is that banks’ balance sheets remain strong, credit quality has not deteriorated, and loan write-offs have not picked up.  Many of those reporting this week saw nice gains.

On the other hand, the economic data, that is making its way out, is a bit mixed.  Consumer sentiment is down which shouldn’t come as much of a surprise given the government shutdown.  But more importantly, European data suggests Europe is weakening.  Germany’s growth has slowed to a five-year low after reporting dismal industrial production figures last week.  There are indications that a global slowdown is afoot.

As for company news, we hit the mother lode this week.  There was so much I think the best way to summarize it is with bullet points:

  • Volkswagen announced it is building a new EV (electric vehicle) plant in Tennessee. Ford announced it is planning a fully electric version of its F-150 pickup truck.  And Toyota executives were quoted as saying they believe the EV market is being overbuilt and that demand will lag the huge buildup in supply in coming years.
  • PG&E filed for bankruptcy, disclosing the substantial liability it faces after the fires it inadvertently started in California. A judge this week ruled that the company is in fact at fault in creating the fires.  To put thing in perspective, PG&E is California’s largest utility provider.  Considering how large California is relative to most states, this is a monumental problem.
  • Netflix decided to raise its monthly subscription price for the third time in as many years. While the price increase is nominal at approximately $2 per month (depending on tier), it highlights the increasing costs of producing a large amount of content.  The company had $4.9 billion in debt as of Sept. 2017, $8.3 billion as of Sept. 2018, and $12 billion just three months later.
  • Tesla announced it plans on reducing its workforce by 7% in coming months. Much like Netflix, it has a debt “issue” which is looming.  It has a bond in the amount of $920 million coming due in March.  The catch is, if the stock price is above $359 at the time it matures, the company can convert the debt into equity thereby avoiding a cash crunch.  Today’s move suggests the company is feverishly trying to cut expenses with the hope of pushing the stock price above this threshold or at the least, have the cash on hand to settle the bond at maturity.
  • The judge overseeing the Sears bankruptcy awarded the liquidation to ESL Holdings, which just happens to be ex-CEO Eddie Lampert’s holding company. While the media heralded the last-minute proposal as having tremendous benefit to both the company and its employees, I’m less sanguine.  Lampert has a long history of taking advantage of the Sears corporation for personal benefit.  The cynical part of me believes this is a play for the property and it won’t be the last time we hear about Sears closing for good.
  • Lastly, Amazon announced it now has more than 100 million subscribers to its Amazon Prime service. Is there anything that can stop this company?

In closing, I leave you with a sobering statistic.  A recent study revealed that one in five millennials (those age 18 to 34) expect to die without ever having paid off their debt.  The average millennial has about $32,000 in personal debt, excluding home mortgages.  Apparently, that debt is both crushing and endless.  Just over 60% of millennials with debt don’t know when, or if, they’ll ever be able to pay off what they owe.  That includes roughly 42% of millennials who don’t know when they’ll be able to wipe out their debt, and almost 20% of those who expect to die in debt.  Along the same lines, it was reported this week that debt is the primary reason homeownership is down among this demographic.  It may be easy to vilify young adults these days, suggesting they are lazy, lack ambition, and are too complacent.  But they do face headwinds in their lives and careers that prior generations may not have experienced.  It’s worth thinking and maybe even talking about.

January 18, 2019

To Tip or Not To Tip?

Jan 11, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

The old adage no news is good news held true this week.  The markets were relatively calm ahead of fourth quarter earnings announcements which will begin next week.  There were a few companies in the retail and technology sectors who lowered guidance ahead of earnings season, presumably to allow the markets time to digest the news.  It is yet to be seen whether others will follow suit or if this is simply company specific.  However, it seems reasonable that CEOs may want to lower expectations for 2019 given what we know about the economic and political headwinds.

Along those lines, the current government shutdown is in its twenty-first day, tying the record for the longest such case in American history.  With both sides believing they have leverage, I don’t expect the shutdown to be resolved anytime soon.  For those 800,000 government employees currently furloughed, this will be the first pay period they forgo a paycheck.  While this may not appear to be a crisis yet, a recent study indicates 78% of those currently employed live paycheck-to-paycheck.  That includes those earning over $100,000 a year.  If these numbers are to be believed, it won’t be long before voters reach a tipping point and demand action.

In company news, Amazon took the top spot for the largest public company with a market capitalization of $803 billion.  It did so largely due to softness in Apple’s end markets which caused its stock price to dwindle over the last few months of 2018.  Sears sidestepped final bankruptcy once again when the judge hearing the case allowed its previous CEO, Eddie Lampert, one last chance to put together a bid.  Monday, we expect a final answer.  And lastly, IBM once again took the crown for receiving the most patents in 2018.  While this company may not be what it once was, it is far from being down and out.  Its library of intellectual property continues to grow each year as it finds new ways to remake itself.

A couple weeks back I commented on a significant number of pharmaceutical companies raising prices on medications by an average of 6.3%.  However, two new gene therapy drugs are on the verge of coming to market with prices that seem unfathomable.  Bluebird Bio presented on a new gene therapy drug that it believes has a value of $2.1 million.  The company expects to offer insurance companies the option to pay for this treatment over five years, essentially offering zero percent financing, much like consumers could a few years ago when purchasing a new car.  Unfortunately, these treatments cost a whole lot more than a car or even a fleet of cars.  It really says something when insurance companies need financing!  But even more stunning is a drug by Novartis for the treatment of muscular atrophy that is expected to cost $4-5 million.  I guess the sky is the limit.

In other news, the head lawyer for Goldman Sachs is retiring after twenty-seven years with the company.  I assume he must have done an admirable job given his tenure with the company.  After all, he did battle with both Congress and Eliot Spitzer, the then attorney general of New York.  What may come as a bit of a shock is that he is the largest internal shareholder of Goldman Sachs with over a million shares and a retirement package worth $500 million.  It seems he was a partner before the initial public offering (IPO) in 1999 and just held onto his shares.  If you’re interested and have the credentials, you may want to submit your resume.

In closing, in case you thought I couldn’t come up with another crazy story for this week, you’d be wrong.  It seems one airline is floating the idea of having customers tip flight attendants for service.  They take your order, serve up food and drink, and come back to clean up.  But the million-dollar question is, should you tip your flight attendant.  Apparently, Frontier Airlines thinks so.  It seems passengers who order refreshments will now get a prompt from Frontier’s payment system recommending they give a tip.  It offers passengers the options of 15 percent, 20 percent, or 25 percent.  This new model has engendered mixed feelings among passengers.  In case you were wondering, the median annual salary for a flight attendant in 2017 was around $50,500.  Now you know.

January 11, 2019

The Green Mountain State

Jan 4, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

I won’t lie, it was shaping up to be a pretty crummy week prior to today.  Fortunately, two things happened to turn the markets around.  The first is a bit of economic news and the second a message from the chairman of the Federal Reserve.  In recent months negativity and fear, largely due to uncertainty, overtook Wall Street.  Sentiment dropped and the markets finished the year on a low note.  I won’t say there wasn’t good cause for the market correction, but instead that the move went too far too fast.

The piece of economic news that jolted markets higher this morning was the jobs report which showed the economy added 312,000 jobs in the month of December.  This far exceeded expectations for 178,000 additions and was bolstered by upward revisions to both October and November’s numbers.  The bottom line is that this huge beat provides evidence that recession fears are overblown.

The second bit of news that sparked relief was the interview with Jerome Powell, in which he says the Federal Reserve (Fed) is “listening sensitively” to markets concern about risk, always prepared to shift policy.   He went on to say the market is pricing in downside risk well ahead of the data, but seems more mindful of investor sentiment whether due to recent market volatility or pressure from the White House.  Despite investors being ahead of the risk curve, he went on to say, “We’re always prepared to shift policy and shift it significantly if need be.”  This is quite the departure from his last speech in which he basically said, full steam ahead with rate hikes.  The market reacted favorably to this news, anticipating further rate hikes are off the table for now.  In an interesting aside, he also stated he would not resign if asked to by the President.  Seems everyone is a little on edge these days.

Before we move headfirst into 2019, let’s take a minute to re-visit some of the highlights of 2018.  There is the U.S. China trade war, Cambridge Analytica scandal, Iran deal exit, Brexit fireworks, Italian budget, ballooning U.S. debt ceiling, revamped NAFTA, iPhone estimates and patent battles, Disney-Fox deal and IBM-Red Hat, cannabis stocks, Amazon’s new headquarters, GE dropped from the DOW and the collapse of Sears, OPEC output cuts, end of European Central Bank (ECB) buying, rate hike drama, and the current government shutdown.  It was a rather tumultuous year in many respects.

In company news, we learned this week that more than three dozen pharmaceutical companies began 2019 by raising prices on hundreds of medicines by an average of 6.3%.  This was a surprise given the pressure put on the industry by the President.  Both Tesla and Apple had a difficult week after the former announced it failed to meet production expectations for the quarter (by a small margin) and the later lowered its forward guidance on first quarter revenue growth substantially.  It was also announced this week that Bristol-Myers Squibb aims to acquire Celgene for $74 billion in a combination of cash and stock.  The deal is expected to close in the third quarter.

There’s so much that happened this week.  It was discovered that Google shifted $23 billion to Bermuda in 2017 through a Dutch shell company to reduce foreign taxes in a move called the “Double Irish, Dutch Sandwich” tax strategy/loophole.  Also, the government shutdown enters day 14 today with no resolution in sight.  Kevin Hassett, head of the White House Council of Economic Advisers, said his estimate is that GDP will fall by 0.10% every two weeks that the government is shutdown.  However, he was quick to say he doesn’t expect a big economic impact assuming that it ends relatively quickly.

In closing I bring you an idea if you are inclined to move.  It seems Vermont, despite having the second lowest population of all states, has the highest proportion of people moving there from out of state compared to elsewhere in the U.S.  Most people moving to Vermont cited jobs (34.4%) and retirement (31.2%).  Four Western states filled out the top five: Oregon (63.8% inbound), Washington (62.4% inbound), Nevada (61.8% inbound), and Arizona (60.2% inbound).  Among those seeing the largest outflows include New Jersey, Illinois, Connecticut, and Kansas.  Now you know.

January 4, 2019

Bears Coming Out of Hibernation

Dec 21, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Hopefully you had a better week than the markets.  As was expected, uncertainty and fear led to further declines this week.  As of the writing of this piece, only two asset classes are barely positive for the year – cash and treasuries.   Much to the dismay of investors, 2018 is wrapping up to be a big disappointment.  Over 93% of all asset classes have a negative total return to date in dollar terms.  This is the highest percentage on record based on data going back to 1901.  Put simply, there was no place to hide.  Fortunately, these types of years don’t typically repeat and with any luck 2019 will shape up to be a better year.

Part of the decline this week can be directly laid at the feet of the Federal Reserve.  On Wednesday, the FOMC (Federal Open Market Committee) voted to raise interest rates another 0.25%, marking the fourth rate increase this year and eighth time since 2015.  Many, including President Trump, had hoped the Fed would show some caution and perhaps delay a rate hike this time around.  The FOMC did however lower the number of planned rate hikes next year from three to two, which is still above street expectations for just one.  For those searching their memories for the last time equity markets reacted so poorly on a Fed day, don’t worry about coming up empty.  It’s been nearly a generation since something like this week’s selloff occurred on the day of an FOMC meeting.  It was February 1994 when Alan Greenspan surprised markets with a rate hike, sending both stocks and bonds tumbling.  Let’s hope it’s another generation before we see a repeat of this week.

The other part of the decline this week is almost certainly due to uncertainty surrounding a government shutdown which as of this writing appears imminent.  Neither President Trump nor Congress is willing to compromise on the sticky issue of a border wall and more specifically, the $5 billion it will cost.  So much for Mexico paying for the wall.  While there could be a last-minute deal to temporarily extend a stopgap measure for 30 to 60 days, it feels like both sides have dug in and are looking forward to the media exposure in the coming weeks.  If a deal is not reached, there will be a partial government shutdown beginning this weekend.

In company news, Kroger is innovating in new and unexpected ways.  The company announced this week it will launch the first-ever unmanned delivery service.  In partnership with Nuro, Kroger has been trialing a self-driving grocery delivery service in Scottsdale, Arizona.  The fleet of autonomous vehicles has completed nearly one thousand deliveries to the general public.  It is just a matter of time before going into the supermarket once a week will be a thing of the past.  In other company news, stock buybacks hit an all-time record of $1.1 trillion in 2018.  As stocks turned down in the final quarter of the year, many companies announced new buyback programs, including some very large companies such as Johnson & Johnson and Boeing.  This trend is expected to continue in 2019 assuming that free cash flow is not an issue.

We understand this has been a frustrating year in the markets.  The best explanation I came across is an analyst with Deutsche Bank that noted, “peak quantitative easing moving to quantitative tightening and the Fed raising rates four times this year has been enough to reverse a significant amount of the liquidity-inspired asset price returns of the pre-tightening era.  A bit like Road Runner galloping off the cliff only to suddenly look down.”  Essentially, this is where we are.  Will the tightening continue into 2019?  Probably not, at least not to the extent it has this year.  However, this doesn’t mean that we’ve found a bottom in the market.  At the moment there is more pressure to the downside than there is to the upside.  We believe there could be a short-lived relief rally in the first part of 2019, but the pressures of a slowing economy could come to bear.  We are positioning portfolios to best weather the gale force winds we find ourselves in.  We wish everyone a very Happy Christmas and a safe New Year’s Eve.

December 21, 2018


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