Browsing articles in "Weekly Market Update"

Rocket Mortgage Blasts Off

Apr 13, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

The Dow Jones Industrial Average gained over 500 points this week after having been on a bit of a roller coaster ride these past few weeks.  Between a potential trade war with China and Russia and escalating tensions in Syria, it’s no wonder the market has been all over the place.  As long-term investors, we know times like these can feel very uncomfortable.  However, it is prudent to stay invested during these periods and not try to time the market.  Easier said than done, it is essential to keep our focus on our long-run goals and not concentrate too much on the drama du jour which has become a staple of the news cycle.

With that aside, let’s focus on what is important.  First quarter earnings announcements will begin in earnest in the coming weeks.  The volatile stock market will see a major test as traders size up the first-quarter results.  Tax cuts should help corporate America show its biggest quarterly profit growth in seven years, with S&P 500 profits expected to rise 18.4%.

In economic news, it seems gas prices may be heading higher just in time for summer.  The average gas price reached $2.70 a gallon last week to mark the highest level seen since 2015, according to data from the U.S. Energy Information Administration.  Economists say the higher gas prices in the U.S. are a consequence of the OPEC decision in 2016 to cut back on oil production.  I don’t happen to agree.  To cut back on emissions, oil refineries are required to switch to a summer formulation each year around Memorial Day.  This summer blend of gasoline costs more to produce and thus the price of gas typically rises just in time for summer vacation.  While I may be wrong, the recent price increase may have more to do with rising tensions in the Middle East rather than output cuts instituted two years ago.  One thing we can agree on is that the level of gas prices isn’t considered quite high enough yet to cut significantly into spending by U.S. consumers.

In company news, we learned Sears is shutting down its last store in Chicago, marking the end of an era.  The company has been based in Chicago for more than 100 years.  The company shed more than 50,000 jobs in 2017 and has racked up more than $10.8B in losses over the past seven years.  On a more positive note, local company Kroger, is set to hire an estimated 11,000 positions in its supermarket division, including 2,000 management positions.  This follows hiring 10,000 employees in 2017 and 12,000 in 2016.  Over the last decade, Kroger has added 100,000 new jobs in communities across America.  Also noteworthy, Johnson & Johnson won FDA approval to bring to market the first contact lens that automatically darkens when exposed to bright light.  After more than a decade of development, this new style of contact lens should come to market in the first half of 2019.

On a less positive note, it appears subprime lending is back in an albeit somewhat different form.  The large banks are no longer loaning thousands directly to subprime borrowers but instead lending indirectly through nonbank operators who make the loans.  Bank loans to nonbank financial firms are up six-fold since 2010 to $345B.  Amongst the largest lenders to nonbank financial firms are Wells Fargo, Citi, Bank of America, and JP Morgan.  You may be surprised to learn that the largest mortgage lender in 2017 was Rocket Mortgage a division of Quicken Loans, a nonbank lender.  It closed on over $96B in loans in 2016.  As of 2018, Rocket Mortgage replaced Wells Fargo as the top U.S. retail mortgage lender.

In closing, I’d like to turn your attention to one of my childhood heroes.  Some of you may remember the tennis player Bjorn Borg.  He’s widely considered to be one of the greatest in this history of the sport and was the first to man to win 11 Grand Slam singles titles between 1974 and 1981.  Since then he’s embarked on a totally different career as a fashion and sportswear retailer in Sweden.  But here’s the interesting part.  For more than two years the company has made on-the-job exercise mandatory.  The current CEO is on record saying, “If you don’t want to exercise or be a part of the company culture, you have to go.”  Can you imagine a movement like this occurring in the United States?  No? I can’t either.  Now you know.

April 13, 2018

The 40% Rule

Mar 16, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

With another shakeup in President Trump’s cabinet, the markets started the week on shaky ground.  Fortunately, the economic data proved enough to buoy investor sentiment and while the market will close slightly lower this week, it ends on a good note.

It is the end of an era.  After six decades of rule by the Castro’s, Cuba went to the polls last Sunday to select ruling party candidates.  The members will choose a successor to President Raul Castro when he steps down next month.  Perhaps this will signal a new chapter as this country moves on.  Similarly, ending a chapter is China which amended its constitution removing presidential term limits and paving the way for President Xi to remain in power indefinitely.  Much like Putin’s grasp on power in Russia, a consolidation of power in China could change the nature of our relationship, especially as the U.S. threatens tariffs on its largest trading partner.

Talking about ousters, we learned this week that Secretary of State, Rex Tillerson, no longer has a position in President Trump’s Cabinet.  The announcement was made on Twitter where Mr. Tillerson first learned of the news.  He is replaced by CIA Director, Mike Pompeo, who was a member of the House of Representatives from Kansas not long ago.  The move comes ahead of what could prove to be difficult negotiations with North Korea in the weeks ahead.  Along similar lines, it now seems H.R. McMaster may be next in President Trump’s crosshairs.  He currently serves as the President’s National Security Advisor but has been at odds with the president over strategy in recent months.

In economic news, the February Consumer Price Index was in-line with consensus estimates and eased some of the recent anxiety over the growth of inflation.  Similarly, the February Producer Price Index rose in-line with expectations.  Given the recent economic releases, both Goldman Sachs and JPMorgan economists expect continued job growth of more than 200K per month for the next couple of years, which will take the unemployment rate below 3% – a level the economy has not experienced in 65 years.  In light of the consistent job growth and rising wage pressure, many on Wall Street are beginning to agree that four rate hikes are coming this year as opposed to the previously expected three.

Pressing for fewer rate hikes is Mr. Lawrence Kudlow who was announced as Gary Cohen’s replacement on the President’s economic council.  Mr. Kudlow last served in the Reagan administration as head of the Office of Management and Budget (OMB).  As a proxy for the President, he quickly went on the offensive explaining that the President’s positions on tariffs is “not what people think.”  He defends the President’s position that China has not been playing by “the rules.”  Later in the week, he went on record pressing the newly appointed head of the Federal Reserve, Jerome Powell, to leave the economy alone by not raising interest rates.  He said, “the market is going to take care of itself.  The whole story’s going to take care of itself.”  The Fed has long been an independent agency, however, with these latest appointments it is to be seen just how independent it remains.

In company news, Exxon announced this week that it has formed a partnership with Synthetic Genomics for the purpose of advancing biofuels made from algae.  The company now believes biofuels could grow rapidly in the late 2020s and are aiming to set up one or more demonstration plants by 2025 to produce 10K bbl/day of diesel and jet fuel from genetically modified algae.  Electric vehicles may have some competition after all.  Microsoft made a breakthrough of another type this week.  It announced the company has created the first machine translation system that can translate sentences of news articles from Chinese to English as well as a person.  Researchers believe the system has achieved human parity in translations.  This is a big step and another breakthrough in artificial intelligence (AI).

In closing let’s talk about pundits.  You know, the people you see on TV channels such as CNBC, MSNBC, and the like?  Do you ever wonder how pundits never get it wrong?  I learned this week that the trick is called the 40% rule.  It is a forecasting tactic that makes a bold call without being too bold.  The nice thing about 40% is that you never have to say you were wrong.  If the prediction comes true you look smart, but if it doesn’t then we can say the odds were against it.  The nice thing about the 40% rule is that you never have to say you were wrong.  With that in mind, I believe the Dow Jones Industrial Average has a 40% chance of hitting 30,000 before year-end.  Now you know.

March 16, 2018

Steeling the Spotlight

Mar 2, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

The week started off on the right foot with strong economic numbers buoying optimism and anticipation of Jerome Powell’s first public statements as head of the Federal Reserve.  However, not a week goes by these days without a fear event shaking investors’ confidence and this week it presented in the form of a tariff.  Sparse on details, this topic quickly overtook the airwaves with experts from every walk of life opining on the consequences such a policy.  Who you believe will partly be a function of who you listen to, watch, and read.  Hopefully, you’ll weigh what I say below and reconcile some of these ideas with your own beliefs.

Let’s talk about the big news.  President Trump announced his administration will impose a 25 percent tariff on imported steel and a 10 percent tariff on imported aluminum, on the grounds that other countries’ trade practices endanger our national security by undermining domestic production.  While this goes against the bedrock Republican principle and conservative ideology of free trade, President Trump appears to be rebuffing those in his party who are imploring him to change his mind.  American steel and aluminum companies have long complained of unfair practices by overseas competitors, especially Chinese subsidies, which flood the global marketplace and depress prices making American production less economical.  The big winners are the U.S. steel and aluminum industries.  The most immediate losers are the industries that rely on steel and aluminum which account for such a large part of the U.S. economy.  Some examples include the nation’s biggest industries: the automobile industry; aerospace; heavy equipment; and construction.

Does this matter for the economy?  In a nutshell, this action may create some jobs in domestic metals-producing companies, cost some jobs in a field where steel and aluminum are inputs, and push consumer prices a bit higher.  The U.S. economy can handle it.  The risk comes from the unintended consequences.  Affected countries may well retaliate by ordering tariffs on American goods, and they could carefully target goods to cause economic or political pain.  There are few winners in an all-out trade war.  The irony is that the aim of this administration is to punish China; however, Canada and Brazil are the top exporters of steel and aluminum to the United States.  China doesn’t even crack the top ten.  This surprise announcement seems clumsy, rushed, and extraordinarily broad in nature.  I suspect lobbyists and advisors will craft a more narrowly defined tariff before it takes effect next week.

Unrelated to the tariff news, most major automobile manufacturers reported sales were down in February.  Among those suffering the largest declines are Ford, General Motors, Honda, and Hyundai.  It appears higher interest rates and fewer discounts are dissuading customers from trading up.  Along the same lines, pending home sales declined sharply in January.  While it is too soon to say, it could be interest rates are beginning to change consumer behavior.  On the flip side, consumer confidence hit its highest level since 2000.  Jobless claims hit a multi-year low, the ISM manufacturing index expanded in February, and manufacturing PMI was the strongest in almost fourteen years.  Gains were seen in employment, inventories, backlogs, and supplier deliveries.  It appears the corporate tax break is making a difference.  Companies are in fact spending more on capital equipment.

Companies are also spending more on buying back stock.  Per Goldman Sachs, companies are poised to unleash $2.5 trillion in cash spending in 2018, of which share buybacks will total $650 billion.  The rate at which companies are buying their own stock is now more than double last year according to the Wall Street Journal.  While this doesn’t exactly help the economy, it does impact the stock market favorably.  There is vigorous debate whether companies should repurchase shares but I’ll leave that for another weekly column.  I’m afraid I’ve used my allotted space to cover just a fraction of the many news stories shaping the markets this week.  Have a great weekend and enjoy the sunny weather.  Spring is right around the corner!

March 2, 2018

Stately Living

Feb 23, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

After a turbulent few weeks, the markets seemingly took a deep breath and said, “I’m tired, let’s rest a bit.”  For a couple weeks, the good news was viewed as “bad” since it signaled the potential for inflation.  Computer trading took over and the roller coaster ride ensued.  Fortunately, someone unplugged the computers and good news once more turn into good news.  The markets recovered much of the sell-off and here we stand today at DOW 25,000 once more.  As predicted, volatility has picked up this year.  While it may feel strange after such a long period of movement in only one direction, it is more normal for these markets to go both up and down.  We should get used to the volatility since it is, in all likelihood, here to stay.

The most influential news of the week was found in the minutes of the January Federal Reserve meeting.  The minutes revealed increasing confidence in the economic outlook.  My take is the economic indicators have wiped away lingering concerns about the inflation outlook and now allow policymakers to coalesce around the existing three-hike projection.  Even the most dovish among them now think that rate hikes are prudent given the pace of economic growth and fiscal stimulus in the form of tax reform.  As would be expected, we’ve seen interest rates continue to rise with the 10-yr Treasury now approaching 3%.

As interest rates have risen, so too have mortgage rates.  While still low by historical standards, the 30-year fixed mortgage rate reached its highest level since April 2014.  It is worth noting a depository bank is no longer the leading mortgage originator in the United States. After the financial crisis, tens of billions in penalties were levied on deposit-taking banks in addition to stiff regulations and lending standards.  The result is that mortgage origination and servicing is no longer worth the trouble for many banks.  Unaffiliated mortgage companies now account for more than 40% of new conventional mortgages – almost twice the level just eight years ago.  It may come as a surprise, but Quicken Loans surpassed Wells Fargo in the fourth quarter last year to become the largest mortgage originator with $86 billion in loans in the quarter.  Some believe the hardship of regulation should be lifted to level the playing field, or conversely equally applied to nonbank entities.

In other news, the gas tax we spoke about last week may be dead in the water.  President Trump’s Council of Economic Advisers has warned that taxing gasoline to pay for infrastructure improvements is not desirable.  While it’s not clear if this is a reversal of policy or simply a lack of coordination between the left and right hand, it is clear that the times have changed.  The council’s chairman perhaps states it best when he says, “The gas tax’s current design isn’t really a 21st-century design – that the gas tax was set at levels that were needed to fund highways back in the days when fuel economy was really low and we didn’t have electric cars.”

In closing, I was reminded once again that taxes vary widely depending on where one chooses to call home.  The Tax Foundation puts together an annual report highlighting the disparity of state income taxes and its results are worth considering especially if you happen to live in one of the high-tax states.  The states that are among those with the lowest tax burden include Alaska, Wyoming, South Dakota, Tennessee, Louisiana, and Texas.  I won’t provide commentary on whether one would want to live in one of these states other than to say, they may not be for everyone.  On the flip side of the equation are the highest-taxing states which include (not surprisingly) New York, Connecticut, New Jersey, California, and Illinois.  While those states certainly have their charms, they certainly have their costs.  Now you know.

February 23, 2018


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