Browsing articles in "Weekly Market Update"

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

Around the World in 245 Days

May 11, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

If the market closes higher today, it will mark the seventh straight day of gains.  In fact, the Dow Jones Industrial Average has risen 1,000 points this week which also corresponds with the end of first quarter earnings announcements.  For the most part, companies announced earnings and revenue growth at or above analysts’ expectations in large part due to lower corporate tax rates.  However, much of this news was already priced in which meant prices didn’t rise as much as we might have wanted.  At this point, I expect attention will return to trade negotiations with China and NAFTA, rising oil prices due to the developing situation with Iran, and ultimately the number of interest rate hikes telegraphed by the Federal Reserve.

As has been headline news most of the week, the United States has withdrawn from the Iran nuclear deal brokered under the previous administration.  At this point it isn’t clear whether this is another of President Trump’s negotiating tactics or the start of serious sanctions against Iran and possibly even our European allies.  Fearing the latter, crude oil broke $71 per barrel this week marking the highest level since 2014.  One analyst at Bank of America Merrill Lynch went so far as to predict $100 per barrel oil over the next 18 months citing the Iranian sanctions, collapse in Venezuelan production, and the ongoing OPEC-led supply cuts. Not surprisingly, gas prices headed higher this week averaging $2.86.

Company news seemed more prominent this week perhaps due to the dwindling of earnings announcements as the week progressed.  We learned definitively that Starbucks is entering an alliance with Nestle to the tune of $7B, allowing Nestle the right to market Starbucks’ coffee products.  Starbucks announced it will use the proceeds to buy back shares.  We also learned this week that Walmart is buying an online retailer in India named Flipkart for $16B.  Walmart hopes to tap into a potentially huge market giving it diversification outside the United States.

Tesla hit a bit of a brick wall this week when its CEO, Elon Musk, refused to answer certain questions from analysts on a conference call.  He went one step too far by belittling several analysts and suggesting they want to see the company fail.  In his defense, Tesla is the most shorted company in the Russell 3000 with shorts accounting for 31.25% of the free float.  He walked back some of his comments but seems overly sensitive to the criticism that Model 3 production is far behind schedule.  Perhaps he should stop releasing unrealistic production numbers time after time, if he wants analysts to take him seriously.  Speculation is rampant about the amount of cash the company is burning through with many believing the company will have to go to investors again for another round of funding.  Mr. Musk vehemently denies this speculation but this week the company did amend the terms of its borrowing agreement with banks to allow it to pledge its Fremont factory – the production hub of its Model 3 sedan – as collateral.

Perhaps a better development for Tesla is that California has become the first U.S. state to require solar panels on nearly all new homes built after Jan. 1, 2020 as part of new energy efficiency standards adopted by the California Energy Commission.  While this is a boost to the solar industry, critics say it will add $8K-$12K to the cost of buying a new home in the state.  The solar power industry already provides 16% of California’s electricity, this highest rate in the U.S.

I was going to finish this week off by talking about how Social Security beneficiaries top 62 million for the first time, or how a record 95 million people are not in the labor force as Baby Boomers retire, but I’ll save that for another week.  Instead, let’s talk about the world’s longest cruise.  Viking just unveiled an epic eight-month round-the-world trip.  If you can afford to take that much time off work, it will only cost $93,000 per person, but includes all business-class airfare, transfers to and from the ship, all gratuities and service fees, and pretty much all the alcohol you’d like to drink on board.  The 245-day journey hits 59 countries and hits every continent except Antarctica.  The trip departs London on August 31, 2019 and returns to London on May 2, 2020.  It’s not too late to book your tickets.  Now you know.

May 11, 2018

How Low Can Unemployment Go?

May 4, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

While the market had a few big days this week, it finished right around where it started.  That’s the thing with volatility.  One big up day does not indicate the market is heading higher, nor does one big down day suggest the market is on the verge of collapse.  Volatility has a way of intensifying one’s feelings in sometimes irrational directions.  The reality is that the market has gone sideways for much of this year despite some big movements both up and down.  The next phase of this market will be determined by economic data and perhaps a political catalyst, i.e. resolution to issues with China, N. Korea, Iran, or even NAFTA.

Along those lines, a trade delegation led by Treasury Secretary Steven Mnuchin has arrived in China to talk about tariffs.  While most pundits don’t expect a breakthrough, many believe China may make a conciliatory effort which could stall the implementation of tariffs on approximately $50B in Chinese exports.  However, it is becoming clear that this administration often makes threats as a form of leverage or negotiating tactic.  We learned this week that the administration is delaying a decision about whether to impose steel and aluminum tariffs on the European Union, Canada, and Mexico until June.  This is the second (or perhaps third) delay and allows negotiations to continue unabated.  It seems concessions are likely coming but may not rise to the level the rhetoric would have us believe.

As has been the case so far this year, the economic data remains strong.  The unemployment number for April was released today and it came in at 3.9% which is its lowest level in almost two decades.  Additionally, the economy added 204,000 jobs in April and initial jobless claims are down 18% year-over-year.  Perhaps a contrarian indicator, personal savings is down 20% as well, but that indicates people are spending which is good for the economy if not problematic in the long-run.

In company news, it seems the bookmakers don’t give very good odds on T-Mobile merging with Sprint.  While the merger could improve the health of the telecom industry given that there are really only two very large competitors, Verizon and AT&T, it doesn’t appear likely that regulators will bless this merger.  However, another rumored merger that seems peculiar but possible continues to gain steam.  A significant partnership or outright purchase of Humana could be good for Walmart shareholders and consumers.  Humana has a large Medicare Advantage business that skews to lower income seniors and looks like a natural fit for Walmart with its large aging customer base.  While this would be an odd combination, it could help diversify Walmart outside of just retail.  Lastly, there was word today that Starbucks may be selling its packaged food business to Nestle.  While the deal has not been finalized, it appears that both sides are close to reaching an agreement.  Perhaps we’ll learn more next week.

In closing I’d like to relate a story I heard this week.  While car sales fell in general during the month of April, it seems one car company can’t make them fast enough.  You may be mistaken in thinking I’m talking about Tesla.  However, it seems times are good for Ferrari who has sold out most of its models for 2018 and a part of next year.  What’s even more impressive is that the manufacturer is running at full capacity.  However, just in case you must have a Ferrari this year, it seems they still have a few GTC4 models.  It will set you back $300,000 but then you’ll have it in your garage this year.  One other tidbit I learned about Ferrari is that it has a self-imposed 10,000-car annual limit.  Apparently, this allows it to operate under less stringent fuel-economy rules.  Now you know.

May 4. 2018

Interest Rates on the Rise

Apr 27, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Stocks fluctuated this week as the benchmark 10-year Treasury yield hit 3% for the first time in four years sparking concerns over higher borrowing costs for companies already facing rising commodity and labor costs.  Although the move in interest rates is important, earnings announcements remain center stage with many companies beating expectations on both revenue and earnings growth.  The impact of the recently passed tax reform is somewhat larger than expected, however a lot is already priced in to stocks at these levels which is why we aren’t seeing too many big price moves.

Today we learned that U.S. Gross Domestic Product (GDP) for the first quarter came in at 2.3% which exceeded the consensus expectation for 2.0%.  For many, this is viewed as good news because it suggests the U.S. economy is plugging along well and gives the Federal Reserve the needed data to keep pushing forward with its plan to raise interest rates two more times this year.

Additionally, the March Consumer Confidence number came in higher than expected at 128.7 vs the 126.1 consensus.  Both the present situation and expectations index were also higher.  Consumers appear to be pulling out their pocketbooks more frequently due to tax cuts, wage growth, and even tax refunds.  We anticipate this behavior to continue through at least the third quarter.  However, energy could be the wildcard given the recent rise in the price of crude oil and the impact that could have on gasoline prices and indirectly on discretionary spending.

Along those lines, the price of crude oil crept higher this week.  This stealthy move has seemingly flown under the radar of most media channels.  Oil has risen from $26 per barrel to almost $70 per barrel over the last two years, and as we move into the summer months it could mean increased transportation costs for summer travelers.  Also putting pressure on the price of oil is the current decision whether to renew the Iran nuclear deal.  President Trump has openly declared that he opposes the deal and is the most significant element behind crude’s recent rally.  The U.S. has until May 12 to decide whether to quit the deal and reimpose sanctions against Iran.

In company news, we learned Amazon is raising the price of its Prime membership from $99 to $119 per year beginning June.  They also announced a new partnership with GM and Volvo to provide “in-trunk” delivery of packages which is a first of its kind.  First, they wanted into our homes, now they want into our cars?  In other news, we learned that Google’s CEO, Sundar Pichai, has restricted stock that vested to the tune of $380 million.  This is one of the largest single payouts to a public company executive in years and makes me wonder when million-dollar bonuses stopped being enough.  To his credit, Google’s stock has surged 90% since the restricted stock was granted.  Apple’s Tim Cook met with the President in a closed-door meeting in the oval office this week to discuss… you’re guess is as good as mine.  Perhaps it was the repatriation of Apple’s huge cash position held oversees?

In closing, I grew up in an era of wood-paneled station wagons which should give you a decent indication of my age.  The station wagon was replaced by the minivan, and for those without the capacity needs, the four-door sedan.  In more recent times, sales of pickup trucks and SUVs have gone mainstream.  To that end, Ford announced this week that it will stop selling all sedans in the U.S. except the Mustang.  The company expects that by 2020 almost 90% of its portfolio will be trucks, utilities, and commercial vehicles.  We’re entering a new era and it sadly doesn’t include the sedan.  Now you know.

April 27, 2018

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