Browsing articles in "Weekly Market Update"

Innovation: Not Just an Idea

Mar 29, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Today was a great end to a great quarter.  The gains experienced in the S&P 500 in the first quarter are among the best in the past decade.  The quarter certainly benefited from an oversold bounce back, after the fourth quarter’s heavy 14% slump, but analysts still see a positive year ahead.  While there could be some bumps in the second quarter as the market struggles with earnings growth and a slower economy, positive U.S. China trade talks and investment sentiment could propel stocks higher.  Here’s to wishing for a repeat.

Before I get to the fun stuff, let’s talk numbers.  In 2018, U.S. companies repatriated $664.8 billion of offshore profits to the U.S.  While this is a significant amount of money, it is far less than the $4 trillion that had been expected as a result of the 2017 tax reform.  That’s not to say that the tax reform wasn’t successful.  In 2017, U.S. companies repatriated only $155 billion.  To some extent, the tax on this repatriated money was included as an offset to the decrease in tax revenue due to the corporate tax cuts.  With repatriation falling well below estimates, we have yet another puzzle piece as to the reasons for the record setting monthly deficits and quickly rising national debt.

In company news, we learned this week that Apple is expanding its service offerings.  This move will help it diversify away from hardware, i.e. iPhones.  Among its new offerings were four major categories: Apple TV+ (new original content), Apple TV Channels (channel aggregation), Apple Arcade (online gaming), and Apple Card.  Of the four, the Apple Card is the real innovation.  The company plans on issuing a credit card with no number or name on its face and no magnetic strip on its back.  It will be made of titanium and have an embedded chip for credit card readers.  MasterCard sees banks following Apple’s lead to increase security.

We also learned this week that Johnson & Johnson had positive results from two Phase 3 clinical trials evaluating its investigational antihistamine-releasing contact lens.  Patients wearing the contact lenses experienced significantly lower itching within fifteen minutes of lens insertion and lasting up to twelve hours.  This is potentially big news for those who suffer from seasonal allergies but choose to wear contact lenses.  Since these lenses are in clinical trials, it is unknown when they will become available for purchase and there is no mention of the price premium these lenses will certainly carry.

Another company that continues to push the technology envelope, which may come as a surprise, is McDonald’s.  Its recent acquisition of Dynamic Yield is expected to give it the ability to vary electronic menu boards based on time, weather, and regional factors.  It could allow McDonald’s to respond to customer preferences in real-time.  Naturally, this reminds me of Uber and its dynamic pricing model.  But also interesting is the about-face the company has taken regarding the movement to raise the minimum wage.  Once a stalwart opponent of legislation to hike the minimum wage, it will no longer take part in efforts to lobby against it.  In fact, I can’t help but wonder if its push to utilize technology, i.e. cashier-less kiosks, will result in fewer employees in the long run and a significant competitive advantage versus its peers, especially given a higher minimum wage.  Sneaky?  Maybe.  Strategic?  Definitely.

In closing let’s talk about trying to time the market.  I’m sure you all know that this is not only difficult but also impossible to do over the long-run.  An investor needs to be right twice, correctly predicting when to move out of and then when to move back into the market.  To that end, I received an email from Wells Fargo this week that demonstrated this reality in a way that is hard to ignore.  It looked at market returns over the last thirty years (1998-2018) and found that if one were fully invested over the entire time period, the annual return was 7.61%.  Missing the ten best days out of the thirty years (10,950 days) resulted in an annualized return of 5.16%.  Missing the thirty best days gave a return of 2.07%, and missing the fifty best days resulted in a loss of -0.47%.  The takeaway is that missing even a handful of days when the stock market experienced its best gains can dramatically reduce returns.  Statistically speaking, it’s best to stay the course.  Now you know.

March 29, 2019

1,000,000,000,000,000,000

Mar 22, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Despite today’s pullback, the market had a fairly normal week ending only modestly lower.  Headline news dominated market movements with issues in Europe taking center stage.  As mentioned last week, we can expect geopolitical news to drive investors ahead of earnings announcements mid-April.  While today was a bit of an anomaly, we should expect volatility to remain heightened given the sustained uncertainty that has grabbed hold.

The biggest news this week was the announcement out of the Federal Reserve (Fed) that it intends to raise interest rates only once this year.  It had previously stated that no less than three rate hikes were on tap for 2019.  This newfound dovish attitude sent the opposite signal to investors than the Fed had hoped.  Investors took this announcement as a sign the economy had slowed more than anticipated and that perhaps the Fed knows more than it is letting on.  Whether pressure from the White House or weakness in the economic indicators, it seems almost inconceivable that the Fed will raise rates in this environment.

Speaking of this environment, it should be noted that the yield curve inverted today for the first time since 2007.  While today’s inversion is the spread between the 3mos and 10yr yield, it is more typically the 2yr and 10yr treasuries that are compared and at the moment that spread is still positive by 11 basis points (.11%).  Regardless, today’s pullback was a reaction to this event which historically signals a recession in the coming 12-24 months.  While this news may be jarring to many, it is not a big surprise as analysts and economists have been stating this likelihood for some time now.  As we’ve noted several times this year, economic growth is slowing both in the U.S. and abroad.  Since the fourth quarter of 2018, we have been making changes to our models to adjust for a slowing economy and the possibility of a recession next year.

In company news, it seems Intel and the Department of Energy are working on building the world’s fastest supercomputer dubbed Aurora.  Currently the two fastest computers are in the United States with the third and fourth residing in China.  The goal is for this to be the first supercomputer with a performance of one exaflop, which is one quintillion calculations per second.  To put that in perspective, if every person on Earth did one calculation per second, it would take everyone over four years to do all the calculations that Aurora could do in one second.  A supercomputer with such capabilities could be used to safely simulate and test new weapons, design better batteries, wind-powered systems, or nuclear reactors.  On the health front, it could be used for research on cancer, cardiac issues, traumatic brain injuries, and suicide prevention.  One thing is certain though, it still won’t be able to predict the weather in Ohio.

In other company news, it seems Anheuser-Busch InBev has teamed up with Keurig to bring us a new type of cocktail machine.  The Drinkworks machine adds water, carbonation, and flavored alcohol pods to create cocktails such as Moscow Mules, Old Fashioneds, mojitos, or gin and tonics.  The companies are still testing different price points and are in talks to license known alcohol brands.  Another innovation comes from JP Morgan which announced a new type of “checkless” bank account this week. It gives customers access to mobile apps, branches, and ATMs.  You may be wondering, “what’s the innovation?”  Well, they plan on charging $4.95 per month for the benefit of you depositing your money with them.  That to me is not the kind of innovation I like.

In closing, I bring you the lawyers that once sued and beat Big Tobacco.  A new class-action lawsuit takes aim at real estate agents and the tools they use to do business.  The suit was filed in Chicago on behalf of anyone who sold a home through one of 20 of the largest listing services in the country over the past five years.  The suit alleges the National Association of Realtors has conspired to require anyone selling a home to pay the commission of the broker representing the buyer “at an inflated amount,” in violation of federal antitrust law.  If this case were to prevail, it could revolutionize the way Americans buy and sell the biggest asset they’ll ever own.  Now you know.

March 22, 2019

Levi Strauss to Deepen Pockets

Mar 15, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

In the scheme of things, it was a good week for the stock market.  In recent quarters the cycle seems to fluctuate between earnings season and political developments (i.e. government shutdown, trade negotiations, Brexit, etc.).  It is typically at the peak of the new cycle that we see volatility and volume surge.  For now, we are at a lull in the cycle but expect things will pick up again soon with the start of earnings season in early April.

Due to the government shutdown, we are just now getting some important pieces of economic data from December and January and I’m pleased to report that it looks good.  January Durable Goods Orders came in considerably higher than expected and showed growth.  After a difficult December, January Construction Spending far surpassed expectations.  Also, consumer sentiment surged past estimates with even future expectations showing signs of improvement.  Lastly, job openings hit 7.58 million in January suggesting jobs are aplenty for those looking.  While you could contend these data points are from some months ago, it is hard to argue with the market recovery over the past few months.

In company news, we learned that Kraft Heinz is weighing the sale of its Breakstone’s dairy business.  The move is believed to be part of a broader review of the company’s dairy business, which also includes cheeses.  Dairy sales have slowed in recent years as U.S. consumers increasingly turn away from dairy products or look to non-dairy alternatives like oat, soy, and almond milk.  It is fascinating to watch industries adapt to cultural trends.  The best companies recognize these changes and find ways to thrive despite changing customer tastes and habits.

We also learned this week that Levi Strauss is once more going public.  I was surprised not by the announcement, although I had never given much thought to this company, but instead that this is the second time it is going public.  The company, founded in 1853, went public in 1971 but was again taken private in 1985.  The company is most known for its blue jeans, but should also be recognized for its Dockers brand, which helped usher in the era of casual Fridays.  The company looks to raise approximately $550 million with an average price between $16-17 per share.  The date of the IPO has not been determined but I would expect it within the next couple of months.

Last week I discussed our national debt and deficit spending.  I think I touched a nerve and apologize if I left anyone feeling down after reading last week’s email.  This week I came across a novel, dare I say innovative, idea regarding credit cards.  You’re undoubtedly familiar with cash-back credit cards and those that offer travel rewards.  How about a card that offers “stock-back?”  If financial startup Stash has its way, the next time you shop at Amazon, pay your Netflix bill, or pick up groceries from Kroger, rather than cash back, you’ll earn fractions of shares of the companies’ stock.  It will be interesting to see how this pans out and if other card companies follow suit. This is not an endorsement for either the company or its credit card.

In closing, I don’t have a witty or strange story this week.  However, I do have an offer that sounds like a good deal.  Burger King is running a coffee promotion through its app (what company doesn’t have an app these days).  For just $5 for the month, you can get a cup of coffee at Burger King every day.  That works out to only $0.17 a day for a 30-day month.  While it is unlikely Starbucks will offer anything similar, if you like Burger King coffee and don’t mind downloading another app on your phone, this sounds like a good deal.  Now you know.

March 15, 2019

An Ugly Jobs Report

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

All three major stock averages are heading for their fifth straight day of declines in the wake of a disappointing jobs report, persistent uncertainty over China-U.S. trade talks, and Brexit.  This week we are reminded that the markets rarely go straight up for very long.  A certain amount of volatility is to be expected and a reversion to the mean is part of the cycle and not an exception to it.

Today started off on a bad note after U.S. non-farm payrolls rose a seasonally adjusted 20,000 in February, sharply missing expectations of 180,000 new jobs.  It came as a huge surprise which no one seems able to fully explain.  Some economists suggest the cold snap that paralyzed much of the country is to blame, while others believe the government shutdown played a hand in the decline.  The number is so low that investors shrugged it off as an anomaly and perhaps even an accounting fluke.  The last time the number was this low was in September 2017 and before that May 2016.  It does happen occasionally, but is typically a one-month event with a large bounce higher the following month.

In company news, it seems Amazon won’t be satisfied until it revolutionizes every industry.  Despite acquiring Whole Foods in 2017, it now wants to roll out a new grocery store format going head-to-head with Kroger, Walmart, and Target according to the Wall Street Journal.  This $1 trillion industry is certainly large enough to accommodate another entrant, however, margins are already exceedingly low and even a small decline in profits can send a company’s stock sharply lower, i.e. see Kroger down 15% this week.  Amazon’s ace-in-the-hole is its own private label which it hopes to capitalize on, putting pressure not only on other supermarket chains but also package foods and household product companies such as Kraft Heinz, General Mills, and Kimberly-Clark among many others.

Aside from the weak jobs report, we also learned this week that U.S. credit card balances hit a record $870 billion in December.  Balances grew $26 billion in the fourth quarter marking the first time credit card balances re-touched the 2008 nominal peak according to the Federal Reserve.  Also, 480 million credit cards are in circulation, up by more than 100 million (+26%) since its trough after the 2008 recession.  Before you hit the panic button, household debt is significantly lower than it had been leading up to the 2008 financial crisis and delinquency rates are not at heightened levels at this time.  The bigger concern, and one that I have mentioned before, is the U.S. budget deficit which swelled 77% in the current fiscal year (YTD).  The shortfall in the first four months of this fiscal year widened to $310 billion.

Ironically, among the other news that sent markets lower this week was China reporting lower exports.  In a nutshell, the good news is that the trade tariffs are working.  The bad news is that trade tariffs are working.  Beijing reported exports in February tumbled 20.7% from a year earlier, far below forecasts of a 4.8% drop.  I said ironically because analysts are suggesting that this drop in exports is indicative of a global economic slowdown.  Policy, meet consequence.

In closing, I want to tell you about special precautions, the kind executives take.  We all know high profile executives often hire bodyguards to protect themselves and their families.  What you may not know is the lengths some go to.  New details emerged this week about the security plan for Mark Zuckerberg, CEO of Facebook.  It seems given his notoriety, he faces severe threats on a regular basis.  Unlike many CEOs, Mr. Zuckerberg works at a regular desk on an open plan floor at Facebook HQ but is said to always be surrounded by undercover security who pose as software engineers.  Also, the company garage is located just beneath his floor, but parking underneath the CEO’s desk is blocked due to the threat of a car bomb.  Most interestingly, it is reported that Mr. Zuckerberg’s desk is located next to a bullet proof conference room with a panic button and perhaps more strangely, a rumored “panic chute” leading to the parking garage below.  Now you know.

March 8, 2019

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