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Monkey Business

Jul 21, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

The focus this week turned to earnings announcements. Although it is still early, many of the companies reporting this week beat analysts’ expectations and were generally optimistic regarding the remainder of the year. The earnings announcements in the coming weeks will help determine what the second half of the year will look like. Despite an inability to pass legislation to spur the economy, we believe economic growth will continue at a slow but consistent 2% to 2.5% pace.

Outside of earnings announcements, there was a lot of company news this week. Let me highlight a few of the notable stories:

  • Procter & Gamble is perhaps the largest company ever to face a proxy fight. Nelson Peltz’s Trian Fund Management plans to battle for a board seat at P&G in an effort shake up its “slow-moving and insular” culture. Peltz is not seeking a breakup of the company at this time.
  • What not to say as CEO – At the National Governors Association meeting this past weekend, Elon Musk made some news saying (again) that Tesla’s stock price is too high. He realized his mistake when the stock price fell sharply the following day and took to Twitter to say the price is high based on past and present, “but low if you believe in Tesla’s future.” Nice save.
  • Facebook announced it is doubling its investment in New Mexico with plans that include a $500 million data center expansion. The company broke ground on the first building, to cover an area equal to 17 football fields, that should go live in late 2018. Construction on the second building should run through 2020.
  • McCormick announced it is acquiring Reckitt Benckiser’s food business in a deal worth $4 billion. It apparently beat out several competitors including Unilever and Hormel, Financial Times reports. Reckitt’s food business includes French’s mustard and Frank’s RedHot sauce.

In other news, it finally happened this week. It took seventeen years, but the S&P 500 information technology sector has finally recovered from the dramatic collapse of the dotcom bubble. The index closed at 992.99 on Wednesday, breaking the record of 988.49 set on March 27, 2000. The gradual recovery spanned the rise of social media, the revolution in cloud computing, and the invention of smartphones.

Perhaps a little sobering is the news that the number of Americans renting hit a 50-year high. The percentage of households renting rose to just under 37% last year, according to Pew Research. That’s vs 31% in 2006, and just under 37% seen all the way back in 1965. While the groups that have historically tended to rent – young adults, non-whites, and the lesser educated – continue to do so, Pew found rising rates among traditional buyers likes whites and middle-aged adults. Some of the reasons given for the shift include rising home prices, stagnant wages, and overwhelming student loan debt.

For the story of the week, I return to a piece I first mentioned back in 2014. It is the story of a selfie taken by a macaque monkey and the legal question of who owns the photo. The case has bounced through the court system these past three years and now finds itself in Federal court. Here’s a quick recap – a curious monkey with a toothy grin and a knack for pressing a camera button took a particularly good picture of himself. The photo went viral and the photographer, David Slater, asked for the image to be removed on the grounds that the websites didn’t have the right to publish the image without his consent. People for the Ethical Treatment of Animals (PETA) is suing Slater and the self-publishing company Blurb for copyright infringement, on behalf of the macaque monkey who “took” the photo. It seeks to administer all proceeds from the image to a wildlife reserve in Sulawesi, Indonesia. A federal judge ruled against PETA last year, saying it lacked the right to sue because there was no indication that Congress intended to extend copyright protection to animals. The 9th U.S. Circuit Court of Appeals in San Francisco heard the appeal this week. Perhaps the best line is, “Monkey see, monkey sue” is not a good law under any federal act. Blurb’s attorney wondered at the possibilities if they do not prevail. “Where does it end? If a monkey can sue for copyright infringement, what else can a monkey do?” The outcome has not yet been decided, but rest assured we’re on it. You can see the picture the monkey took and read the original story by clicking here. Now you know.

July 21, 2017

Job Growth Brings Optimism

Jul 7, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

While this week was slightly positive for the markets, it was somewhat lackluster most likely because we are on the precipice of earnings announcements due out in the coming weeks.  While most headlines were focused on news of North Korea’s launch of its first ICBM missile, and who won the handshake competition between President Trump and President Putin at the G20 summit, there was noteworthy news that wasn’t covered.  Let’s take a few minutes to review the other news that happened this week.

Perhaps the most important news is that the labor market roared back in June, with a hefty monthly gain in jobs, and revisions added 47,000 more jobs in April and May than previously reported. Over the past three months, job gains have averaged 194,000 a month. Although the unemployment rate ticked up from the previous month, it did so because more people joined the workforce.  While the payroll number was well above expectations, the wage numbers were weaker than expected.  Economists expect wages to rise at an even faster pace because the unemployment rate is near a post crisis low, and so there should be more competition for skilled workers. But some Federal Reserve officials have noted that the lower unemployment rate is not lifting workers’ pay the way it used to partly because productivity is lower.  Either way, today’s news gives cover to the Fed should they decide to continue raising interest rates.

Along similar lines, the Federal Reserve released the minutes from its latest meeting and while it may be on the path to normalizing interest rates, there is little consensus on when to start paring down its massive balance sheet.  To shrink the nearly $5 trillion balance sheet, the Fed said it plans on gradually allowing fixed amounts of assets to roll off without reinvestment, and raise the caps on these amounts every three months.  While some of the voting members prefer clear communication on balance sheet reduction, others favor waiting until later this year, believing a move now would signal that the Fed is getting more aggressive.  So while an interest rate hike or two remain likely before the end of the year, how to resolve the Fed’s huge balance sheet remains a bit of a mystery for now.

One sector that did well this week is the defense sector.  Defense stocks are on the rise after North Korea launched its first ballistic missile capable of reaching the continental U.S.  Its actions may cause the U.S., Japan, and South Korea to fund missile defense at an above average rate, according to a Jefferies analyst.  Additionally, Poland agreed to buy the Patriot missile defense system from the U.S., in a deal worth up to $7.6 billion.  While opinions span the spectrum on President Trump, his policies influence not just the market but individual companies as they relate to his agenda.

In closing, I bring you a scandal of the highest proportions.  Well, maybe not that big but worth noting nonetheless.  A couple months back, we learned that Tom Price (R-GA), President Trump’s nominee to be Health and Human Services Secretary, was under investigation for having bought shares in a tiny biotechnology company while sitting on a committee that influenced the firm’s prospects.  Shocking, you say?  A recent study found that 28 House members and 6 Senators each traded more than 100 stocks in the past two years, placing them in the cross hairs of a conflict of interest on a regular basis.  Before you get out your pitchforks, it should be noted that 384 House members and Senators who served in the 114th Congress made no stock trades over the past two years.  While Congress passed a law just five years ago to curb lawmaker insider trading, it seems there is no enforcement of said law.  And while it isn’t common practice, this most recent report indicates there’s more work to be done.  Now you know.

July 7, 2017

These Times They Are A-Changin’

Jun 30, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Today marks the close of the second quarter.  It was a busy week which included the second go at a healthcare bill from the GOP, a ransomware attack on several multinational corporations, and the approval by the Federal Reserve allowing thirty-four of the largest banks to commence capital return plans.  The second quarter had its ups and downs but managed to finish on a positive note despite the dysfunction in our nation’s capital.

Let’s start with some company news.  This week was the tenth anniversary of Apple’s iPhone and while it has both fans and detractors, no one can say it hasn’t been a success.  So I take this moment to remind us that even the best and brightest minds are sometimes wrong.  Steve Ballmer, then CEO of Microsoft, famously said, “$500, fully subsidized, with a plan!  That is the most expensive phone in the world and it doesn’t appeal to business customers because it doesn’t have a keyboard, which makes it not a very good email machine.”  Mr. Ballmer spent another six years stubbornly fighting the tide before stepping down in 2013.

In other company news, self-driving cars remain in the headlines.  The latest round of news is that companies are creating joint ventures and partnerships with the aim of building strong alliances before the market is fully developed.  Among those announcing partnerships are Volvo, Autoliv, and Nvidia.  This goal is to develop software systems for autonomous vehicles.  One day earlier, Apple reported it is working with Hertz on autonomous testing, while Alphabet (Google) inked a deal with Avis to manage its self-driving car fleet.

Self-driving cars aren’t the only changes on the horizon.  Unilever is undergoing a radical hiring experiment.  To diversify its candidate pool for early-career roles that are a fast track to management, Unilever is ditching resumes and traditional campus recruiting.  Its new process relies on algorithms to sort applicants and targets young potential hires through their smartphones.  To quote Bob Dylan’s 1964 album, “These Times They Are A-Changin.”

What isn’t changing is the improvement in the financial sector.  This week Janet Yellen announced the results of the latest stress tests and found that the banking system is very much stronger than in the past.  She even went so far as to say a financial crisis like the one seen in 2008/09 isn’t likely “in our lifetime.”  Your guess is as good as ours as to who’s lifetime.  All thirty-four banks won clearance by the Federal Reserve which is the first time since the global financial crisis.  As a result, financial stocks had a good week with most issuing capital return plans in the form of dividend hikes and increased stock repurchase authorizations.

ETF ownership of stocks rose to a record in the quarter.  ETF inflows in the first quarter were $98 billion, prompting Goldman Sachs to raise its full-year inflow forecast by $100 billion to $300 billion.  ETFs, per Goldman, now own a record 6% of the U.S. stock market.  Mutual funds, on the other hand, were net sellers of $31 billion of stock but still own 24% of the stock market, although representing the lowest level since 2004.  Still, ETFs weren’t the biggest buyers of stock.  That award goes to corporations, which hoovered up $136 billion through buybacks.  Goldman expects that number to reach $640 billion for the full year.

In closing, I turn to Illinois.  As of this writing, the state is in dire straits and without a budget for the third straight year.  Its comptroller is on record saying that if a budget isn’t passed by midnight tonight, the state will begin defaulting on large parts of its economy.  But this is the part of the story you might not have heard.  The Illinois Lottery announced on Tuesday that, without a budget or any special legislation, it won’t be able to pay anyone winning $25,000 or more come July 1.  In response, the popular Powerball and Mega Millions have asked the state of Illinois to stop selling tickets effective immediately.  As for those winning more than $25,000, they’ll have to press their luck for lawmakers and the governor to authorize payments.  Now you know.

June 30, 2017

The Intersection of Politics and Investments

Jun 9, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

I know it has been a couple weeks since our last update and A LOT has occurred.  The good news is the market has been very resilient in the face of a lot of uncertainty.  Between the terror attack in London, British elections, the Comey testimony, and renewed Middle East tensions, the stock market continues full steam ahead.  Instead of predictions of collapse, the headlines suggest “Why The Dow Can Go Much, Much Higher,” “This is a Reagan-like Rally and Here’s How Much Higher Stocks Can Go,” and “Dow Rises: Why The Trump Stock Market Rally Will Continue.”  It goes without saying, the pundits think this bull market has room to run.  For now, it seems investors agree.

It’s hard to avoid politics these days.  Unfortunately, politics does impact various industries and companies in significant ways.  The House voted yesterday along party lines to pass a major rollback of Dodd-Frank regulations.  The bill will relieve healthy banks of some regulatory requirements and force failing banks into bankruptcy via the court system instead of a liquidation process spearheaded by regulators.  It goes without saying, bank stocks were some of the largest winners this week.  In other news, the “fiduciary rule” went into effect today requiring financial advisors to put their customers’ interests ahead of their own when providing advice about their retirement money.  As a registered investment advisor, Harvest Investment Advisors has acted as a fiduciary since its inception.  However, the rule could be killed by a provision in the Financial CHOICE Act which has widespread support in the House.  Putting client’s interests first should not be a difficult decision.  At least, that’s what we think.

While legislation shapes the economy, market forces also play an important part.  I’ve talked at length about automation and its impact on labor and productivity.  This week Boeing announced it is studying self-driving planes.  It is looking forward to a world where jetliners fly without pilots and aims to test some of its new technology next year.  Boeing’s VP of Product Development said, “the basic building blocks of the technology are clearly available.”  Honda announced its future strategy is to launch a Level 4 autonomous driving technologies in its cars by 2025.  Level 4 means the cars can drive themselves on highways and city roads under most situations.  To make this happen it has ramped up R&D spending, earmarking a record $6.8B for this year.

Technology isn’t only changing the face of transportation.  We also learned this week that robots are helping to boost production in athletic apparel.  Morgan Stanley forecasts that 20% of the production from Nike and Adidas will be through automated factories by 2023.  Adidas already has its next-gen Speedfactory in Germany up and running as well as an Atalanta Speedfactory site being built, while Nike has several automated platforms in development.  The International Robot Federation estimates that over 2.5 million industrial robots will be at work by 2019.

There were two other significant developments this week include Anthem pulling out of ACA in Ohio in 2018 citing uncertainty.  The insurer ticked off a list of concerns, including “continual changes in federal operations, rules and guidance” and “an increasing lack of overall predictability.”  The move will leave about 10,500 Ohio residents in at least 18 counties without an insurance option.  Anthem is currently reviewing its involvement in the fourteen states where it currently participates.  Insurers in New York requested double-digit increases as high as 47% for ACA policies next year as the debate rages in Washington on how to overhaul the law.  The other big development this week was the announcement that this administration would like to privatize air traffic control in the United States.  As far back as I can remember, there has been talk of overhauling the air traffic control system in this country.  Thirty years later, by all accounts it remains a major infrastructure weakness.  However, while some airlines applaud this move, others find it problematic.  Executives from United Airlines, American Airlines, and Southwest Airlines praised President Trump’s plan.  They believe the antiquated system we rely on today is inefficient and causes thousands of avoidable flight delays.  Those on the other side, including Delta Airlines, believe that privatization would not save money, but instead would drive up ticket costs and could create a national security risk.  Like I said above, while I don’t like talking about politics, politics does have a big impact on the industries and companies we invest in.  It’s hard to be an investor these days and not pay close attention to politics.

While I could go on about Apple’s WWDC conference this week, or how Alphabet’s (Google) shares joined Amazon in the $1,000 per share club or the elections in the U.K, or how the European Union is preparing a new defense union to potentially replace NATO or former FBI Director Comey’s testimony…  There simply isn’t enough time to discuss it all.  I appreciate your patience this past couple of weeks.  For the next couple of months, this weekly email will be more sporadic but rest assured it will return to its reliable consistency in August.

June 9, 2017

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