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Shifting Landscape

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

In a win of sorts, the market went sideways this week.  Considering the United States launched missiles into Syria, the Senate changed long-standing rules to confirm a Supreme Court nominee, and a much weaker than expected jobs report was announced, we should be happy with how the markets held up.

I’ve noted in recent weeks companies that have filed for Chapter 11 bankruptcy.  This week we learned Payless Inc., the shoe company, is the latest to suffer from a shift in consumer preferences.  The disruption occurring in the retail industry is on a scale not seen in decades.  The shift to online sales steadily sped up in recent years with brick-and-mortar retailers having to rethink their business models.  Perhaps first to fall was Barnes & Noble, which admittedly still exists but with a rapidly declining footprint.   Some of the largest retailers are spending furiously to build an Internet presence, including Walmart, Kohls, and Target.  An ancillary industry that is also feeling the pinch are the mall operators themselves.  It is estimated more than 10 percent of U.S. retail space, or nearly 1 billion square feet, may need to be closed or converted to other uses.  Even a trip to the supermarket looks different these days.  If you haven’t tried Kroger’s new ClickList you owe it to yourself.

Before you say good riddance to the omnipresent strip mall, consider the toll on jobs.  We learned today that only 98,000 jobs were created in March.  This came as a big surprise since 180,000 were expected.  Some of the shortage can be attributed to the 30,000 positions retailers cut in March.   However, there’s the other side of the coin to consider.  153,000,000 Americans were employed in March, setting the second consecutive monthly record with only 7.2 million people currently unemployed.  The unemployment rate fell to 4.5%.

As for company news, we learned Panera is being acquired by JAB Holdings, a privately held German company which owns Keurig, Caribou Coffee, Stumptown Coffee, Einstein Bagels, and Krispy Kreme Donuts.  Starbucks was rumored to be a suitor, but may now need to reconsider its options.  In other news, Coca-Cola struck a deal with Major League Baseball, so expect to see more soft drink commercials this summer while rooting for the Reds!  And something more unusual, it seems Warren Buffet has given permission for his image to appear on cans of Cherry Coke in China.  The Chinese apparently really like Mr. Buffet, and his company, Berkshire Hathaway is one of Coca-Cola’s largest shareholders with 9% of the company.  Now that’s thinking outside the box.

While on the subject of a changing landscape, it was announced this week that Tesla’s market capitalization has exceeded both Ford and General Motors.  That’s not to say they produce more cars than Ford or GM because they clearly don’t.  Last count Tesla produced 83,000 vehicles last year.  For reference, General Motors sold almost 10 million vehicles globally in 2015.  However, what this does suggest is that investors believe electric vehicles are the future and as such, have bid up the price of Tesla’s common stock price to an astronomical level.  Lest we forget, GM, Ford, BMW, Toyota and virtually every other car manufacturer is also working on producing electric vehicles, and in some cases, are already ahead of Tesla.  Having said that, Tesla does have a lot going for it most especially its very enthusiastic and loyal customers.

It seems the theme this week is about change.  Along those lines, we may all benefit from this story.  Scientists are developing a contact lens that tells you when you’re sick.  Imagine a biosensing contact lens that can tell when your blood sugar is getting too low, or if there’s something wrong with one of your organs.  By leveraging the power of ultra-thin transistor technology, researchers at Oregon State University have taken us a step closer to achieving that goal.  At the moment, a lab-tested prototype can only detect blood glucose levels, but the hopes for this technology are far reaching.  Now you know.

April 7, 2017

Mooo’vng Forward

Mar 31, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

It is hard to believe the first quarter just ended.  It was a quarter which saw stocks rise but one that also experienced an increase in uncertainty and volatility.    President Trump was in no small part responsible for both the appreciation and the uncertainty.  While his timeline has certainly changed, it appears his goals remain intact.  We anticipate the economy will continue to grow modestly in the second quarter as gridlock in Congress takes hold.

There is quite a lot to talk about this week.  I’ve mentioned the issues surrounding the Department of Labor’s Fiduciary Rule August 2015 and again November 2016.  Without getting too far into the weeds, the Fiduciary Rule was originally proposed in 2010 as part of sweeping financial reforms.  However, it was pulled from the bill and brought back in 2015.  In essence, the fiduciary rule is about putting clients’ interests first.  For clarity, Harvest Financial Advisors already abides by the fiduciary rule while the brokerage and insurance industry does not.  Though this should not be a controversial topic, it gets to the heart of how brokers are compensated in the financial services industry.  Upon taking office, President Trump ordered a review of the rule at the behest of the world’s largest asset managers who control America’s $16 trillion retirement industry.  Among those are Blackrock and Vanguard, two of the largest and most trusted names in the industry, who are concerned the new rules “risk confusing investors and adding unnecessary costs for the financial industry.”  I’ll let you draw your own conclusion.

Another topic that frequently comes up is automation and its impact on jobs.  This is a theme I anticipate will grow in the years and decades ahead.  Ford announced this week it will invest $1.2 billion to expand SUV and truck capacity at three separate Michigan plants.  This is fantastic news and was quickly pushed by the White House as “making America great again.”  However, reading a little further, one would notice that this rather large expenditure is expected to add or retain only 130 jobs.  The moral of the story is automation could lead to greater productivity at the expense of labor.

So I’ve touched on regulation in the financial industry and jobs in manufacturing.  The only thing left to discuss is climate change.  This week Exxon Mobil urged President Trump to keep the United States in the 2015 Paris climate agreement, calling the accord “an effective framework for addressing the risks of climate change.”  So what’s up with the world’s largest fossil fuel company pushing for climate change regulation?  As with the financial industry above, it is important one considers the motivation.  Exxon Mobil says in its letter that, “there are several reasons for the U.S. to stay in the Paris pact, including the opportunity to support greater use of natural gas, since it creates lower carbon emissions than coal when used for power generation.”  You’ll never guess who has been investing heavily in natural gas the past few years.

And lastly, if you thought privacy was essentially dead, it is now officially dead.  Both the House and the Senate voted this week to repeal regulations governing consumer privacy protection at Internet service providers.  When the president signs this legislation, the repeal will allow service providers to sell consumer information including browsing history without customer consent.  Major providers that will benefit from looser rules include AT&T, Comcast, and Charter Communication.  Your web browsing patterns contain a treasure trove of data, including your health concerns, shopping habits and visits to personal sites. ISPs can find out where you bank, your political views, and sexual orientation simply based on the websites you visit. The fact that you’re looking at a website at all can also reveal when you’re at home and when you’re not.  Welcome to the 21st century.

In closing, I came across a story about Fitbit for cows.  Cows?  It seems the tags which most cows have in their ears are going high tech.  The new ear tags will monitor each cow’s heart rate, body temperature, and location.  It will also store the animal’s date of birth and vaccination history.  A rancher will be able to access this data using Bluetooth-enabled devices, essentially creating “smart cows.”  Not unlike precise crop management, this will usher in the era of smart herd management. Now you know.

March 31, 2017

Two Spaces or One?

Mar 24, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

While Monday marked the first week of Spring, green failed to materialize in the markets.  Sentiment soured a little for the first time on President Trump’s ability to accomplish his promised pro-growth policies of tax reform and stimulus.  Also, health care reform appears to have met an impasse in the House, and a lot of investors are waiting for the next catalyst.

At issue, the growing doubts that tax reform, infrastructure spending, and deregulation will take longer to pass than initially thought.  Optimism after the presidential election led markets higher on the premise that a lot of what the President campaigned on could be implemented quickly.  Markets shot higher, and valuations became stretched.  However, opposition within the President’s party was not fully appreciated, and President Trump’s strong-arm business style flies in the face of the long-standing tradition of “horse trading” otherwise known as politics.

President Trump wasn’t the only one having a difficult week.  Sears stock declined over fifteen percent as the company warned it might not continue to be a “going concern.”  While this doesn’t come as a surprise, it is unusual for a company to make such a statement unless there is a good cause.  It should be noted Sears still retains 15-20% of the appliance market and 10-15% of the tool market.  Continued declines at Sears could be a win for the likes of Home Depot and Lowes.  On another note, Google had a difficult week after several large advertisers, including Verizon, AT&T, Johnson and Johnson, and JP Morgan, announced they are freezing advertising on non-search properties of Google.  Apparently, ads from these companies were placed next to content promoting terrorism and hate on YouTube (which is owned by Google).  Google issued a mea culpa and promised to give companies more control over where their ads appear.

Not to be forgotten, England is still in the process of decoupling from the European Union.  Prime Minister Theresa May will formally write to the European Union next Wednesday to announce Britain’s withdrawal from the bloc.  If all goes according to the two-year negotiations set out in the official timetable, Brexit should happen in March 2019.  Also on the radar, Greece is set to miss yet another deadline for unlocking bailout funds, edging closer to a repeat of the 2015 drama that pushed Europe’s most indebted nation to the edge of economic collapse.  So if it makes you feel any better, the United States, while undergoing some dysfunction, remains the best place to invest.

In closing, I discovered I’ve been doing something wrong for a long time.  In fact, I’d bet many of you may be as surprised as I was upon learning that you should never put two spaces after a period.  How can it be wrong when we were taught this so many years ago?  You can blame it on the electric typewriter (yes, that dates me).  As typesetting became more widespread in early 20th century Europe, its practitioners adopted best practices.  Among those was the use of a single space following a period.  Every major style guide – including the Modern Language Association Style Manual and the Chicago Manual of Style – prescribes a single space after a period.  Most people would know the one-space rule if it weren’t for a quirk of history.  It comes down to the electric typewriter circa 1950.  Electric typewriters used monospace type – that is, every character occupies an equal amount of horizontal space.  This is in contrast to proportional type which typesetters used.  Monospace type gives you text that looks “loose” and uneven.  Hence the adoption of the two-space rule.  On a typewriter, an extra space after a sentence makes text easier to read.  Here’s the thing, Monospaced fonts went out in the 1970s.  While I intellectually understand the rule, this habit thirty years in the making may be hard to break.  Please don’t fault me.  Now you know.

March 24, 2017

Fed Decision

Mar 17, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

It was a relatively quiet week as investors waited for the Federal Reserve (Fed) meeting Wednesday.  At the end of last year, the Fed anticipated raising rates three times in 2017.  This past Wednesday was the first opportunity to raise rates and investors took a wait-and-see approach to avoid getting ahead of the Fed’s decision.  Because it was so highly anticipated, when the Fed did make the announcement to hike rates 0.25%, it was largely met with a collective yawn.

What is rather unusual is the lack of larger swings in the market.  So far this year, the Dow has only closed higher or lower by more than 100 points on 13 days.  If this pace keeps up, 2017 will be the year with the second least 100-point moves since 2006.  For clarification, a 100-point on the Dow represents only 0.48% Dow’s value.  The low number of 100-point days comes alongside a host of other stats demonstrating just how abnormally quiet stocks have been.  The CBOE Volatility Index has remained anomalously low, and the S&P 500 has not fallen by 1 percent or more since early October, the longest such streak since 1995.  The consensus is investors are in a “buy-the-dip” mentality since the election last November.

In other news, with tax reform looking less likely this year, U.S. companies are making overseas acquisitions now rather than waiting for tax changes later.  Intel announced Monday it is paying $15 billion to buy Mobileye, and in January Johnson & Johnson agreed to buy Switzerland’s Actelion for $30 billion.  In both cases, the corporations are paying for their acquisitions completely with cash they’ve stashed abroad.  Publicly listed U.S. corporations have announced more than $60 billion in acquisitions of targets outside of North America this year, more than double the amount in the same period a year ago, per Bloomberg.  There’s too much cash on corporate balance sheets.  That cash wants to go someplace, and if it can’t go home, it will travel.  Congress’s non-partisan Joint Committee on Taxation estimates that U.S. corporations hold as much as $2.6 trillion of profit overseas that hasn’t been taxed in the U.S.

While we’re on the subject of tax reform, it might be a good opportunity to review some highlights of President Trump’s first budget proposal.  The good news, I suppose, is that it does not touch mandatory spending programs like Social Security, Medicare, and Medicaid (which collectively make up 75% of total federal spending).  What he addressed in his budget is the 25% which is considered discretionary spending.  It should come as no surprise that the areas he wants to spend more on are those he talked about on the campaign trail, while those parts of the budget he wants to cut are ones he has been most vocal about since taking office.  If one were to score the agencies regarding winners and losers under the current proposal, it would look like the chart above.  In a nutshell, defense spending will increase approximately 10 percent while the EPA and aid to foreign countries would take the biggest hit.  While the budget will most likely be tweaked in the coming weeks, it will undoubtedly have a positive impact on some sectors while making it more difficult for other sectors.  The stock market will try to anticipate the winners and losers.

For the story of the week, I turn to YouTube.  By now most of your have heard of YouTube, and many may watch videos on it regularly.  I count myself among the latter group.  But what I came across a couple of weeks ago caught me completely off guard.  As of this month, people around the world now watch more than 1 billion hours of YouTube per day!  For comparison sake, viewers of regular television programming watch 1.2 billion hours per day.  While many of the clips found on YouTube are short, they clearly add up.  YouTube put it in further perspective, pointing out that an individual attempting to rack up 1 billion hours of viewing would have to find a playlist that was 100,000 years long.  It is a huge shift and one that reflects YouTube’s ascent to a primary media distribution platform.  Google owns YouTube.  Now you know.

March 17, 2017

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