Browsing articles in "Weekly Market Update"

A Duo of Deadlines

Feb 8, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

If you are anything like me, you may be wondering where did January go?  Last time I looked at the calendar we were just wrapping up New Year’s.  Fortunately, January was a good month as far as the market is concerned.  This week a bit of uncertainty returned with official talk of a China trade deal seeming to diminish with each new talking point.  While this news put a damper on the market this week, it isn’t this deadline that will be next week’s story.  You’ll remember there is a deadline next Friday regarding immigration and border security.  Truthfully, little has been reported on these negotiations and it is hard to know if any progress has been made.  We will find out soon enough.

I know I’ve touched on earnings season the past couple weeks, but this week marks the mid-point with around 234 companies in the S&P 500 reporting results.  Collective earnings per share have grown 18% compared to the same period last year, just ahead of the 15.5% estimate for the entire reporting season.  71% of companies have also reported earnings that have beaten analysts’ estimates, a figure that is ahead of the long-term average of 64%.  While these numbers are indeed good, keep in mind that a good portion of the gains was due to last year’s tax reform.  The comparative gains will almost certainly be lower going forward.

Changing gears, we learned this week that Bill Gross has decided to retire.  The 74-year-old bond manager and one-time “bond king” has announced his retirement from Janus Henderson.  You may recall he co-founded PIMCO in 1971 and served as managing director and its chief investment officer until 2014 when he left under difficult circumstances.  He never really regained his mojo with his unconstrained bond fund underperforming its benchmark since his start with Janus in 2014.   It is a new chapter in his life and a sad one for those of us who have been around long enough to know him.

In other news, there were a few interesting company stories this week.  It seems IBM and McCormick have teamed up to bring artificial intelligence (AI) to food products.  They have formed an ongoing research collaboration using AI for flavor and food product development.  The AI will explore flavor combinations and predict new flavor combinations from millions of data points.  Another interesting story worth mentioning is that electric vehicles (EVs) weren’t particularly happy with the Polar Vortex last week.  The deep freeze exposed some of the limitations of EVs.  Owners of Tesla, Nissan, and Jaguar EVs reported a loss of range of as much as 30% amid the record-setting low temperatures.  Perhaps just a coincidence but Tesla reported it is acquiring Maxwell Technologies which specializes in ultracapacitors.  Manufacturers are aggressively seeking denser battery packs, with long operational life, and most importantly the ability to charge faster than currently available.  It seems progressive is being made along these lines.

While we’re on the subject of cars, Kelley Blue Book estimates the average car price in the U.S. rose 4.2% last year to $37,149 as the shift away from passenger cars continues.  The average transaction price for the various manufacturers are as follows: Honda $29,341, Fiat Chrysler $39,484, Ford $41,446, General Motors $40,664, Hyundai-Kia $25,116, Nissan $29,819, Subaru $29,727, Toyota $33,258, and Volkswagen $37,149.

For the story of the week, let’s turn to Millennials.  A story reported a few months back polled Millennials to discover which brands they love.  While not groundbreaking, it is sometimes nice to know what direction spending is going, not to mention the occasions when you must buy a millennial a birthday or Christmas gift.  The following are the top ten brands in order:

  1. Nike
  2. Apple
  3. Amazon
  4. Target
  5. Walmart
  6. Samsung
  7. Google
  8. Sony
  9. Jordan
  10. Adidas

Now you know.

February 8, 2019

100 Months of Jobs Growth

Feb 1, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

It was another good week in the markets with lots of good earnings announcements and a Dow Jones Industrial Average reclaiming 25,000 for the first time since early December.  In fact, the month that just ended saw a large reversal of the selloff in December and marks the best January in the past thirty years.  The bulk of the news this week regarded earnings which came in as expected or better.  The few companies that missed analyst expectations or surprised investors with lowered future guidance were punished.  However, investors appear more forgiving this earnings season than most considering that expectations have come down considerably.

Aside from earnings announcements, the Federal Reserve met this week to discuss interest rate policy.  Having done a full 180-degree turn over the past two months, it should not come as a surprise that they held off raising interest rates at this meeting.  Perhaps the real surprise is that the hawkish Fed is turning into quite the dove, suggesting that not only could all rate hikes be off the table this year, but that it is considering an end to its balance sheet reduction program.  You’ll remember the Fed’s balance sheet grew to over $4 trillion during the financial crisis of 2008 due to quantitative easing aimed at stabilizing the economy.  It has spent the past year slowly reducing its balance sheet to the tune of approximately $50 billion per month.  Fed Chair, Jerome Powell, suggested it might have to reevaluate this unwinding which sent the markets higher.  A dovish Fed is not worth fighting.

The big news came today in the form of the jobs report which stated 304,000 jobs were created last month.  This now represents 100 months of job gains.  As might be expected, people who previously decided to leave the workforce are reentering the market pushing the labor participation rate up.  Additionally, the lack of available workers has pushed wages higher by 3.2%.  These indicators remain favorable, aside from the good earnings announcements mentioned above.

In company news, we heard from Walmart who is aggressively seeking to hire more truck drivers.  The company says it will pay an average of $87,500 per year to its truck drivers starting next month.  However, before you quit your job to embrace the open road, it should be noted self-driving trucks are in testing as we speak.  We also heard from Foxconn who said it might not build an LCD plant in Wisconsin after all.  However, breaking news this afternoon suggests this on-again, off-again deal appears on-again after President Trump reminded Foxconn of its commitments to both Wisconsin and the White House.  Time will tell if the economic reality trumps political pressure.  And lastly, T-Mobile and Sprint, who are trying to gain approval to merger, have announced it plans on hiring 5,600 additional employees in five new customer service centers spread throughout the country.  This comes as a bit of a surprise since most mergers seek to find synergies and aim to reduce costs.

In closing I admit I had a hard time coming up with this week’s story of the week.  I was so focused on the deluge of earnings announcements that I seemingly didn’t read much else.  However, I reached deep into my old stories file to come up with this one.  Last September, Merriam-Webster announced it would add 25 new words to the dictionary.  This isn’t an unusual event since new words are being created all the time.  However, codifying them into the dictionary gives these words, which might have previously been slang, more weight.  You’ll undoubtedly recognize many, although some may have you scratching your head.  I’ll give you five that I found fun:

  1. TL;DR (abbrev): “Too long; didn’t read – used to say that something would require too much time to read.”
  2. Adorbs (adj.): “Extremely charming or appealing; adorable.”
  3. Guac (n.): Guacamole
  4. Generation Z (n.): The generation of people born in the late 1990s and early 2000s.
  5. Hangry (adj.): “Irritable or angry because of hunger.”

Now you know.

February 1, 2019

The Shutdown Comes to an End (for now)

Jan 25, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

You undoubtedly heard by now, but just in case, the government shutdown has been temporarily lifted.  Hallelujah.  For the next three weeks both parties will hash out the details to make this temporary reprieve permanent.  That’s not to say we won’t hear a lot of strife these next few weeks, just that federal employees will get their back pay and the impact on the economy will be minimized.  Surprisingly, the stock market didn’t react to the press conference today but instead shrugged off the news.  Perhaps it is because it hasn’t really reacted to the government shutdown so far, this year.  Regardless, earnings announcements continued to trickle out this week and were positive for the most part.  Analysts are most focused on forward guidance, and with the exception of a few companies, most are meeting expectations.

I’ve listened to several 2019 market outlook conference calls this week, from JP Morgan to Goldman Sachs and Charles Schwab and Co.  To a tee, all believe a recession is not on the menu for this year.  In fact, all believe we could have a positive year in 2019 with an increasing risk of the slowdown hitting in 2020.  They all point to the low unemployment rate, lack of inflation, high level of Leading Economic Indicators, and dovishness of the Federal Reserve.  There are some red flags, such as our national debt and annual budget deficits ballooning, but those are issues for well beyond 2020.  In a nutshell, the sentiment among analysts and economists is optimistic.  The same can’t be said for investors who still hold a fairly negative outlook.  In Davos this week, a large number of celebrity money managers, including hedge fund gurus and private equity billionaires, met to discuss the economy and most sounded pretty dour.  One among them said, perhaps the soundbites coming out of Davos should be used as a contrarian indicator.  I happen to agree, especially given the track record of these people the past couple of years.

In other news, the on again – off again negotiations between the United States and China will once more come to a head.  Next week the two sides will meet to hammer out a deal.  Wilbur Ross, the U.S. Commerce Secretary, was quoted saying we’re still miles and miles apart.  The sticking points aren’t a surprise.  Among them are America’s “intolerably big trade deficit” with China, China’s plan to dominate global high-tech industries, increasing access for U.S. companies to China’s markets, and intellectual property rights.  Within the hour, Larry Kudlow, the Director of the President’s National Economic Council went on the air saying a deal is likely.  It seems the left hand doesn’t know what the right is doing.  Either way, I expect the coverage leading up to the meeting and news coming out of the meeting will be market movers next week.

In economic news, the jobless claims fell to a fifty-year low.  In fact, Progressive (PGR) plans to hire more than 10,000 people in the coming year to support its growth.  This represents a 30% increase in its staffing.  It is the first time in a while I’ve heard a company come out with such an aggressive announcement.  Even better, the company will offer positions in information technology, analysts roles, corporate functions, customer care, and claims.  Not long ago, many of these functions would have been outsourced.  It seems, in the current environment, at least this one company is looking domestically to fill its roles.  However, I am left wondering how a company such as Progressive has survived this long being so significantly understaffed.

In closing, let’s talk about real estate.  Some have suggested we’ve reached a peak.  In fact, we’re once again hearing about the resurgence of the unconventional mortgage.  However, this story regards someone who is unconventional in a different way.  Ken Griffin is a hedge fund billionaire and he just bought an apartment on billionaire’s row across from Central Park for $238 million.  Yes, I said apartment.  It just so happens that this one is 24,000 square feet.  What makes this special is that it breaks the record for the most expensive home ever sold in the United States.  The previous record was set in 2014 when a home in the Hamptons sold for $137 million.  Much like art, when you begin to see prices skyrocket like they have recently, you wouldn’t be wrong in thinking investors are using alternative investments as a place to park money.  Now you know.

January 25, 2019

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

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