Browsing articles in "Weekly Market Update"

Tariffs: From Seafood to Mattresses

Jul 13, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

You wouldn’t know it if you weren’t paying close attention, but the market was up this week.  With all the tensions between President Trump and NATO, Theresa May, China, Mueller, etc. you’d think that things were going worse than they are.  In fact, Microsoft hit a new all-time high this week.  That’s not to say all sectors and industries are doing well, but instead to point out that there are pockets of strength that remain.  However, the big concern continues to be tariffs which now appear to be more than just a negotiating tactic but instead a policy strategy.

Let’s talk tariffs.  This week China imposed a retaliatory tariff on U.S. optical fiber products of up to 78% hitting primarily U.S. company Corning (GLW).  The White House quickly published a new list of tariffs calling for a 10% tariff on $200 billion worth of Chinese goods which will likely become official in about two months.  Ironically, fearing a trade war, exporters rushed shipments to avoid the coming tariffs and thereby pushed the June trade deficit to a record $28.97 billion giving President Trump further ammunition to use against China.  For now, financial markets so far have shrugged off the first round of tariffs, but a new list would mark an escalation.  However, the following industries have already begun to feel the heat:

  • The textile industry is front-and-center in the escalation of tariffs. As a group there have been broad declines, but companies hit particularly hard include PVH, Tapestry, Gildan Activewear, Fossil, Vera Bradley, and Skechers.
  • Also hit hard is the soybean industry. Soybean prices fell to their lowest price in nearly a decade with domestic supplies set to rise to the highest level ever on expectations that China will cut into exports.  The USDA expects soybean exports to fall 11% next year with other countries failing to offset the lost demand in China.

Looking more broadly, it appears the corporate tax reform has resulted in what many analysts had expected.  S&P 500 companies are on track to repurchase up to $800 billion in shares this year – a total that would top the 2007 record.  However, despite these record share buybacks, a full 57% of those companies are trailing the S&P 500’s YTD performance, which marks the highest ratio of underperforming stocks since 2008.  One must wonder if corporate executives are buying high, just as in the previous record year of 2007.  Among sizable repurchasers this year not seeing a very good return on investment is Oracle, McDonald’s, and Bank of America.

In company news, Starbucks has big plans to ditch plastic straws in favor or new lids and recycled paper straws.  Starbucks isn’t the first company to do this, but seems to get more than its share of attention.  The movement to reduce plastic is gaining traction.  PayPal announced it plans on spending $3 billion annually on mergers and acquisitions that enable it to acquire specific capabilities.  The company is ambitious in its plans to grow and has a healthy balance sheet to help it get there.  And lastly, P&G announced it is not immune from tariffs, but not from China as might be expected.  Instead, the company says the vast majority of its products will be impacted by tariffs in Canada after the Canadian government decided not to issue an exemption.  It seems our stalwart ally to the north is done playing “nice” guy.

In closing, I came across an article today that got me thinking.  There used to be a time when the titans of industry worked to make the world a better place.  For example, Rockefeller donated more than $500 million to various philanthropic causes.  In more modern times, we have Bill Gates and Warren Buffett who himself has given away more than $46 billion since 2000.  But it seems, imperceptibly gradual, that philanthropy has diminished over time.  There are perhaps many good reasons explaining away this observation, including the possibility that the premise is completely wrong.  However, I’d be interested in knowing your thoughts after reading the following article.   Survival of the richest: The wealthy are plotting to leave us behind.  Let me know.

July 13, 2018

Protecting Free Markets

Jun 29, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

It is hard to believe the second quarter is now behind us.  We were just celebrating the new year the other day.  How quickly the snow melts into spring flowers, and the spring flowers melt into the summer.  The big news this week had to do with tariffs and Supreme Court decisions.  There was a small uptick in volatility with the end of the quarter, but that is to be expected.

The news this week was tariffs.  What started as idle threats seem to have turned into the beginning of a trade war.  Both China and Canada have levied tariffs on U.S. products in retaliation for U.S. tariffs on steel and aluminum last month.  Our Canadian friends will impose tariffs on almost $15 billion worth of U.S. imports beginning Sunday, ranging from steel and aluminum to whiskies, mustard, toilet paper, washing machines, motorboats, and oddly enough maple syrup.  China reported it has an additional $450 billion worth of tariffs earmarked if the Trump administration chooses to escalate things further.  In economics we learned that every decision, from public policy to corporate projects, needed a cost-benefits analysis.  It’s what got Ford in trouble with the Ford Pinto and its exploding gas tank.  So where is the cost-benefit analysis in these tariffs?  I’ve yet to see who exactly benefits and who pays.  There will be winners and perhaps even more losers.

Not surprisingly U.S. auto manufacturers are crying foul.  To be taken with a grain of salt, an automotive trade group representing GM, Toyota, and Volkswagen says a 25% U.S. tariff on imported passenger vehicles, if imposed on national security grounds, would cost American consumers $45 billion annually, or $5,800 per vehicle.  They further argue, this hit alone would largely cancel out the benefits of the tax cuts.  Ironically, a couple weeks ago it was the rising price of gasoline that was going to wipe out the benefit of the tax cuts.  It seems the benefit of the tax cuts is doomed at this point.  No doubt, the proponents would argue that this gives good cause for manufacturers to build more plants in the U.S. to serve our market.  Along those lines, Harley Davidson announced this week it will shift production of motorcycles for European Union (EU) destinations from the U.S. for exactly the reason to get around EU tariffs.  So, there is a case to be made.

In other news, the Supreme Court ruled on several important cases they heard last Fall.  I won’t get into the politics of it since I’m sure there are those on both ends of the political spectrum who read this weekly email.  I will however provide links to the opinions of those cases.

And finally, you’ll be happy to know that all banks, except for one, have passed the Federal Reserve’s stress test this year.  The banks intend on increasing dividend payouts and buying back substantial shares in some cases.  Investors were pleased by the news.  The other sector that did well this week was Energy due to oil prices moving higher.  Increased demand due to the Fourth of July holiday could be part of it, however, some attribute at least some of the recent rise to the upcoming ban on all Iranian oil imports both domestically and abroad.  The White House expects not only our allies to abide by the ban, but also intends for China, Turkey, and India to follow suit.

I’m sorry I don’t have anything funny to close on, but I do want you to pay attention to one thing this weekend.  The Mexican presidential election is Sunday and it could be the beginning of a new era for Mexico.  The frontrunner, a politician named Andres Manuel Lopez Obrador (AKA Amlo), is strongly left-leaning and could present a challenge to President Trump’s agenda, i.e. immigration, the border wall, and NAFTA negations.  The populist movement that started here two years ago is burning bright across the globe, from Italy to Germany, and Mexico to Brazil.  Keep an eye on this election.  I have a feeling it will be consequential.

June 29, 2018

Innovating the Future

Jun 8, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

It was a surprisingly quiet week that saw the Dow Jones Industrial Average pick up almost 700 points.  I had to go back and double check my numbers because this stealth rise escaped even my notice.  While most of the attention is on President Trump and the G-7 meeting, there was a lot of company news that was reported this week, as well as a few other points of interest.  Let’s dive in.

It seems fast food innovation is picking up speed as these companies work hard to attract, retain, and in some cases, expand their customer base.  For example, McDonald’s has been testing self-serve kiosks allowing customers to place orders directly.  One surprising finding is that customers tend to spend more when ordering directly on a kiosk.  As a result, the company will be adding kiosks to one thousand restaurants each quarter for the next two years.  Perhaps a coincidence, McDonald’s sent an email out to U.S. employees this week stating there will be another round of layoffs announced at the June 12 town hall meeting.  Lastly, it appears President Trump and Kim Jung Un do have at least one thing in common:  They both love McDonald’s.  North Korean leader Kim Jong Un reported that he may allow McDonald’s into the nation as a goodwill gesture to the U.S.  I’m sure goodwill is his motivation.

In other food news, Kentucky Fried Chicken (KFC) is testing vegetarian options.  The company is devising a fake meat version aimed at the U.K. as part of a move by the British government to reduce calories by 20% per serving by 2025.  While I am not sure how I feel about fake meat, reducing calories is something I fully support.  And lastly, the International House of Pancakes (IHOP), which has been around since 1958, is looking to change its image.  The company announced it will rebrand soon, starting with a name change to IHOB.  Management is being coy regarding what the new name means, but many speculate the “B” stands for Burgers, Bacon, or perhaps most likely, Breakfast.  The full announcement should come soon.

In other news, IBM has once again retaken the title for the world’s fastest supercomputer.  The numbers are mind boggling.  The supercomputer dubbed Summit can perform 200,000 trillion calculations per second, or 200 petaflops.  That’s eight times more powerful than Cray’s Titan supercomputer and nearly twice as fast as the peak speed for Chinese supercomputer Sunway TaihuLight.  And some people don’t think AI is on the horizon?  The computer was developed at a cost of $200 million and will be used to apply machine learning to genetic data to find patters for treatments for Alzheimer’s, heart disease, and opioid addiction.  The next global ranking of fastest supercomputers comes June 25, but as of November, China held 202 of the spots compared to 143 for the United States.

While not all innovation is of the product variety, this innovation in marketing/sales caught my attention.  Mercedes Benz announced the launch of a new subscription service.  The services offer Signature, Reserve, and Premier tiers ranging in price from $1,095 to $2,995 per month.  Subscribers may choose from all the vehicle body styles offered in that subscription tier and may change cars as frequently as they choose.  With self-driving cars still on the distant horizon, and electric cars slowly gaining market share, it seems an expanded lease model may be an interim step toward a future in which people never really own cars like we do today.

I know I didn’t get to any economic data this week but rest assured there will be many weeks that you’ll wish I had other things to talk about.  So in closing, I want to bring you a bit of news that might just help you live longer.  Scientists from five universities have discovered that walking faster could add years to your life.  Before you scream fake news, there just might be something to this.  Walking at an average pace was linked to a 20% reduction in the risk of mortality compared to walking at a slow pace, while walking at a brisk pace was associated with a risk reduction of 24% according to the study.  A similar result was found for the risk of dying from cardiovascular disease.  Also, the study found it’s not too late to start.  In fact, the benefits were far more dramatic for older walkers.  Average pace walkers aged 60 years or over experienced a 46% reduction in risk of death from cardiovascular causes, and fast paced walkers a 53% risk reduction.  So, get out this weekend and walk a little.  It might just add some years to your life.  Now you know.

June 8,2018

Bullish Until Proven Otherwise

May 25, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

This week had its share of stories, including the decision by the President to scrap the summit with N. Korea, cooling trade talks with China, and potential tariffs on new imported cars.  Instead of talking about these stories as I usually would, I’d like to do something a little different this week.

In the process of bringing you the news each week, I tend to gravitate to the stories that made the most headlines and the stories that have the largest impact on the stock market.  However, these stories often highlight negative news since those are the headlines that are most widely reported.  I mention this because I came across a piece this week that hit a nerve and helped me realize the pervasiveness of negative news can color one’s outlook, maybe even mine.  You see, I read a lot of analyst papers each week and, they all focus on solutions to one risk or another.  To be fair, it is our job to look ahead and parse out the real risks from the perceived risks.  Yet, when one does this day after day, much like watching the evening news, it may seem that there are only bad things happening.  So when I came across this column, it made me aware that perhaps what is needed is a little more balance.  With that, I decided to copy the article in its entirety.  This piece was written by Mitch Zacks from Zacks Investment Management.  Without further ado, here is the piece.

“Successful investing often relies on research, patience, discipline, and smart decision-making. But, there’s another trait that can be helpful – in a word, “optimism.”

The world is full of uncertainty – disease outbreaks, the threat of nuclear war, hyper-partisanship and divisiveness, mounting debt, anemic savings rates, and so on. So, it’s easy to be pessimistic and bearish. But, history suggests it’s better to be bullish until proven otherwise.

For example, in 1950 the Korean War broke out – just five years after the end of World War II. The S&P 500 was up +30.81% that year. In 1963, President Kennedy was assassinated, but the market was up +22.61%. 1975 marked the fall of Vietnam, yet the market soared +37%. In 1993 Congress passed the largest tax increase in history, and the S&P 500 increased +9.97%.

Over time, events occur that result in mass casualties or destruction of businesses or even industries. Yet, stocks manage to battle through the adversity and have continued throughout history to trend higher, reaching new highs in every cycle.

In some cases, gains seem to defy logic. Stocks love to climb a wall of worry and have proven over time that solid, long-term returns come to those who wait. Waiting requires patience and an ever-constructive attitude regarding human potential and the potential for growth in the global economy. It requires optimism.

Since 1998, we’ve endured the Tech Bubble bursting, 9/11, the Iraq War, and the deepest recession since the Great Depression. But, $10,000 invested on January 1, 1998 would have been worth $40,135 by December 29, 2017; a +7.2% annualized gain for the investor patient and optimistic enough to take the long view that the economy would prevail. And, it has.

In the last two decades, an investor whose optimism wavered during the most challenging times could have paid a big price. Selling out of the market in response to the biggest declines – usually to ‘wait it out’ – could have meant sacrificing some of the market’s biggest ‘up’ days. During the 1998 – 2017 time frame mentioned above, 6 out of the 10 best days in the market occurred within two weeks of the 10 worst days. The best day of 2015, for example (August 26) was just two days after the worst day of that year (August 24).  Downside volatility often gives way to “v-shaped” bounces, making steep declines arguably some of the worst opportunities to sell out of stocks.

I’m not calling for interminable, blind optimism. There will be reasons to think and invest defensively. Still, in my view, those who invest in equities for long stretches of time are likely to generate attractive, competitive returns. What it takes, particularly in the face of so many adverse events, is optimism. Channel optimism, see past the small stuff, and realize that stocks and the global economy can overcome what might seem like the biggest challenges.”

In the face of these difficult times, perhaps the author is right.  Perhaps what is needed is a little optimism.  Let me know what you think.

May 25, 2018

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