Is the honeymoon over yet? The move up in the market since the election seemingly paused this week waiting for President-elect Trump to fill in some policy details. Unfortunately, he did not elaborate, and investors are left wondering what might await them next week after the inauguration. There is a lot of speculation as to what his first one-hundred days will hold, but at this time it is only speculation. We’re going to have to wait patiently to find out what his priorities are for his coming term in office. Something tells me we won’t have to wait long.
Next week will be the start of earnings announcements. However, this week was dominated by company news of one sort or another. It seems companies far and wide are falling all over themselves to announce new jobs, projects or manufacturing plants coming to the United States in the coming year. Fiat Chrysler, which is incorporated in the Netherlands, announced it plans on investing $1 billion in plants in Michigan and Ohio creating 2,000 new jobs in the process. Alibaba reported it would create 1 million new jobs in the United States over the next five years after Jack Ma met with President-elect Trump on Monday. Perhaps feeling the pressure, on Thursday Amazon announced it is expanding the company’s 180K headcount to 280K by the middle of 2018. It was quick to point out is has created 150K jobs within the United States over the last five years.
With regards to expansion, it appears companies have mixed feelings regarding China. McDonald’s announced this week it is pulling up stakes in China citing the economic and political uncertainty in the country. It has entered into an agreement to sell 80% of its 2,000 stores in China for a cool $2 billion. On the other hand, we have Taco Bell (owned by Yum Brands) reporting that after a ten-year absence, it plans on opening 1,000 restaurants in China by 2022. Admittedly, it is tailoring its menu to local tastes. Along the same lines, Starbucks is betting big on an expansion into China over the coming years. Some companies see a huge opportunity, while others see tremendous uncertainty. Time will tell.
While we’re talking about the Far East, Takata shares jumped 16% on news the Japanese airbag maker reached an agreement with the Department of Justice over its faulty airbags. The settlement includes a $25 million criminal fee, $125 million in victim compensation, and $850 million to reimburse automakers who have suffered as a result of Takata’s widespread recalls. You read that right. The automakers have suffered due to the faulty airbags.
For more positive company news, let’s talk about IBM which broke the record for the number of patents received in one year. With 8,088 patents (22 per day; 2,700 related to artificial intelligence, cognitive and cloud computing) granted across its more than 8,500 inventors in 47 states and 47 countries in 2016. Other companies receiving a large number of patents include Samsung Electronics (5, 518), Canon (3, 655), Qualcomm (2,897), Google (2,835), Intel (2,784), LG Electronics (2, 428), Microsoft (2,398), Taiwan Semiconductor (2,288), and Sony (2, 181).
In closing, I turn to a story I first reported on in June 2015. The “Taxi King” of New York continues to struggle as competition from Uber and Lyft transform his business. Monday was the deadline for Mr. Friedman to turn over 46 medallions valued at over $600,000 each or face jail time for failing to repay creditors. That comes on top of the 44 medallions he already agreed to give up to Citibank. He will still own over 800 of the 13,600 total medallions, but they won’t be worth the $1.05 million each they were at their peak in 2013. For an interesting take on this story, NPR’s Planet Money did a segment on this back in July 2015. You can listen to it here. Now you know.
January 13, 2017
We hope everyone had a wonderful Christmas and a Happy New Year. The market moved higher this week, continuing the trend started some weeks ago. We’re pleased with current economic data and are sketching our thoughts out for 2017. Among the many questions we are considering are which sectors will do well this year? Will the oil rally continue? Is the IPO market poised for a comeback? Will M&A activity break records again this year? What will happen with the elections in France and Germany? How will Brexit turn out? Will new trade agreements be signed? What will happen with tensions between the U.S. and China, North Korea, Russia, and Mexico? What will happen with monetary policy this year? And lastly, how much will a Trump presidency shape the markets? As you can see, our plate is full of all the unanswered questions that will undoubtedly shape 2017.
Let’s get this week’s economic data out of the way. December Non-Farm Payrolls came out a little below expectations today, and the unemployment rate increased slightly to 4.7%. However, the big news is that wage growth is accelerating at the fastest pace since 2009. Wages grew 2.9% y/y in December which suggests we’re basically at full employment. Assuming current trends persist, wages could heat up in 2017 giving the Federal Reserve all the ammunition it needs to continue hiking interest rates. Along those lines, the Federal Open Market Committee (FOMC) released its minutes, and the main takeaway is that the pace of rate hikes could be faster than expected.
In company news, the automakers remain in the spotlight. December sales growth was strong across the board, with this being the seventh straight year of growth. Analysts are now questioning if we’ve reached “peak” car sales. However, some manufacturers are in the spotlight for other reasons. General Motors and Toyota received a stern Twitter rebuke from President-elect Trump regarding recent production and manufacturing moves. It seems Twitter will be a major form of communication with this Administration, and we should expect Twitter “drive-bys” to become a normal means of doing business. Ford was rewarded with a positive tweet when it announced it is ending production of a new manufacturing facility in Mexico for a new plant in Michigan.
While retail sales this holiday season was brisk, the latest reports suggest brick-and-mortar stores were the victim of online sales. Retailers without a large online presence such as Macy’s, Sears and Kohl’s all took a hit this week. Kohl’s cut its 2017 earnings guidance after Q4 sales came in worse than expected. Sears announced it is selling its Craftsman brand to Stanley Black & Decker and plans on closing 150 stores (109 Kmart, 41 Sears) that aren’t profitable. In similar fashion, Macy’s announced plans to close 100 stores and cut 10K jobs. We’re watching, in real-time, the transition of our retail economy to online sales. Further complicating matters, proposals for a border tax on goods coming into the country are seen as a major headwind for retailers. One analyst sees apparel prices increasing 15% as a result of the tax. Only those retailers that source their material from within the U.S. would be exempt.
In an oddly ironic piece of news, it seems China is looking to renewable fuels amid its choking smog problem. China says it will invest $361 billion in renewable fuels by 2020 as part of a five-year plan to combat pollution. The National Energy Administration said it’s targeting wind, hydro, solar and nuclear power as part of the program. This comes at a time when the United States looks to reverse its recent energy policies for fossil fuel.
In closing, I bring you a story about repaying one’s debt. In 1945, Britain borrowed $4.3 billion from the United States, which prevented it from going bankrupt after WWII. In 2006, it finally paid off the last of that loan. However, It’s not unheard of for a country to default on its debt. Among the consequential defaults in modern times are Mexico in 1994, Russia in 1998, Iceland in 2008, and Greece in 2012. One country that hasn’t defaulted on its loans is Cuba. It seems Cuba has offered to repay its $272 million of Cold War-era debt to the Czech Republic in rum. If the proposal becomes a reality, the Czech Republic would have enough Cuban rum to last over a century according to the Czech Statistics Office. A spokesman for the Czech Finance Ministry said Prague would still prefer the debt was at least partly paid in cash. In the past, North Korea offered to repay its $10 million debt with products made with ginseng. And in 1993, Russia offered New Zealand a nuclear submarine and two MiG jets to settle a $100 million bill for dairy products including butter. Now you know.
January 6, 2017
Two more weeks until we ring in the New Year. After listening to more than a few conference calls this week, I came away feeling good about the prospects for economic growth in 2017. Analysts, generally speaking, believe fiscal stimulus coupled with tax reductions and a less regulatory environment will be what is needed to kick the economy into a higher gear. It appears the Federal Reserve thinks so too, having raised interest rates this week for the first and only time this year. While we’re heading into uncharted territory next year, many believe we’re at the beginning of what will be a prosperous future for the markets and the economy.
You might have noticed the Dow Jones Industrial Average, commonly referred to as the “Dow,” is trying its best to break 20,000 for the first time. Breaking this mark will be a historic milestone but won’t come easy as it also represents an emotional hurdle for investors. I remember the Dow breaking 10,000 like it was yesterday, although it was almost seventeen years ago. The reason I remember this milestone so vividly is that shortly after breaking through, the market fell substantially due to “Y2K” and the “tech bubble.” It took almost four years to regain the 10,000 mark. I’m not alone in thinking this time will be different. The Federal Reserve Open Market Committee (FOMC) decided to raise interest rates 0.25% this week and believes it will be necessary to raise rates no less than three times next year. The consensus was for two rate hikes next year. The Fed has gone from worrying about deflation, to worrying about inflation. The shift in attitude came suddenly and took many by surprise.
In company news, there were a few good stories that came across my desk this week. Trump may be many things to many people, but you can’t deny he has shaken things up. IBM announced it plans on investing $1 billion in U.S. employees, hiring 25,000 over the next four years and focusing on development and training of domestic talent. Along the same lines, Boeing announced it plans on moving its headquarters from St. Louis to Washington D.C., joining the migration of almost all of the Department of Defense, top-tier suppliers to the nation’s capitol. In other news, Berkshire Hathaway’s “A” shares broke $250,000 per share for the fist time ever. It seems Mr. Buffett put his first buy order in for the textile maker 54 years ago this week. His initial trade was for 2,000 shares at $7.50 per share. When the owner of Berkshire, then a textile company, tried to pull one over on Mr. Buffett, he began aggressively buying up shares and eventually took over the company. Today, Berkshire Hathaway has a market capitalization of over $400 billion.
For those who prefer closer oversight and regulation of Wall Street, this next story may upset you. In the aftermath of the financial crisis of 2008, forensic experts determined one of the largest contributing factors to the collapse was trading in derivatives. Two years later the “Volker Rule” was enacted as part of the Dodd-Frank Wall Street and Consumer Protection Act. It restricts banks from making certain kinds of speculative investments that do not benefit their customers. It is often referred to as the ban on proprietary trading. It was scheduled to go into effect April 2014. It was delayed a year. Then another year. And then another. This week, the Fed granted another extension of five-years allowing banks more time to comply. At this pace, I’m not confident the rule will ever be implemented.
In closing, the story of the week is a cautionary one. Venezuela decided to ban it’s largest denominations this week following in the footsteps of India. Both governments are trying to put an end to their respective underground economies which are thriving but starving their countries of tax revenue. The interesting part is what I read a couple of weeks ago. In Venezuela, the currency is so devalued that even the smallest of purchases requires hundreds of bills. Shoppers shove piles of money into gym bags before venturing into crime-plagued streets and shopkeepers stash thousands in boxes and overflowing drawers. Vendors have given up counting the bills in favor of simply weighing the pile of them. It is the clearest sign yet that hyperinflation could be taking hold in Venezuela. Some other countries that experienced hyperinflation include Post-World War I Germany, Yugoslavia in the 1990s and Zimbabwe a decade ago (which holds the record for the largest denomination bill ever printed – $100 Trillion Dollars). Now you know.
December 16, 2016
These are raucous times. Renzi’s out in Italy, the case for Brexit is now being heard by Britain’s Supreme Court, and a U.S government shutdown looms. We’re less than a week away from what most expect to be the one and only interest rate hike this year and president-elect Trump is making deals even before his inauguration. Momentum is on the side of the bulls for now.
Let’s start with the potential government shutdown this weekend. You most likely haven’t heard about it. In fact, I just read about it today and have yet to see it picked up by the mainstream media. It seems the House voted on Thursday to finance the government through late April. However, a couple of senators including Sherrod Brown of Ohio and Joe Manchin of West Virginia oppose the spending bill. At issue is the extension of health care coverage for retired coal miners. The House which is in recess for the holidays has no plans to reconvene.
There was quite a bit of company news this week. The following is the executive summary:
- Amazon introduces a new concept store with no checkout lines called Amazon Go. Early reports suggest as many as 2,000 outlets, but an Amazon spokesperson denied these claims.
- Under Armour inked a historic deal with Major League Baseball. The company announced a 10-year partnership that will see UA be the official uniform provider to MLB.
- President-elect Trump took aim at Boeing this week, suggesting the $4 billion price tag for development and production of two new Air Force One planes was too much.
- Carrier announced a 5% price hike on all its residential and commercial HVAC equipment effective January 1st. A company spokesperson said this is unrelated to the Indiana factory.
- Coca Cola’s CEO, Muhtar Kent, will step down in May. The current COO, James Quincey, will succeed Kent.
Wells Fargo (WFC) made headline news a few months ago when it was revealed its customer service employees were under such pressure to cross-sell, they illegally opened accounts and credit cards for customers. You’d think this practice would die a slow death. Unfortunately, cross-selling is foundational in the banking industry and appears here to stay. The Wall Street Journal reported Merrill Lynch would require each of its client-facing employees to make at least two client referrals to other parts of Bank of America or face a 1% pay cut. You’ve been warned.
Each year, anticipation for the yet to be announced iPhone grows well in advance of its actual release. This week Credit Suisse initiated Apple as an outperform on iPhone 8 prospects. To my knowledge, we don’t know anything about Apple’s next iPhone which won’t be released for another ten months. Assuming Credit Suisse doesn’t have inside information, it is unfathomable they would make this recommendation on pure speculation and rumors. And yet, they just did.
In closing, let’s talk airlines. Not how difficult it is to get through TSA checkpoints, the ridiculously long lines, or how the seats are shoehorned into the plan these days. Let’s talk about fees. You might remember, baggage fees began in 2008 as a way for airlines to recoup the cost of fuel back when the price of oil was well north of $100 per barrel. It started slow and met a lot of resistance, but over the past eight years, it has become the norm. The latest data indicates United tops the list of fees with almost $6.2 billion collected annually. The unintended consequence of requiring passengers to pay for luggage means lot of passengers are bringing their luggage onboard. The bean counters at United Airlines, never satisfied with enough, are now proposing plans to charge passengers extra for the use of overhead bins. The new program allows people only the space at one’s feet to store one’s carry on. Now you know.
December 7, 2016