Browsing articles in "Weekly Market Update"

The Trump Slump

May 19, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Political jitters increased volatility this week.  Stocks suffered their worst one-day selloff since September, finally cracking after several weeks of little action.  The stock market had been counting on President Trump and the Republican-led Congress to deliver tax reform, deregulation, and infrastructure spending, but those plans now seem shaky as D.C. looks increasingly likely to become bogged down in investigations and finger-pointing.

While most weeks I can balance the good news with the bad, this week swung toward fear and concern.  From the President’s interactions with ex-FBI Director James Comey to allegedly leaking high-level intelligence to Russia and geopolitical problems in both Venezuela and Brazil, it wasn’t the type of week you really want to recap.

Let’s start with the concerted push to lower mortgage down payments.  The CEO of Bank of America, Brian Moynihan, was quoted this week saying, “Our goal – going back to regulatory reform – is should you move the down payment requirement from 20% to 10%?  It wouldn’t introduce that much risk but would actually help a lot of mortgages get done.”  You might recall, Bank of America was the top U.S. mortgage lender ahead of the 2008 mortgage crisis, causing it to face greater losses, both from defaults and litigation, than any other bank.

Along similar lines, a senior analyst at Wells Fargo downgraded the credit-card industry noting net charge-offs for the group rose to 3.5% in the first quarter.  There is a concern credit has become too easy once again, with subprime having the potential to become a problem.  The number of charge-offs is at a four-year high and this analyst expects it to stay elevated for the rest of the year, even in a benign economic environment.  A 1% increase in the provision for charge-offs would cut earnings for the sector by 27% on average, with Capital One faring the worst, followed by Discover, Synchrony, and American Express.

For those of you who were looking forward to the repeal of Obamacare, you may have to wait a bit longer.  For those looking to block the repeal, you got some good news this week.  Bloomberg reports that the House of Representatives may have to vote again on the Republicans’ repeal of Obamacare depending on how the Congressional Budget Office (CBO) estimates its effects.  House leaders want to ensure that the bill conforms with Senate rules for reconciliation so it can pass with a simple majority vote.  If GOP leaders hold onto the bill until the CBO releases its report, then majority leader Paul Ryan and his team can tweak it, if necessary, which would require another vote.

If you don’t follow the news, you might not know that there’s a problem brewing in Venezuela.  It’s actually quite serious and has been building for several weeks.  Earlier this week, a day that began with largely peaceful protests against Venezuela’s socialist government took a violent turn as fierce clashes between state security and demonstrators killed at least two people.  Unfortunately, the mood has spread to Brazil with suggestions of government corruption there too.  There are allegations President Michel Temer agreed to pay hush money to a key witness in the country’s biggest-ever corruption probe.  While we continue to like emerging markets, these developments are a concern and should be closely watched.  We do not have any direct exposure to either country at this time.

In closing, let’s turn to the luxury market.  Sotheby’s this week sold the world’s most expensive earrings for $57 million, topping the $17.7 million price of a pair sold by Christie’s last year.  The two pear-shaped stones are perfectly similar except for their color: one is pink while the other is blue.  Not to be outdone, Sotheby’s also sold a painting by late graffiti artist-turned-expressionist painter, Jean-Michel Basquiat, becoming the most expensive at an auction of any U.S. artist, fetching $110.5 million in New York.  We are living in very heady times.  Now you know.

May 19, 2017

Deconstructed Shoes

May 12, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

While it was a politically newsworthy week, in truth there wasn’t much to move the market.  Investor complacency appears to be the norm while simultaneously the volatility index fell to a multi-decade low.  With first quarter earnings announcements all but finished, it seems investors are waiting to see what comes next.

While there wasn’t any one big news story, there were lots of smaller, perhaps more interesting stories this week.  I’ll go in chronological order.  Perhaps the most newsworthy story of the week was the runoff election in France.  We learned on Monday that Emmanuel Macron won 66% of the vote and is poised to become the youngest president in France’s history.  This victory helps solidify France’s place in the European Union (EU) and helped reassure investors that the EU isn’t falling apart.

You no doubt are aware that the current administration is hard at work dismantling regulations in various industries from the energy sector to the financial services industry.  This week we learned that the FDA is delaying a rule requiring restaurants to post calorie counts.  Dr. Tom Price, Secretary of Health and Human Services, approved the FDA decision noting the rules would be burdensome for the food services industry.  So much for making America healthy again?

As noted in the opening, the volatility index (VIX) fell to a 24-year low of 9.7.  The downward swing in this fear gauge is likely tied to the result of the French election and the general sideways action in global markets.  Perhaps the best explanation I found was from Convergex chief market strategist Nicolas Colas.  He stated, “Volatility is ultimately a mathematical measurement of human emotion on stock prices.  Emotions are by their nature unpredictable, which makes the VIX equally inscrutable.  All we know is that human emotions still exist, and therefore volatility will return.”

For those of you following cryptocurrencies, Bitcoin hit a new all-time high this week.  Bitcoin soared passed $1,800 only two days after breaking the $1,700 level and rising more than 300% this year.  What could be driving this move is the recent move by Japan to legalize the cryptocurrency as a payment method.  Russia is considering doing the same.  I’m not sure if the recent trend in blockchain currencies is a bubble, but it sure has that feeling.

There isn’t a week that goes by that Amazon doesn’t have some new concept or project.  The company announced it is looking to open four massive warehouses to help it deliver bulky items like appliances and furniture.  The initiative is part of a strategy to expand furniture offerings and speed up delivery times.  A top Amazon executive said, “Furniture is one of the fastest-growing retail categories.”  While Costco has been doing this for some time, this move by Amazon is sending a shiver through the furniture and home furnishing sectors.

And we can’t end the week without some news out of the airline sector.  It seems airlines around the world are bracing for a possible expansion of an electronics travel ban to include many routes from Europe to the United States.  Representatives from Delta, United, and American met with national security officials in Washington to discuss threats to aviation security and the possible pre-emptive measures.

In closing, the story of the week has to do with distressed clothing.  Remember the trend in the 80’s when new jeans came looking pre-worn.  Stone washed jeans quickly morphed into jeans with holes in strategic places to make them look more fashionable.  Well, this trend reached new heights a month ago as Nordstrom started selling jeans caked in fake dirt for $425 a pair.  And just last week Neiman Marcus started selling battered and ripped sneakers for $1,425 a pair.  Don’t believe me? Check out the links.  I’m at a loss for words.  Now you know.

May 12, 2017

Fiscal Discipline Wilts

Apr 28, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Investors breathed a big sigh of relief this week as several potentially problematic issues were averted.  Voters in France are overwhelmingly supporting the more moderate candidate that isn’t calling for France’s exit from the European Union and Congress voted today to avoid a government shutdown, albeit for just one week.  With earnings announcements coming in generally better than expected, the market reversed the trend of the past six weeks and will finish the week higher.

While it is too soon to say what impact President Trump’s tax cut proposal will have on the economy, it has clearly drawn a line between those for it and those against it.  Unfortunately, many key details were not released when the White House made the announcement and it differs in four ways from the President’s campaign proposal.  The following are the main differences:

  • A smaller tax cut for top earners: The White House proposal would lower the top marginal rate for individuals from 39.6% to 35%, rather than the 33% proposed on the campaign trail.
  • A smaller tax cut for middle-income individuals: The proposal now calls for a standard deduction of $24,000 for couples rather than $30,000. This is still roughly twice as much as the current standard deduction.
  • Repeal of the state and local tax deduction: The Trump campaign proposal was unclear about which individual tax deductions might be eliminated. The deductions for mortgage interest, charitable contributions, and retirement savings would be maintained.
  • A territorial tax system for business income: The revised White House plan would adopt a territorial tax system, which exempts foreign earnings from U.S. tax.

Conspicuously absent was any mention of a border tax adjustment, which has been floated in Paul Ryan’s plan and widely accepted in the House of Representatives.  It also repeals the death tax and abolishes the alternative minimum tax (AMT).  Additionally, it would cut the corporate tax rate from 35% to 15%, and apply the same rate to pass-through entities which benefit most small businesses throughout the country.  I expect a long road ahead for tax legislation.  While there is a good chance that tax reform becomes law, the details will likely make this a tough piece of legislation to pass.

In other news, Gross Domestic Product (GDP) slowed more than expected in the first quarter.  The consensus was for GDP to come in at 1.2% which itself is lower than the 2.1% we saw in the fourth quarter of last year.  However, GDP came in at 0.7% which surprised many but didn’t seem to bother the market.  The culprit was consumer spending which softened considerably from 3.5% in Q4 to just 0.3% in Q1.  Spending on large-ticket items such as cars and home appliances dropped and possibly affecting results was the low level of heating due to moderate weather in large parts of the U.S.  Most economists believe Q1 is an anomaly and consumer spending will likely pick back up in Q2.

It was announced this week that China now holds the record for the world’s largest money market fund.  A Chinese money market fund set up as a repository for leftover cash from online spending has emerged as the world’s biggest, with $165.6 billion under management.  Alibaba’s four-year-old Yu’e Bao fund – which means leftover treasure – has overtaken JP Morgan’s U.S. Government Money Market Fund, which has $150 billion.  Yu’e Bao pays 3.93% and no, we can’t invest in it!

In the wake of the United Airlines beat down and the American Airlines issues with mothers traveling with children, it should come as a relief to know that both airlines are hard at work figuring out how to treat their customers like people.  Perhaps adding a helping hand, the Federal Communications Commission (FCC) is withdrawing its proposal that would have allowed air travelers to use their cellphones while in flight.  Despite new advances in in-flight communications, the value of quiet at 30,000 feet was deemed more important.  United will be able to use their slogan, “Fly the Friendly Skies” and possibly mean it.  Now you know.

April 28, 2017

Geopolitics Takes Center Stage

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

The uncertainty regarding healthcare reform, infrastructure spending, and tax reform took on new dimensions this week.  Geopolitical risks took center stage this week.  From the terrorist attack in Paris on the eve of their presidential election to the continued risks in both Syria and North Korea, investors are understandably reluctant to keep driving the market higher.  It looks like we’re headed for a period of consolidation while these various issues are resolved one way or another.  In the meantime, we remain invested but diversified.

It was a light week for economic news, however, first quarter earnings announcements began to dribble in.  Some of the largest Dow 30 companies reported this week including popular names such as American Express, Visa, Verizon, and General Electric.  Having a difficult time are the largest banks whose stocks are basically flat for the year.  The energy sector is also having a tough time as oil prices have stalled around $50 per barrel with pressure to the downside.  The energy sector is down 9.8% for the year.  However, there are bright areas of the economy which include technology, consumer discretionary, and healthcare.  In fact, technology is the clear winner up almost 10% this year. It seems people are still spending money on appliances, automobiles, entertainment and dining out.

In other news, let’s turn to France.  Voters will be going to the polls on Sunday to choose their next president.  It is a close race between the four frontrunners, which include independent Emmanuel Macron, far-right Marine Le Pen, conservative Francois Fillon, and far-left Jean-Luc Melenchon.  Since an outright majority is unlikely, a run-off between the two leading candidates is expected on May 7.  Security fears have re-emerged in the run-up to the election after an ISIS gunman killed one and injured two on the Champs Elysees this week.  This is the sixth terror strike on Paris in three years.  France is the second largest economy in the Eurozone and its president holds enough power to influence the country’s economic and political path.  Both Marine Le Pen and Jean-Luc Melenchon have proposed, via different routes, taking France out of the euro and, like Britain, out of the European Union (EU).  All eyes will be on France this weekend.

The brief respite we receive this week was after Treasury Secretary Steve Mnuchin let slip that President Trump is working on an enormous tax reform proposal that may come as early as next week.  In an Associated Press interview, President Trump promised a “massive” cut for both businesses and individuals.  It is expected on Wednesday or shortly thereafter, in time for what looks like an important self-imposed 100-day deadline for President Trump.  His administration will release the plan for cuts that are “bigger I believe than any tax cut ever.”  At this time it is unknown whether the proposal will be deficit neutral but either way it could have large implications on the economy.

In closing, I appeal to all the data junkies out there.  I came across a new organization funded by none other than Steve Ballmer (ex-CEO of Microsoft) called USAFacts.  According to the website, “USAFacts is a new data-driven portrait of the American population, our government’s finances, and government’s impact on society. We are a non-partisan, not-for-profit civic initiative and have no political agenda or commercial motive. We provide this information as a free public service and are committed to maintaining and expanding it in the future.”  So why is Ballmer doing this? The project grew out of his conversations with his wife, Connie, about their philanthropic initiatives. One of his theories was that government was best-positioned to handle many of the issues most important to them — education, poverty, inner-city youth — and so perhaps they didn’t need to worry so much, as long as they paid their taxes. Connie Ballmer challenged him on that point, which led Steve Ballmer to look for the kind of report on government that he would have sought when trying to analyze a company as an investor.  When he couldn’t find one, he set out to build it himself. is the result of several years of hard work in partnership with Stanford University, the Wharton School of Business, and $10 million of Mr. Ballmer’s own money.  If you have a moment, it is worth a look.  Now you know.

April 21, 2017


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