Browsing articles in "Weekly Market Update"

100 Months of Jobs Growth

Feb 1, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

It was another good week in the markets with lots of good earnings announcements and a Dow Jones Industrial Average reclaiming 25,000 for the first time since early December.  In fact, the month that just ended saw a large reversal of the selloff in December and marks the best January in the past thirty years.  The bulk of the news this week regarded earnings which came in as expected or better.  The few companies that missed analyst expectations or surprised investors with lowered future guidance were punished.  However, investors appear more forgiving this earnings season than most considering that expectations have come down considerably.

Aside from earnings announcements, the Federal Reserve met this week to discuss interest rate policy.  Having done a full 180-degree turn over the past two months, it should not come as a surprise that they held off raising interest rates at this meeting.  Perhaps the real surprise is that the hawkish Fed is turning into quite the dove, suggesting that not only could all rate hikes be off the table this year, but that it is considering an end to its balance sheet reduction program.  You’ll remember the Fed’s balance sheet grew to over $4 trillion during the financial crisis of 2008 due to quantitative easing aimed at stabilizing the economy.  It has spent the past year slowly reducing its balance sheet to the tune of approximately $50 billion per month.  Fed Chair, Jerome Powell, suggested it might have to reevaluate this unwinding which sent the markets higher.  A dovish Fed is not worth fighting.

The big news came today in the form of the jobs report which stated 304,000 jobs were created last month.  This now represents 100 months of job gains.  As might be expected, people who previously decided to leave the workforce are reentering the market pushing the labor participation rate up.  Additionally, the lack of available workers has pushed wages higher by 3.2%.  These indicators remain favorable, aside from the good earnings announcements mentioned above.

In company news, we heard from Walmart who is aggressively seeking to hire more truck drivers.  The company says it will pay an average of $87,500 per year to its truck drivers starting next month.  However, before you quit your job to embrace the open road, it should be noted self-driving trucks are in testing as we speak.  We also heard from Foxconn who said it might not build an LCD plant in Wisconsin after all.  However, breaking news this afternoon suggests this on-again, off-again deal appears on-again after President Trump reminded Foxconn of its commitments to both Wisconsin and the White House.  Time will tell if the economic reality trumps political pressure.  And lastly, T-Mobile and Sprint, who are trying to gain approval to merger, have announced it plans on hiring 5,600 additional employees in five new customer service centers spread throughout the country.  This comes as a bit of a surprise since most mergers seek to find synergies and aim to reduce costs.

In closing I admit I had a hard time coming up with this week’s story of the week.  I was so focused on the deluge of earnings announcements that I seemingly didn’t read much else.  However, I reached deep into my old stories file to come up with this one.  Last September, Merriam-Webster announced it would add 25 new words to the dictionary.  This isn’t an unusual event since new words are being created all the time.  However, codifying them into the dictionary gives these words, which might have previously been slang, more weight.  You’ll undoubtedly recognize many, although some may have you scratching your head.  I’ll give you five that I found fun:

  1. TL;DR (abbrev): “Too long; didn’t read – used to say that something would require too much time to read.”
  2. Adorbs (adj.): “Extremely charming or appealing; adorable.”
  3. Guac (n.): Guacamole
  4. Generation Z (n.): The generation of people born in the late 1990s and early 2000s.
  5. Hangry (adj.): “Irritable or angry because of hunger.”

Now you know.

February 1, 2019

The Shutdown Comes to an End (for now)

Jan 25, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

You undoubtedly heard by now, but just in case, the government shutdown has been temporarily lifted.  Hallelujah.  For the next three weeks both parties will hash out the details to make this temporary reprieve permanent.  That’s not to say we won’t hear a lot of strife these next few weeks, just that federal employees will get their back pay and the impact on the economy will be minimized.  Surprisingly, the stock market didn’t react to the press conference today but instead shrugged off the news.  Perhaps it is because it hasn’t really reacted to the government shutdown so far, this year.  Regardless, earnings announcements continued to trickle out this week and were positive for the most part.  Analysts are most focused on forward guidance, and with the exception of a few companies, most are meeting expectations.

I’ve listened to several 2019 market outlook conference calls this week, from JP Morgan to Goldman Sachs and Charles Schwab and Co.  To a tee, all believe a recession is not on the menu for this year.  In fact, all believe we could have a positive year in 2019 with an increasing risk of the slowdown hitting in 2020.  They all point to the low unemployment rate, lack of inflation, high level of Leading Economic Indicators, and dovishness of the Federal Reserve.  There are some red flags, such as our national debt and annual budget deficits ballooning, but those are issues for well beyond 2020.  In a nutshell, the sentiment among analysts and economists is optimistic.  The same can’t be said for investors who still hold a fairly negative outlook.  In Davos this week, a large number of celebrity money managers, including hedge fund gurus and private equity billionaires, met to discuss the economy and most sounded pretty dour.  One among them said, perhaps the soundbites coming out of Davos should be used as a contrarian indicator.  I happen to agree, especially given the track record of these people the past couple of years.

In other news, the on again – off again negotiations between the United States and China will once more come to a head.  Next week the two sides will meet to hammer out a deal.  Wilbur Ross, the U.S. Commerce Secretary, was quoted saying we’re still miles and miles apart.  The sticking points aren’t a surprise.  Among them are America’s “intolerably big trade deficit” with China, China’s plan to dominate global high-tech industries, increasing access for U.S. companies to China’s markets, and intellectual property rights.  Within the hour, Larry Kudlow, the Director of the President’s National Economic Council went on the air saying a deal is likely.  It seems the left hand doesn’t know what the right is doing.  Either way, I expect the coverage leading up to the meeting and news coming out of the meeting will be market movers next week.

In economic news, the jobless claims fell to a fifty-year low.  In fact, Progressive (PGR) plans to hire more than 10,000 people in the coming year to support its growth.  This represents a 30% increase in its staffing.  It is the first time in a while I’ve heard a company come out with such an aggressive announcement.  Even better, the company will offer positions in information technology, analysts roles, corporate functions, customer care, and claims.  Not long ago, many of these functions would have been outsourced.  It seems, in the current environment, at least this one company is looking domestically to fill its roles.  However, I am left wondering how a company such as Progressive has survived this long being so significantly understaffed.

In closing, let’s talk about real estate.  Some have suggested we’ve reached a peak.  In fact, we’re once again hearing about the resurgence of the unconventional mortgage.  However, this story regards someone who is unconventional in a different way.  Ken Griffin is a hedge fund billionaire and he just bought an apartment on billionaire’s row across from Central Park for $238 million.  Yes, I said apartment.  It just so happens that this one is 24,000 square feet.  What makes this special is that it breaks the record for the most expensive home ever sold in the United States.  The previous record was set in 2014 when a home in the Hamptons sold for $137 million.  Much like art, when you begin to see prices skyrocket like they have recently, you wouldn’t be wrong in thinking investors are using alternative investments as a place to park money.  Now you know.

January 25, 2019

Earnings Announcements Kick Off

Jan 18, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

After a tumultuous end to 2018, investors are back with an appetite for equities.  A good portion of last year’s sell-off has now been recovered in the first couple weeks of the year as hopes for a détente between the U.S. and China take hold.  Having said that, the ongoing government shutdown will be an issue for the economy both now and potentially in the future.  The downside is, we won’t know since the agencies tasked with putting out economic data are currently furloughed.  Quite literally, the economic data investors and politicians depend on for both policy and investment decisions is missing in action.

This week started fourth quarter earnings announcements.  For the most part, this week was about the financial sector and a surprisingly large number of banks reported within days of each other.  If I didn’t know better, I might think this was intentional.  The takeaway is that banks’ balance sheets remain strong, credit quality has not deteriorated, and loan write-offs have not picked up.  Many of those reporting this week saw nice gains.

On the other hand, the economic data, that is making its way out, is a bit mixed.  Consumer sentiment is down which shouldn’t come as much of a surprise given the government shutdown.  But more importantly, European data suggests Europe is weakening.  Germany’s growth has slowed to a five-year low after reporting dismal industrial production figures last week.  There are indications that a global slowdown is afoot.

As for company news, we hit the mother lode this week.  There was so much I think the best way to summarize it is with bullet points:

  • Volkswagen announced it is building a new EV (electric vehicle) plant in Tennessee. Ford announced it is planning a fully electric version of its F-150 pickup truck.  And Toyota executives were quoted as saying they believe the EV market is being overbuilt and that demand will lag the huge buildup in supply in coming years.
  • PG&E filed for bankruptcy, disclosing the substantial liability it faces after the fires it inadvertently started in California. A judge this week ruled that the company is in fact at fault in creating the fires.  To put thing in perspective, PG&E is California’s largest utility provider.  Considering how large California is relative to most states, this is a monumental problem.
  • Netflix decided to raise its monthly subscription price for the third time in as many years. While the price increase is nominal at approximately $2 per month (depending on tier), it highlights the increasing costs of producing a large amount of content.  The company had $4.9 billion in debt as of Sept. 2017, $8.3 billion as of Sept. 2018, and $12 billion just three months later.
  • Tesla announced it plans on reducing its workforce by 7% in coming months. Much like Netflix, it has a debt “issue” which is looming.  It has a bond in the amount of $920 million coming due in March.  The catch is, if the stock price is above $359 at the time it matures, the company can convert the debt into equity thereby avoiding a cash crunch.  Today’s move suggests the company is feverishly trying to cut expenses with the hope of pushing the stock price above this threshold or at the least, have the cash on hand to settle the bond at maturity.
  • The judge overseeing the Sears bankruptcy awarded the liquidation to ESL Holdings, which just happens to be ex-CEO Eddie Lampert’s holding company. While the media heralded the last-minute proposal as having tremendous benefit to both the company and its employees, I’m less sanguine.  Lampert has a long history of taking advantage of the Sears corporation for personal benefit.  The cynical part of me believes this is a play for the property and it won’t be the last time we hear about Sears closing for good.
  • Lastly, Amazon announced it now has more than 100 million subscribers to its Amazon Prime service. Is there anything that can stop this company?

In closing, I leave you with a sobering statistic.  A recent study revealed that one in five millennials (those age 18 to 34) expect to die without ever having paid off their debt.  The average millennial has about $32,000 in personal debt, excluding home mortgages.  Apparently, that debt is both crushing and endless.  Just over 60% of millennials with debt don’t know when, or if, they’ll ever be able to pay off what they owe.  That includes roughly 42% of millennials who don’t know when they’ll be able to wipe out their debt, and almost 20% of those who expect to die in debt.  Along the same lines, it was reported this week that debt is the primary reason homeownership is down among this demographic.  It may be easy to vilify young adults these days, suggesting they are lazy, lack ambition, and are too complacent.  But they do face headwinds in their lives and careers that prior generations may not have experienced.  It’s worth thinking and maybe even talking about.

January 18, 2019

To Tip or Not To Tip?

Jan 11, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

The old adage no news is good news held true this week.  The markets were relatively calm ahead of fourth quarter earnings announcements which will begin next week.  There were a few companies in the retail and technology sectors who lowered guidance ahead of earnings season, presumably to allow the markets time to digest the news.  It is yet to be seen whether others will follow suit or if this is simply company specific.  However, it seems reasonable that CEOs may want to lower expectations for 2019 given what we know about the economic and political headwinds.

Along those lines, the current government shutdown is in its twenty-first day, tying the record for the longest such case in American history.  With both sides believing they have leverage, I don’t expect the shutdown to be resolved anytime soon.  For those 800,000 government employees currently furloughed, this will be the first pay period they forgo a paycheck.  While this may not appear to be a crisis yet, a recent study indicates 78% of those currently employed live paycheck-to-paycheck.  That includes those earning over $100,000 a year.  If these numbers are to be believed, it won’t be long before voters reach a tipping point and demand action.

In company news, Amazon took the top spot for the largest public company with a market capitalization of $803 billion.  It did so largely due to softness in Apple’s end markets which caused its stock price to dwindle over the last few months of 2018.  Sears sidestepped final bankruptcy once again when the judge hearing the case allowed its previous CEO, Eddie Lampert, one last chance to put together a bid.  Monday, we expect a final answer.  And lastly, IBM once again took the crown for receiving the most patents in 2018.  While this company may not be what it once was, it is far from being down and out.  Its library of intellectual property continues to grow each year as it finds new ways to remake itself.

A couple weeks back I commented on a significant number of pharmaceutical companies raising prices on medications by an average of 6.3%.  However, two new gene therapy drugs are on the verge of coming to market with prices that seem unfathomable.  Bluebird Bio presented on a new gene therapy drug that it believes has a value of $2.1 million.  The company expects to offer insurance companies the option to pay for this treatment over five years, essentially offering zero percent financing, much like consumers could a few years ago when purchasing a new car.  Unfortunately, these treatments cost a whole lot more than a car or even a fleet of cars.  It really says something when insurance companies need financing!  But even more stunning is a drug by Novartis for the treatment of muscular atrophy that is expected to cost $4-5 million.  I guess the sky is the limit.

In other news, the head lawyer for Goldman Sachs is retiring after twenty-seven years with the company.  I assume he must have done an admirable job given his tenure with the company.  After all, he did battle with both Congress and Eliot Spitzer, the then attorney general of New York.  What may come as a bit of a shock is that he is the largest internal shareholder of Goldman Sachs with over a million shares and a retirement package worth $500 million.  It seems he was a partner before the initial public offering (IPO) in 1999 and just held onto his shares.  If you’re interested and have the credentials, you may want to submit your resume.

In closing, in case you thought I couldn’t come up with another crazy story for this week, you’d be wrong.  It seems one airline is floating the idea of having customers tip flight attendants for service.  They take your order, serve up food and drink, and come back to clean up.  But the million-dollar question is, should you tip your flight attendant.  Apparently, Frontier Airlines thinks so.  It seems passengers who order refreshments will now get a prompt from Frontier’s payment system recommending they give a tip.  It offers passengers the options of 15 percent, 20 percent, or 25 percent.  This new model has engendered mixed feelings among passengers.  In case you were wondering, the median annual salary for a flight attendant in 2017 was around $50,500.  Now you know.

January 11, 2019

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