Browsing articles in "Weekly Market Update"

Did the Grinch Steal the Christmas Rally?

Dec 14, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Ordinarily, this time of year we would be talking about a Christmas rally in the markets.  However,this year feels a little different as talks of another government shutdown highlight the difficulties facing our nation and economy.  The honest to goodness truth is that much of the“problem” is self-inflicted with both parties jockeying for prominence before the transition of power in the House of Representatives.  It is unfortunate since the economy, albeit slowing, remains not far off the historical norm of 2.5-3% year-over-year growth.  The media, appealing to both extremes, flames the fire and causes a heightened sense of doom and gloom.  It is no wonder the markets can’t seem to gain any traction in this environment. 

Talk about self-inflicted, the trade war is starting to have a real impact on both China and the United States.  China reported it is on track for the first drop in auto sales since 1990.  Chinese automobiles sales fell 14% in November to mark the fifth month in a row of declining volume.  In the U.S., soybean sales (primarily to China) fell off a cliff and drove soybean prices sharply lower. China accounts for roughly 60% of all U.S. overseas shipments in deals valued at more than $12B.  Despite China making its first big buy of soybeans since the Trump-Xi meeting, inventories remain at historic highs. 

However, the issue runs deeper than just sales.  At risk is manufacturing in both the United States and China.  Several German automobile companies are evaluating their presence in the United States, most notably BMW, Volkswagen, and Mercedes who cumulatively employ over 50,000 American workers.  On the flip side, production of electronics in China may be moving elsewhere due to the slow slide toward a trade war.  Apple is exploring manufacturing opportunities outside of China given an estimated $1 per share,or roughly a 7.5% hit to earnings, if the U.S. imposes a 10% tariff on phones produced in China.  GoPro has plans on moving some of its production outside of China too by next summer also fearing the potential tariff impact.  While the balance of trade has been far from balanced these past three decades, righting the ship will necessarily cause pain in the near-term.  The negotiations between the U.S. and China will remain headline news for the foreseeable future and will likely be the cause for heightened volatility.

In company news, the battle between Apple and Qualcomm heated up this week.  Qualcomm won a preliminary ban in China on some models of Apple’s iPhone.  The People’s Court of China found Apple violated two of Qualcomm’s software-related patents.  Qualcomm is hoping China places a more permanent injunction on all iPhones until this issue is resolved.  Another story that caught my eye involves United Airlines.  It seems the company is considering charging more for some coach seats. “Preferred” seats will offer customers a seat closer to the front of the plane, giving them access to in flight services sooner and the opportunity to deplane sooner.  Yep.  The same economy seat, just more expensive depending on its proximity to the front of the plane.  While this is a subtle money grab, it seems United is simply following rivals American and Delta in making this change.

I could dedicate an entire email (and then some) to the issue of Brexit, Theresa May, and the European Union (EU).  However, to do it justice would require going into more depth than is warranted in this weekly synopsis.  So, to summarize this week’s developments,Theresa May survived a coup within her party to retain the title of Prime Minister.  However, she may lack support to pass the negotiated Brexit deal and it is unlikely the EU will renegotiate the deal.  The fate of the U.K. is very much up in the air.

In closing, I came across a story that surprised me.  California is often far out in front when it comes to issues like immigration, the environment, healthcare law, etc.  It was early in the fight against plastic bags and plastic straws, the size of soda containers, higher fuel efficiency requirement for cars, and legalized marijuana years before other states followed suit.  This week state regulators in California have proposed creating a surcharge on text messaging.  The goal would be to generate roughly $45 million annually to help fund phone service to the poor.  However, more surprising is that the regulators proposed making this surcharge retroactive going back five years and could amount to a bill of more than $220 million for California consumers.  Fortunately,we have the wireless carriers on our side telling the FTC they view text messaging as an information service like email, not a telecommunication service subject to the commission’s authority.  Now you know.

December 13, 2018

Countdown to Christmas: T-25 Days

Nov 30, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

After some weeks of downward pressure, the markets rebounded in a big way this week.  The spark that ignited things was a simple sentence from the chairman of the Federal Reserve.  Sometimes it is the little things that make the most difference.  Some of you may remember an old commercial from the 1970s and 1980 in which the actor confidently states, “When E.F. Hutton talks, people listen.”  It seems Mr. Powell is the modern day E.F. Hutton and this week he seemed to suggest the course of the Federal Reserve may be changing.

Earlier in the week we learned from the Washington Post that President Trump is “not even a little bit happy” with his appointment of Jerome Powell as Fed chair and believes the central bank is “way off-base with what they’re doing.”  I’d like to believe the Federal Reserve is completely independent of politics, but the pressure put to bear on the Fed has been unrelenting in recent weeks.  So perhaps it doesn’t come as a surprise that the Fed is telegraphing its intent to slow the rate of interest rate hikes it had planned.  While there remains a very high probability of a rate hike next month, the three hikes planned for next year have evaporated.  Instead, many analysts believe there could be as few as just one rate hike next year.  While most investors applauded the move, it does imply that raising rates further could jeopardize or perhaps even stall economic growth.  Whether for political or economic reasons, the Fed appears ready to transition to a new policy come 2019.

In other news, Cyber Monday sales topped $7.9 billion according to Adobe analytics, making it the single largest shopping day in U.S. history.  To put it in perspective, this represents a 20% increase over sales in the same period last year.  Also, in comparison, Thanksgiving Day and Black Friday brought in $3.7B (28% growth y/y) and $6.2B (23.6% growth y/y) in revenue, respectively.  Sales coming from smartphones also hit an all-time high of $2B and the “buy online, pick up in-store” trend spiked 50%.  The flip side of the coin is that consumer debt has increased substantially and will top $4 trillion (excluding mortgage debt) by the end of this year.  With defaults rates remaining low, it appears consumers haven’t overextended themselves yet.

In company news, we learned that General Motors plans to downsize 15% of its workforce.  This came as a surprise to many, including President Trump, who was not at all happy with this announcement.  In its announcement, the company said it plans on cutting production of several well-known sedans including, the Buick LaCrosse, Chevy Volt, Chevy Cruz, Chevy Impala, Cadillac CT6, and Cadillac XTS. Its goal is to shave $6 billion per year in costs by 2020 while transforming the company toward “battery-electric” vehicles.  Unfortunately, among the plants being closed is one in Ohio and another in Michigan, which have already experienced drastic cuts to manufacturing over the past two decades.  Some believe the trade-war with China and steel tariffs are to blame.  The company reported its costs increased by $1.5 billion due to higher steel and aluminum prices.  Others are more inclined to believe it is a strategic decision to move production outside the United States.  Either way, the Midwest looks like it will take the brunt of it again.

In closing, this weekend could be a significant one as far as economic policy goes.  President Trump plans to meet with China’s Xi to discuss the status of trade negotiations between the countries.  At the moment the odds are 50/50 they’ll be able to reach an agreement.  Goldman Sachs sees an escalating China-U.S. trade war as the “most likely” outcome from the meeting this weekend.  If an agreement is not reached, it could go one of two ways.  The path of escalation would include tariffs rising to 25% on all Chinese imports currently under tariff and tariffs placed on remaining imports.  The next most likely outcome is a “pause”, in which existing tariffs stay in place while negotiations continue.  Next week could be volatile regardless of which way the talks progress.  We’re hoping for an amicable solution soon.  Now you know.

And finally, tomorrow is the Olde West Chester Christmas Walk.  As in past years, we will provide refreshments and cookies, as well as, a balloon artist for the kids.  For those in town, we encourage you to stop by and say hello.  The event begins at 2pm with crowds growing steadily throughout the day, culminating in a parade from 6:30-8:00pm.  We hope to see you there!

November 30, 2018

Making a Splash

Nov 16, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

It was another volatile week in the markets as investors and analysts digested corporate and economic news.  The technology sector led the slump once again as Apple and Nvidia disappointed.  In fact, corporate stories from General Electric to PG&E drove the markets lower this week.  We remain optimistic that a Christmas bump may be coming but unfortunately, it didn’t happen this week.

Let’s start with the good news.  The latest negotiations between the U.S. and China appear to be moving forward.  In a press conference today, President Trump announced that four of the five sticking points between the nations have been resolved.  The trade war has acted as a drag on the economy in terms of uncertainty.  A resolution on this front could provide the fuel for another push higher in the markets.  The second piece of news is that the Fed’s Vice Chair, Richard Clarida, said in an interview today that the Fed may stop raising rates at the “neutral rate,” which in layman’s terms means sooner rather than later.  The expectation for future interest rate hikes is slowly changing, with a high probability of another rate hike in December followed by a reassessment of the economic conditions and perhaps even a pause.  This too could go a long way to reassuring investors’ fears of the Fed going too far.

In other news, we learned Germany’s economy shrank in Q3 for the first time since 2015.  Some believe it could be chalked up to new emissions tests that temporarily disrupted auto production.  However, the contraction will feed fears that the euro area’s expansion is running into trouble.  We also learned that Japan’s economy contracted in the third quarter, mostly attributed to strong typhoons and a powerful earthquake that halted factories and stifled consumption.  A decline in exports was also concerning, suggesting trade protections are starting to take a toll on overseas demand.  Both countries will be watched closely in the months ahead.

As for company news, there was more than a bit and it could best be described as mixed.  Amazon finally announced the location of its second headquarters.  Apparently, it had such a difficult time deciding it chose both New York City and Washington D.C.  The move does not come without controversy, especially from taxpayers in New York who will be paying a whopping $48,000 per job in incentives to lure the company to its environs.  New York is on the hook for over $1.5 billion in tax cuts and incentives over the next ten years.  For other company news we turn to PG&E which is quite possibly responsible for the fires in Northern California.  Talk had turned to bankruptcy for California’s largest utility provider as liabilities could far exceed its insurance coverage.  The stock fell as much as 63% before slightly rebounding after representatives in California said it wouldn’t let the company go bankrupt.  And finally, it seems General Electric is once more in the spotlight for all the wrong reasons.  The company fell on hard times after the financial crisis in 2008 and has struggled to find its footing ever since.  Despite billions in asset sales, it’s debt level continues to weigh on the stock as investors fear credit rating agencies will drop its rating to junk status.  The company has a herculean task ahead both in righting the ship and in calming investors nerves.

In closing I turn to the art market which seems to come up occasionally on my radar.  In the past, I’ve mentioned pieces of art that have sold for astronomical amounts.  This time is no different.  Talk about making a splash, on Thursday a painting by David Hockney, titled Pool with Two Figures, sold for a mind numbing $90.3 million.  What makes this special is that it is the highest ever paid for a piece of art by a living artist.  In less than nine minutes of heated bidding at Christie’s, this piece smashed the previous record held by Jeff Koon’s sculpture, Balloon Dog (Orange), which fetched $58.4 million in 2013.  I’m sorry if you were in the market for a Hockney and missed this sale, but at least now you can start saving for the next record breaking auction.  Happy Thanksgiving!

November 16, 2018

Tundra Pie Pro

Nov 2, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

In case you didn’t notice, it was another very volatile week in the markets.  Fortunately, there were more bulls than bears and we look to finish the week higher.  More importantly, the Dow Jones Industrial Average has reclaimed 25,000, which is both a psychological and technical floor.  Earnings announcements continue to flood in with many companies reporting solid earnings and revenue growth with forward guidance to match.   There were a few notable exceptions but not as many as one might think.  Earnings announcements will begin to slow next week after which we should see the news focus on the outcome of the mid-term election and once again return to economic data.

Speaking of economic data, perhaps the best news we learned this week is that the economy added 250,000 jobs in the month just ended, versus an expectation of only 193,000.  Some might argue the quality of these jobs is poor, representing low-wage or entry level positions.  While it is hard to deny many of these jobs are entry level, it does speak to the general health of the economy that vast numbers of jobs are being created.  It also speaks to the deep pockets of consumers who continue to spend with reckless abandon.  While we don’t encourage our clients to spend recklessly, it should be noted that consumer spending makes up 71% of gross domestic product (GDP) or put another way, it is the gasoline for our economic engine.

In other news, last week I mentioned that the methodology for generating FICO scores will be changing next year.  The new UltraFICO score would be more favorable to those with blemished records.  This loosening of standards is not ideal, lest we forget the financial crisis.  So, I was pleasantly surprised to learn this week that both Capital One Financial and Discover Financial Services are becoming more cautious in their handling of credit limits.  They both reported they will be tightening lending standards as a precaution against a future economic downturn, both citing the length of the current recovery as justification.

Another story that caught my attention had a headline, “Tech Giants May Face Billions in New Taxes.”  How could one not be a little intrigued with a headline like that?  It seems the European Union (EU) is tired of tech companies finding tax avoidance loopholes.  As one example, Reuters documented in 2014, Google had moved $12 billion from its Dutch arm to a Bermuda-based, Irish-registered affiliate called Google Ireland Holdings.  The money was received as royalty payments from its Irish affiliate Google Irish Limited, where most non-U.S. revenues are apparently channeled.  If you didn’t follow that, you’re not alone.  Well, the EU decided enough is enough.  Its proposal is to impose a tax based on the revenue of tech companies rather than their profit.  If implemented, this tax could mean billions in taxes on the largest technology companies, including Google, Microsoft, and Apple.

In closing, I often like to talk about innovation in the economy.  After all, it is disruptive innovation that frequently leads to new markets and investment opportunities.  However, this week I bring an innovation that while disruptive, seems downright strange.   Pizza Hut and Toyota have teamed up to make a zero-emission robotic pizza-making truck.  The vehicle, dubbed the Tundra PEI pro, is programmed to have the pies freshly baked as you drive to your delivery destination.  You heard that right, Pizza Hut wants to bake pies in a Tundra.  It does seem to hit on all the key trends, i.e. robotic and zero-emission.  The only thing missing is self-driving.  I don’t know about you, I’m not sure I want a future where pizza is baked in the back of pickup trucks.  That’s one innovation I plan to skip.  Now you know.

November 2, 2018

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