Browsing articles in "Weekly Market Update"

Is Yellen on the way out?

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

From news on tax reform to the failure of an Obamacare repeal, this week was full of consequential news.  Add to that, the busiest week for earnings announcements this quarter and you have the makings of a very crazy week.  I’m happy to say the markets look to close higher despite the wide variety of good and bad news.  I use the word “bad” loosely because it is such a subjective word.  At the moment, investors have a high tolerance for political uncertainty and appear optimistic for the second half of this year.

Let’s start with the Federal Reserve Open Market Committee (FOMC) meeting this week.  To nobody’s surprise, the Fed announced it is holding pat on interest rates.  The difference between the last meeting and the current meeting boils down to about fifteen words.  The Fed’s statement makes clear job gains in June were solid but that inflation is below its two percent target.  The language on both items is stronger than the previous statement.  With regards to its balance sheet it went on to say, “for the time being the Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee currently expects to begin implementing its balance sheet normalization program relatively soon.”  It was the relatively soon part that got people’s attention.  It is unclear whether the Fed will let its holdings mature, actively sell its holdings on the open market, or some combination of the two.  As a reminder, the Fed’s balance sheet swelled from roughly $800 million before the financial crisis in 2008 to roughly $4.5 trillion today.

While we’re on the subject of the Federal Reserve, it should be noted that Janet Yellen’s term as the Chairperson is set to expire in January 2018.  It is up to the president to decide whether to keep or to replace her with a new appointee.  The Fed has been slowly transitioning from a more accommodative to a less accommodative policy regarding the economy, which may work against the current administration’s desire to keep its monetary foot on the gas pedal.  The latest reports suggest that Gary Cohn is the leading contender to replace Janet Yellen.  If appointed, Cohn would be the first Fed Chairman who isn’t a trained economist since Jimmy Carter’s appointment of G. William Miller.  Mr. Miller lasted all of seventeen months before being replaced by Paul Volker in August 1979 due to runaway inflation.  Some of you may remember those days.

In other news, a new study out this week suggests the mortgage interest tax deduction has no effect on home ownership.  I should admit I am skeptical of these findings but believe it will be used in the upcoming tax reform debate.  As reported by the Wall Street Journal, it shows the popular U.S. tax deduction, a “sacred cow” of the country’s tax code, just isn’t very effective.  The study was put together by scholars from MIT, Princeton, and the University of Copenhagen.  Ironically, the study centers on real estate data from Denmark in the ‘80s.  It concludes the deduction reduces government tax collections by $72 billion per year.  This report comes during speculation over the final shape of the administration’s tax cut proposal.  Without savings from the attempted Obamacare repeal, the GOP will have to come up with other ways to cut expenses in order to keep their proposed tax reform deficit neutral.  Another idea being floated is to increase the top marginal tax rate to 44% on those earning above $5 million.  It seems implausible that Republicans will go for that option.

In closing, I turn to speeding tickets.  At some point, virtually everyone will be pulled over for exceeding the speed limit.  Urban legend suggests that the color of the car is a major determinant.  Most people believe the color red gets pulled over more often, but red actually comes in second to white.  So when I came across a non-scientific piece this week that asked which vehicles get the most traffic tickets I was intrigued.  Is it BMWs or perhaps Corvettes?  I figured a sports car would top the list.  I was wrong.  Top of the list is the Lexus ES 300.  To be fair, the remainder of the top ten was, in fact, sports cars.  But Lexus?  To read the results and see where your car ranks check out this website (not an endorsement of  Now you know.

July 28, 2017

Monkey Business

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

The focus this week turned to earnings announcements. Although it is still early, many of the companies reporting this week beat analysts’ expectations and were generally optimistic regarding the remainder of the year. The earnings announcements in the coming weeks will help determine what the second half of the year will look like. Despite an inability to pass legislation to spur the economy, we believe economic growth will continue at a slow but consistent 2% to 2.5% pace.

Outside of earnings announcements, there was a lot of company news this week. Let me highlight a few of the notable stories:

  • Procter & Gamble is perhaps the largest company ever to face a proxy fight. Nelson Peltz’s Trian Fund Management plans to battle for a board seat at P&G in an effort shake up its “slow-moving and insular” culture. Peltz is not seeking a breakup of the company at this time.
  • What not to say as CEO – At the National Governors Association meeting this past weekend, Elon Musk made some news saying (again) that Tesla’s stock price is too high. He realized his mistake when the stock price fell sharply the following day and took to Twitter to say the price is high based on past and present, “but low if you believe in Tesla’s future.” Nice save.
  • Facebook announced it is doubling its investment in New Mexico with plans that include a $500 million data center expansion. The company broke ground on the first building, to cover an area equal to 17 football fields, that should go live in late 2018. Construction on the second building should run through 2020.
  • McCormick announced it is acquiring Reckitt Benckiser’s food business in a deal worth $4 billion. It apparently beat out several competitors including Unilever and Hormel, Financial Times reports. Reckitt’s food business includes French’s mustard and Frank’s RedHot sauce.

In other news, it finally happened this week. It took seventeen years, but the S&P 500 information technology sector has finally recovered from the dramatic collapse of the dotcom bubble. The index closed at 992.99 on Wednesday, breaking the record of 988.49 set on March 27, 2000. The gradual recovery spanned the rise of social media, the revolution in cloud computing, and the invention of smartphones.

Perhaps a little sobering is the news that the number of Americans renting hit a 50-year high. The percentage of households renting rose to just under 37% last year, according to Pew Research. That’s vs 31% in 2006, and just under 37% seen all the way back in 1965. While the groups that have historically tended to rent – young adults, non-whites, and the lesser educated – continue to do so, Pew found rising rates among traditional buyers likes whites and middle-aged adults. Some of the reasons given for the shift include rising home prices, stagnant wages, and overwhelming student loan debt.

For the story of the week, I return to a piece I first mentioned back in 2014. It is the story of a selfie taken by a macaque monkey and the legal question of who owns the photo. The case has bounced through the court system these past three years and now finds itself in Federal court. Here’s a quick recap – a curious monkey with a toothy grin and a knack for pressing a camera button took a particularly good picture of himself. The photo went viral and the photographer, David Slater, asked for the image to be removed on the grounds that the websites didn’t have the right to publish the image without his consent. People for the Ethical Treatment of Animals (PETA) is suing Slater and the self-publishing company Blurb for copyright infringement, on behalf of the macaque monkey who “took” the photo. It seeks to administer all proceeds from the image to a wildlife reserve in Sulawesi, Indonesia. A federal judge ruled against PETA last year, saying it lacked the right to sue because there was no indication that Congress intended to extend copyright protection to animals. The 9th U.S. Circuit Court of Appeals in San Francisco heard the appeal this week. Perhaps the best line is, “Monkey see, monkey sue” is not a good law under any federal act. Blurb’s attorney wondered at the possibilities if they do not prevail. “Where does it end? If a monkey can sue for copyright infringement, what else can a monkey do?” The outcome has not yet been decided, but rest assured we’re on it. You can see the picture the monkey took and read the original story by clicking here. Now you know.

July 21, 2017

Job Growth Brings Optimism

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

While this week was slightly positive for the markets, it was somewhat lackluster most likely because we are on the precipice of earnings announcements due out in the coming weeks.  While most headlines were focused on news of North Korea’s launch of its first ICBM missile, and who won the handshake competition between President Trump and President Putin at the G20 summit, there was noteworthy news that wasn’t covered.  Let’s take a few minutes to review the other news that happened this week.

Perhaps the most important news is that the labor market roared back in June, with a hefty monthly gain in jobs, and revisions added 47,000 more jobs in April and May than previously reported. Over the past three months, job gains have averaged 194,000 a month. Although the unemployment rate ticked up from the previous month, it did so because more people joined the workforce.  While the payroll number was well above expectations, the wage numbers were weaker than expected.  Economists expect wages to rise at an even faster pace because the unemployment rate is near a post crisis low, and so there should be more competition for skilled workers. But some Federal Reserve officials have noted that the lower unemployment rate is not lifting workers’ pay the way it used to partly because productivity is lower.  Either way, today’s news gives cover to the Fed should they decide to continue raising interest rates.

Along similar lines, the Federal Reserve released the minutes from its latest meeting and while it may be on the path to normalizing interest rates, there is little consensus on when to start paring down its massive balance sheet.  To shrink the nearly $5 trillion balance sheet, the Fed said it plans on gradually allowing fixed amounts of assets to roll off without reinvestment, and raise the caps on these amounts every three months.  While some of the voting members prefer clear communication on balance sheet reduction, others favor waiting until later this year, believing a move now would signal that the Fed is getting more aggressive.  So while an interest rate hike or two remain likely before the end of the year, how to resolve the Fed’s huge balance sheet remains a bit of a mystery for now.

One sector that did well this week is the defense sector.  Defense stocks are on the rise after North Korea launched its first ballistic missile capable of reaching the continental U.S.  Its actions may cause the U.S., Japan, and South Korea to fund missile defense at an above average rate, according to a Jefferies analyst.  Additionally, Poland agreed to buy the Patriot missile defense system from the U.S., in a deal worth up to $7.6 billion.  While opinions span the spectrum on President Trump, his policies influence not just the market but individual companies as they relate to his agenda.

In closing, I bring you a scandal of the highest proportions.  Well, maybe not that big but worth noting nonetheless.  A couple months back, we learned that Tom Price (R-GA), President Trump’s nominee to be Health and Human Services Secretary, was under investigation for having bought shares in a tiny biotechnology company while sitting on a committee that influenced the firm’s prospects.  Shocking, you say?  A recent study found that 28 House members and 6 Senators each traded more than 100 stocks in the past two years, placing them in the cross hairs of a conflict of interest on a regular basis.  Before you get out your pitchforks, it should be noted that 384 House members and Senators who served in the 114th Congress made no stock trades over the past two years.  While Congress passed a law just five years ago to curb lawmaker insider trading, it seems there is no enforcement of said law.  And while it isn’t common practice, this most recent report indicates there’s more work to be done.  Now you know.

July 7, 2017

These Times They Are A-Changin’

Jun 30, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Today marks the close of the second quarter.  It was a busy week which included the second go at a healthcare bill from the GOP, a ransomware attack on several multinational corporations, and the approval by the Federal Reserve allowing thirty-four of the largest banks to commence capital return plans.  The second quarter had its ups and downs but managed to finish on a positive note despite the dysfunction in our nation’s capital.

Let’s start with some company news.  This week was the tenth anniversary of Apple’s iPhone and while it has both fans and detractors, no one can say it hasn’t been a success.  So I take this moment to remind us that even the best and brightest minds are sometimes wrong.  Steve Ballmer, then CEO of Microsoft, famously said, “$500, fully subsidized, with a plan!  That is the most expensive phone in the world and it doesn’t appeal to business customers because it doesn’t have a keyboard, which makes it not a very good email machine.”  Mr. Ballmer spent another six years stubbornly fighting the tide before stepping down in 2013.

In other company news, self-driving cars remain in the headlines.  The latest round of news is that companies are creating joint ventures and partnerships with the aim of building strong alliances before the market is fully developed.  Among those announcing partnerships are Volvo, Autoliv, and Nvidia.  This goal is to develop software systems for autonomous vehicles.  One day earlier, Apple reported it is working with Hertz on autonomous testing, while Alphabet (Google) inked a deal with Avis to manage its self-driving car fleet.

Self-driving cars aren’t the only changes on the horizon.  Unilever is undergoing a radical hiring experiment.  To diversify its candidate pool for early-career roles that are a fast track to management, Unilever is ditching resumes and traditional campus recruiting.  Its new process relies on algorithms to sort applicants and targets young potential hires through their smartphones.  To quote Bob Dylan’s 1964 album, “These Times They Are A-Changin.”

What isn’t changing is the improvement in the financial sector.  This week Janet Yellen announced the results of the latest stress tests and found that the banking system is very much stronger than in the past.  She even went so far as to say a financial crisis like the one seen in 2008/09 isn’t likely “in our lifetime.”  Your guess is as good as ours as to who’s lifetime.  All thirty-four banks won clearance by the Federal Reserve which is the first time since the global financial crisis.  As a result, financial stocks had a good week with most issuing capital return plans in the form of dividend hikes and increased stock repurchase authorizations.

ETF ownership of stocks rose to a record in the quarter.  ETF inflows in the first quarter were $98 billion, prompting Goldman Sachs to raise its full-year inflow forecast by $100 billion to $300 billion.  ETFs, per Goldman, now own a record 6% of the U.S. stock market.  Mutual funds, on the other hand, were net sellers of $31 billion of stock but still own 24% of the stock market, although representing the lowest level since 2004.  Still, ETFs weren’t the biggest buyers of stock.  That award goes to corporations, which hoovered up $136 billion through buybacks.  Goldman expects that number to reach $640 billion for the full year.

In closing, I turn to Illinois.  As of this writing, the state is in dire straits and without a budget for the third straight year.  Its comptroller is on record saying that if a budget isn’t passed by midnight tonight, the state will begin defaulting on large parts of its economy.  But this is the part of the story you might not have heard.  The Illinois Lottery announced on Tuesday that, without a budget or any special legislation, it won’t be able to pay anyone winning $25,000 or more come July 1.  In response, the popular Powerball and Mega Millions have asked the state of Illinois to stop selling tickets effective immediately.  As for those winning more than $25,000, they’ll have to press their luck for lawmakers and the governor to authorize payments.  Now you know.

June 30, 2017


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