Browsing articles in "Weekly Market Update"

Getting Tough on China

May 10, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

It was a week highlighted by one tweet.  That tweet, as you’ve probably guessed, was from President Trump who threatened to upend trade talks with China and increase tariffs to 25% on an additional $325 billion of Chinese goods.  Market volatility increased as investors tried to figure out the probability of a trade deal emerging by today.  That task was accentuated by the misinformation found in mainstream media and the seemingly contradictory tweets coming from the President.  To say it was a tumultuous week would be an understatement.  However, with no deal in hand as of last night, the President held true to his word and tariffs were increased on virtually all goods coming from China starting today.

Why should we care?  Well, there are two reasons you might want to take notice.  The first is that anything we buy that was made in China will become more expensive.  To be clear, it is not the manufacturers that pay the import tax.  The cost is born by consumers in the form of higher prices.  Everything from the clothing you buy to the smartphone in your pocket will likely go up in price causing a general increase in the rate of inflation.  This leads to the second issue which is that as inflation rises, consumer spending tends to fall.  Or put another way, each dollar spent has a smaller impact on growing the economy.  Rising inflation has the side-effect of slowing economic growth which is something we all need to watch.

The good news is that a trade war would be mutually destructive to both the United States and China’s economies.  I consider this good because it is in both countries’ interests to find a resolution sooner rather than later.  We expect China to retaliate in coming days with tariffs on U.S. products, most likely including a 25% tariff on U.S. auto imports which had been previously suspended.  This comes at a particularly sensitive time for Tesla who is just starting to sell its electric vehicles in China.  If this negotiation tactic forces both parties to come to an agreement, then it will not have been in vain.

In other news, it seems Iran is flexing its muscle one year to the date after the U.S. pulled out of the Iran nuclear accord.  Iran declared this week that it is no longer committed to the agreement and gives the remaining signatories (the U.K., France, Germany, China, and Russia) sixty days to implement their promises to protect Iran’s oil and banking sectors.  The decision is problematic given the tensions between the United States, China, and Russia.  Ultimately, it gives them the choice to follow President Trump or engage with the Islamic Republic in violation of American sanctions.  Given the tensions, it shouldn’t come as a surprise that oil prices are on the rise.  The energy sector will finish the week about 3% higher despite the market sell-off.

We also learned this week that pharmaceutical and biotech companies will be required to disclose prices in television commercials for medications that cost more than $35 for a month’s supply.  Not surprisingly, there is a lack of enthusiasm from the pharmaceutical industry who believes showing the list price of drugs is both misleading and could have the unintended consequence of causing those who are ill not to seek medical care believing they could not afford the treatments.  To be fair, this new requirement only applies to those drugs which are advertised on TV, which is a relatively small number of medications.  Occupying the top spot is Pfizer, which is responsible for more than half of TV drug ads during the most recent twelve months.  According to one industry analyst, the company paid more than $600 million for 37 unique ads over the past year, including nine for the medication known as Lyrica.  AbbVie is the second most affected, having spent $288 million on 18 different ads for top selling Humira.  Legal challenges are almost certainly coming with the drug industry preferring a mention of a pricing-related website in TV ads rather than outright pricing disclosure.  Expect to hear more on this topic.

In closing I came across a story that sounded so unusual I had a hard time believing it was true.  Well, in this case it turns out to be true.  Microsoft is working on an update to Microsoft Word that will use artificial intelligence to make your writing more politically correct.  For example, it might underline places where your writing exhibits gender bias, i.e. suggesting “mailman” or “Congressman” be replaced with “mailperson” or “Congressperson”.  If you use the term “gentleman’s agreement” it might suggest you use “unspoken agreement” instead.  The term “disabled person” would be replaced with “person with a disability” while the new version’s inclusiveness check searches for words or phrases that might be considered offensive.  This new feature should be available in June.  Now you know.

May 10, 2019

Big Upside Surprise!

Apr 26, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

This week was dominated by earnings announcements and economic releases.  In both cases, the numbers look good.  In fact, some might even say they look great.  That’s not to say that everything is perfect, as we saw some companies miss earnings estimates, but on average both the economy and corporate earnings appear to be in good shape.  It should also be noted that the quarter that just finished will be the low point for the year, with each subsequent quarter gaining strength.

Let’s start with the best news of the week.  Today it was reported that Gross Domestic Product (GDP) in the first quarter grew by 3.2%.  This is a big beat since analysts had estimated growth of approximately 2.3% for the quarter and it eclipsed the 2.2% growth of the fourth quarter last year.  I don’t think anyone expected the number to come in this high.  So why didn’t the market shoot higher today on this news?  Well, to be fair the market has recovered from the losses set late last year.  One might say that much of this news, while being a surprise, was already priced into the market at its current valuation.

In other economic news, new home sales in March blasted through estimates with 692,000 sales.  With wages rising, unemployment low, mortgage rates falling, and millennials growing older, it seems there might just be some pent-up demand for both new and existing homes.  However, this phenomenon may not be taking place everywhere.  I read yesterday that homes in the Northeast, particularly New York, Connecticut, New Jersey and Massachusetts, are staying on the market longer than expected with prices falling in large part due to last year’s tax reform which limits property and state income tax deductions to $10,000.  Along similar lines, another article I read reports states with the highest property and state income taxes saw large outflows of residents last year.

In company news we learned that Amazon is expediting its free Prime two-day shipping to one-day shipping.  To offset the cost, Amazon is taking an $800 million charge in the second quarter.  Don’t worry, the company is still making an extraordinary profit.  We also learned that Tesla plans on rolling out a fleet of 1,000,000 robotaxis in 2020.  Before you ditch your car, just know that Elon Musk made the off-hand announcement on the company’s earnings call along with the pronouncement it will also begin offering car insurance.  Most analysts don’t find either claim credible.  However, it is clear that the company is feeling the pressure from rivals.  Ford announced a $500 million partnership and minority stake in Rivian Automotive, which made a huge splash when it announced a blisteringly fast, off-road capable EV pickup truck late last year.  Ford is hoping to get a jump on the development of its own EV truck by using Rivian’s platform.

Hitting a little closer to home, we learned that Verizon will begin rolling out its 5G network in twenty additional cities, including Cincinnati, Cleveland, Columbus, and Indianapolis, among others.  You might be saying, “5G”?  Let’s take a trip down memory lane.  It all started with 1G in the 1980’s which was basic analog cell phone signal.  2G saw a major improvement when the signal moved from analog to digital, which is more secure and reliable but more importantly allowed for text messaging.  3G is perhaps the most revolutionary in that it allowed for web browsing, email, video downloading, picture sharing, and other smartphone features.  4G was a little different in that it didn’t necessarily provide new features.  Instead it provided speed, high speed to be exact.  Additionally, it improved security and lowered the cost of voice and data services.  That brings us to 5G.  This new standard increases the already fast speed of 4G by 100X, up to 100Gbps.  It also allows for higher density on the network which should also lower the cost, in theory.  Before you get too excited, 5G is not compatible with current smartphones since it requires a new chipset.  At the moment there are only a handful of 5G smartphones.  Here are the manufacturers building them as we speak.  Among them are the Huawei Mate X for $2,600, the Samsung Galaxy S10 5G for $1,300, the Xiaomi Mi MIX 3 for $680, the LG V50 ThinQ, and the ZTE Axon 10 Pro 5G.   It is rumored Apple may have one ready late 2020 but that is still a rumor at this time.  And yes, I hope the prices come down substantially between now and then.  Now you know.

April 26, 2019

Brexit: Season 3

Apr 12, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

As far as weeks go, this one was fairly quiet.  In the run up to earnings season, there is usually a lull in both market news and volatility as investors eagerly await earnings announcements. Boeing and General Electric continue to be a drag on the Dow Jones Industrial Average while JP Morgan gave the markets a lift today.  Earnings announcements will begin to dominate the news starting next week.

Despite the dearth of economic news, there were some corporate announcements worth mentioning.    Novartis (NVS), the world’s fifth largest independent biotech company by market cap, finalized the spin-off of its Alcon division.  Shareholders of Novartis received one share of Alcon (ALC) for every five shares of Novartis held on April 8th.

Chevron (CVX) announced today it plans on acquiring Anadarko Petroleum (APC) in a stock and cash transaction valued at $33 billion.  The merger will shore up Chevron’s upstream operations (the finding and producing of oil and natural gas) by strengthening its shale, deepwater, and natural gas resources.  Management anticipates annual synergies of approximately $2 billion, and expects the deal to be accretive to free cash flow and earnings in one year.

In other corporate news, we learned that Tesla will begin leasing its Model 3.  However, unlike a more traditional lease, customers will not have the option to buy their cars at the end of the lease as Tesla intends to use the vehicles for its long-planned Tesla Network ride sharing program.  If you’re in the market for a Model 3, a 36-month lease will start at $504 per month with $4,199 down.  The downside to leasing a Tesla is that the company gets the federal tax rebate of $3,750 per car plus any state incentive that your state may offer.  For Tesla it is a great deal.  For the lessee, not so much.

In recent weeks we have mentioned the rising minimum wage and its potential strategic benefit.  This week Amazon’s CEO, Jeff Bezos, challenged its competitors in its annual letter to shareholders.  He said, “Today I challenge our top retail competitors to match our employee benefits and $15 minimum wage.  Do it!  Better yet, go to $16 and throw the gauntlet back at us.”  Perhaps not too surprising, those competitors had a few things to say.  Walmart’s Dan Bartlett said, “How about paying your taxes?”  Amazon paid $0 in federal taxes on more than $11 billion in profits last year.  Macy’s CEO, Jeffrey Gennette responded, “We decided to put [tax savings] back into the community” while eBay CEO Devin Wening fired back, saying, “We don’t compete with our sellers.  We don’t bundle endless services to create barriers to competition.”  Sounds like the war of words is just heating up.

As for Brexit, the drama continues.  On Wednesday, the European Union (EU) voted to allow for an extension whose deadline was today.  This brings us to Season 3 of Brexit Forever, which raises the plot of whether Theresa May (Prime Minister) and Jeremy Corbyn (Leader of the Labour Party) will honor the will of the voters.  The new extension gives the UK until October 31st with certain conditions.  However, it is likely that a six-month delay gives the Conservative Party enough time to contemplate a change in leadership, i.e. Theresa May exit stage left.  In such a case, we could be talking about Brexit until the proverbial cows come home.

In closing, I came across a practice in South Korea that is unusual by Western standards.  In S. Korea, babies become 1 on the day of their birth and then get an additional year tacked on when the calendar hits Jan 1.  “Just two hours after Lee Dong Kil’s daughter was born on New Year’s Eve, the clock struck midnight, 2019 was ushered in, and the infant became 2-years old.  Every baby born in South Korea last year become 2 on January 1st.  It is unclear how this tradition started but some attribute it to the time babies spend in the womb, or to an ancient Asian numerical system that didn’t have the concept of zero.  It seems most South Koreans are simply accustomed to living with two ages.  Now you know.

April 12, 2019

Ciao! Keebler Elf

Apr 5, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

It was a week chock-full of good economic news and the markets reacted accordingly.  The Dow Jones Industrial Average looks to close almost 500 points higher on the week, continuing the upward trend which began earlier this year.  Furthermore, the bar for first quarter earnings has been set fairly low.  While a few companies will report earnings next week, the bulk will begin the following week.

The best news of the week was announced today when the March nonfarm payroll report indicated that 196,000 had been created in the month.  You’ll remember that just one month ago we were shocked when the February number came in at only 20,000.  As many suggested at the time, the month of February was an anomaly with a return to more normal job creation returning in March.  Adding weight to this data point, March’s ISM manufacturing index improved and February construction spending rose more than expected.  Fortunately, we have strong enough growth but not necessarily enough to force the Federal Reserve (Fed) to become more hawkish.  This week’s news will allow the Fed to retain a patient stance with interest rates.

While the economic news has been good of late, it hasn’t stopped the President from a new offensive.  President Trump’s relationship with Fed Chair, Jerome Powell, has been rocky from the start despite Mr. Powell being the President’s nominee to head the Federal Reserve.  The President believes if not for the interest rate hikes, economic growth and the stock market would be higher, and the trade deficit wouldn’t have swelled as fast.  He’s not wrong.  However, interest rates which were dropped to previously unseen levels after the financial crisis, never really regained historic norms.  Lowering them again at a time of 2% economic growth and low inflation could be like pouring gasoline on a fire.  Sometimes too much of a good thing can do more harm than good.  While it may be good for the President politically, it almost certainly wouldn’t be good for the economy in the long-run.

In company news, it seems the Keebler Elf will soon become an expat.  It was announced this week that Ferrero SpA acquired a number of cookie brands, fruit snacks, and pie crusts from Kellogg for $1.3 billion.  Aside from Keebler cookies, Famous Amos and cookies manufactured for Girl Scouts of the U.S.A will also be moving across the pond.  While we’re on the subject of food it seems Burger King is testing a new plant-based meat substitute in select markets.  If you happen to be in the St. Louis area, you will be able to test The Impossible Whopper which will be flame grilled like a regular Whopper but contain no meat.  Burger King has partnered with Impossible Foods on the burger initiative with a market for meat-free substitutes growing to an estimated $1 billion in coming years.  Not to be outdone, Nestle plans on bringing its Incredible Burger to Europe this month followed by North America by the end of the year.

Last week I noted that McDonald’s will no longer be fighting against raising the minimum wage and even speculated that this could be a strategic move by the company to put pressure on smaller chains and mom-and-pop alternatives.  It seems McDonald’s isn’t alone in its thinking.  This week Target announced it too will be dropping its fight against lower wages.  The company plans on raising its starting wage to $13 per hour with an incremental plan to hit $15 per hour by the end of 2020.  This puts it right smack in the middle of the minimum wages at Amazon ($15/hr) and Walmart ($11/hr).  It does appear the tide is turning.  The question is how long before these higher wages translate into higher prices and an increase in inflation?

In closing, I bring you more unusual news.  What I thought was an April Fool’s story turned out not only to be true but also somewhat disturbing.  It seems in the Soviet Union there was a candy bar by the name of Hematogen that was a favorite among children.  It was a chocolaty, chewy snack with an oddly metallic aftertaste.  It was made with beet sugar, condensed milk, and sugar syrup but also had a secret ingredient: cow’s blood.  It seems this treat was created as a kid-friendly iron supplement at a time when food scarcity was an issue.  A generation of children came to love the candy bars which were cheaper and more accessible than candy.  Now, these same Russian adults have a soft spot for Hematogen.  You see, it is still in production and can be purchased on Amazon.  If you’re brave enough to order some, you’ll have to let me know how they taste.  Now you know.

April 5, 2019

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