Browsing articles in "Weekly Market Update"

Ciao! Keebler Elf

Apr 5, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

It was a week chock-full of good economic news and the markets reacted accordingly.  The Dow Jones Industrial Average looks to close almost 500 points higher on the week, continuing the upward trend which began earlier this year.  Furthermore, the bar for first quarter earnings has been set fairly low.  While a few companies will report earnings next week, the bulk will begin the following week.

The best news of the week was announced today when the March nonfarm payroll report indicated that 196,000 had been created in the month.  You’ll remember that just one month ago we were shocked when the February number came in at only 20,000.  As many suggested at the time, the month of February was an anomaly with a return to more normal job creation returning in March.  Adding weight to this data point, March’s ISM manufacturing index improved and February construction spending rose more than expected.  Fortunately, we have strong enough growth but not necessarily enough to force the Federal Reserve (Fed) to become more hawkish.  This week’s news will allow the Fed to retain a patient stance with interest rates.

While the economic news has been good of late, it hasn’t stopped the President from a new offensive.  President Trump’s relationship with Fed Chair, Jerome Powell, has been rocky from the start despite Mr. Powell being the President’s nominee to head the Federal Reserve.  The President believes if not for the interest rate hikes, economic growth and the stock market would be higher, and the trade deficit wouldn’t have swelled as fast.  He’s not wrong.  However, interest rates which were dropped to previously unseen levels after the financial crisis, never really regained historic norms.  Lowering them again at a time of 2% economic growth and low inflation could be like pouring gasoline on a fire.  Sometimes too much of a good thing can do more harm than good.  While it may be good for the President politically, it almost certainly wouldn’t be good for the economy in the long-run.

In company news, it seems the Keebler Elf will soon become an expat.  It was announced this week that Ferrero SpA acquired a number of cookie brands, fruit snacks, and pie crusts from Kellogg for $1.3 billion.  Aside from Keebler cookies, Famous Amos and cookies manufactured for Girl Scouts of the U.S.A will also be moving across the pond.  While we’re on the subject of food it seems Burger King is testing a new plant-based meat substitute in select markets.  If you happen to be in the St. Louis area, you will be able to test The Impossible Whopper which will be flame grilled like a regular Whopper but contain no meat.  Burger King has partnered with Impossible Foods on the burger initiative with a market for meat-free substitutes growing to an estimated $1 billion in coming years.  Not to be outdone, Nestle plans on bringing its Incredible Burger to Europe this month followed by North America by the end of the year.

Last week I noted that McDonald’s will no longer be fighting against raising the minimum wage and even speculated that this could be a strategic move by the company to put pressure on smaller chains and mom-and-pop alternatives.  It seems McDonald’s isn’t alone in its thinking.  This week Target announced it too will be dropping its fight against lower wages.  The company plans on raising its starting wage to $13 per hour with an incremental plan to hit $15 per hour by the end of 2020.  This puts it right smack in the middle of the minimum wages at Amazon ($15/hr) and Walmart ($11/hr).  It does appear the tide is turning.  The question is how long before these higher wages translate into higher prices and an increase in inflation?

In closing, I bring you more unusual news.  What I thought was an April Fool’s story turned out not only to be true but also somewhat disturbing.  It seems in the Soviet Union there was a candy bar by the name of Hematogen that was a favorite among children.  It was a chocolaty, chewy snack with an oddly metallic aftertaste.  It was made with beet sugar, condensed milk, and sugar syrup but also had a secret ingredient: cow’s blood.  It seems this treat was created as a kid-friendly iron supplement at a time when food scarcity was an issue.  A generation of children came to love the candy bars which were cheaper and more accessible than candy.  Now, these same Russian adults have a soft spot for Hematogen.  You see, it is still in production and can be purchased on Amazon.  If you’re brave enough to order some, you’ll have to let me know how they taste.  Now you know.

April 5, 2019

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

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