Browsing articles in "Weekly Market Update"

Ringing in the New Year Early

Dec 16, 2016   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Two more weeks until we ring in the New Year. After listening to more than a few conference calls this week, I came away feeling good about the prospects for economic growth in 2017. Analysts, generally speaking, believe fiscal stimulus coupled with tax reductions and a less regulatory environment will be what is needed to kick the economy into a higher gear. It appears the Federal Reserve thinks so too, having raised interest rates this week for the first and only time this year. While we’re heading into uncharted territory next year, many believe we’re at the beginning of what will be a prosperous future for the markets and the economy.

You might have noticed the Dow Jones Industrial Average, commonly referred to as the “Dow,” is trying its best to break 20,000 for the first time. Breaking this mark will be a historic milestone but won’t come easy as it also represents an emotional hurdle for investors. I remember the Dow breaking 10,000 like it was yesterday, although it was almost seventeen years ago. The reason I remember this milestone so vividly is that shortly after breaking through, the market fell substantially due to “Y2K” and the “tech bubble.” It took almost four years to regain the 10,000 mark. I’m not alone in thinking this time will be different. The Federal Reserve Open Market Committee (FOMC) decided to raise interest rates 0.25% this week and believes it will be necessary to raise rates no less than three times next year. The consensus was for two rate hikes next year. The Fed has gone from worrying about deflation, to worrying about inflation. The shift in attitude came suddenly and took many by surprise.

In company news, there were a few good stories that came across my desk this week. Trump may be many things to many people, but you can’t deny he has shaken things up. IBM announced it plans on investing $1 billion in U.S. employees, hiring 25,000 over the next four years and focusing on development and training of domestic talent. Along the same lines, Boeing announced it plans on moving its headquarters from St. Louis to Washington D.C., joining the migration of almost all of the Department of Defense, top-tier suppliers to the nation’s capitol. In other news, Berkshire Hathaway’s “A” shares broke $250,000 per share for the fist time ever. It seems Mr. Buffett put his first buy order in for the textile maker 54 years ago this week. His initial trade was for 2,000 shares at $7.50 per share. When the owner of Berkshire, then a textile company, tried to pull one over on Mr. Buffett, he began aggressively buying up shares and eventually took over the company. Today, Berkshire Hathaway has a market capitalization of over $400 billion.

For those who prefer closer oversight and regulation of Wall Street, this next story may upset you. In the aftermath of the financial crisis of 2008, forensic experts determined one of the largest contributing factors to the collapse was trading in derivatives. Two years later the “Volker Rule” was enacted as part of the Dodd-Frank Wall Street and Consumer Protection Act. It restricts banks from making certain kinds of speculative investments that do not benefit their customers. It is often referred to as the ban on proprietary trading. It was scheduled to go into effect April 2014. It was delayed a year. Then another year. And then another. This week, the Fed granted another extension of five-years allowing banks more time to comply. At this pace, I’m not confident the rule will ever be implemented.

In closing, the story of the week is a cautionary one. Venezuela decided to ban it’s largest denominations this week following in the footsteps of India. Both governments are trying to put an end to their respective underground economies which are thriving but starving their countries of tax revenue. The interesting part is what I read a couple of weeks ago. In Venezuela, the currency is so devalued that even the smallest of purchases requires hundreds of bills. Shoppers shove piles of money into gym bags before venturing into crime-plagued streets and shopkeepers stash thousands in boxes and overflowing drawers. Vendors have given up counting the bills in favor of simply weighing the pile of them. It is the clearest sign yet that hyperinflation could be taking hold in Venezuela. Some other countries that experienced hyperinflation include Post-World War I Germany, Yugoslavia in the 1990s and Zimbabwe a decade ago (which holds the record for the largest denomination bill ever printed – $100 Trillion Dollars). Now you know.

December 16, 2016

United Leads the Way

Dec 9, 2016   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

These are raucous times.  Renzi’s out in Italy, the case for Brexit is now being heard by Britain’s Supreme Court, and a U.S government shutdown looms.  We’re less than a week away from what most expect to be the one and only interest rate hike this year and president-elect Trump is making deals even before his inauguration.  Momentum is on the side of the bulls for now.

Let’s start with the potential government shutdown this weekend.  You most likely haven’t heard about it.  In fact, I just read about it today and have yet to see it picked up by the mainstream media.  It seems the House voted on Thursday to finance the government through late April.  However, a couple of senators including Sherrod Brown of Ohio and Joe Manchin of West Virginia oppose the spending bill.  At issue is the extension of health care coverage for retired coal miners. The House which is in recess for the holidays has no plans to reconvene.

There was quite a bit of company news this week.  The following is the executive summary:

  • Amazon introduces a new concept store with no checkout lines called Amazon Go. Early reports suggest as many as 2,000 outlets, but an Amazon spokesperson denied these claims.
  • Under Armour inked a historic deal with Major League Baseball. The company announced a 10-year partnership that will see UA be the official uniform provider to MLB.
  • President-elect Trump took aim at Boeing this week, suggesting the $4 billion price tag for development and production of two new Air Force One planes was too much.
  • Carrier announced a 5% price hike on all its residential and commercial HVAC equipment effective January 1st. A company spokesperson said this is unrelated to the Indiana factory.
  • Coca Cola’s CEO, Muhtar Kent, will step down in May. The current COO, James Quincey, will succeed Kent.

Wells Fargo (WFC) made headline news a few months ago when it was revealed its customer service employees were under such pressure to cross-sell, they illegally opened accounts and credit cards for customers.  You’d think this practice would die a slow death.  Unfortunately, cross-selling is foundational in the banking industry and appears here to stay.  The Wall Street Journal reported Merrill Lynch would require each of its client-facing employees to make at least two client referrals to other parts of Bank of America or face a 1% pay cut.  You’ve been warned.

Each year, anticipation for the yet to be announced iPhone grows well in advance of its actual release.  This week Credit Suisse initiated Apple as an outperform on iPhone 8 prospects.  To my knowledge, we don’t know anything about Apple’s next iPhone which won’t be released for another ten months.  Assuming Credit Suisse doesn’t have inside information, it is unfathomable they would make this recommendation on pure speculation and rumors.  And yet, they just did.

In closing, let’s talk airlines.  Not how difficult it is to get through TSA checkpoints, the ridiculously long lines, or how the seats are shoehorned into the plan these days.  Let’s talk about fees.  You might remember, baggage fees began in 2008 as a way for airlines to recoup the cost of fuel back when the price of oil was well north of $100 per barrel.  It started slow and met a lot of resistance, but over the past eight years, it has become the norm.  The latest data indicates United tops the list of fees with almost $6.2 billion collected annually.  The unintended consequence of requiring passengers to pay for luggage means lot of passengers are bringing their luggage onboard.  The bean counters at United Airlines, never satisfied with enough, are now proposing plans to charge passengers extra for the use of overhead bins.  The new program allows people only the space at one’s feet to store one’s carry on.  Now you know.

December 7, 2016

Rest in Peace General Tso

Dec 2, 2016   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

It is hard to imagine; Thanksgiving is over, and Christmas is soon upon us.  How time flies.  This week, the market remained relatively flat after having risen since the presidential election.  I should note, a large portion of the gains are concentrated in the energy and financial sectors.  This rally has not seen broad-based gains across all sectors equally.  In fact, there has been a forceful rotation out of certain sectors, i.e. staples, utilities, and technology into the sectors above.  Taking into account the economic data and the end-of-year optimism, we expect markets to remain at or above where they are today, although a lot is baked into the market at these price levels.

For a quick rundown on sector performance, below are the returns in certain S&P 500 sectors since the presidential election on November 8th.

Financials +13.3%                             Utilities -5.2%

Energy +8.2%                                     Consumer Staples -4.4%

Industrials +7.7%                              Technology -1.7%

Materials +5.6%                                Health Care +0.15%

There were several corporate announcements worth mentioning this week.  Nestle reported it made a scientific breakthrough.  With pressure building to make healthier products, Nestle has developed a new technology that has the potential to reduce sugar in some of its products by up to 40% without affecting the taste.  By hollowing out the structure of sugar crystals, each particle dissolves more quickly on the tongue, so less sugar is needed.  In other news, we learned that the CEO of Starbucks, Howard Schultz, is stepping down early next year.  Rumors suggest he may be preparing for a political career but are unsubstantiated at this time.  His successor has been with the company for the past seven years and has been integral to the company’s growth over that time.  As with all things, nothing lasts forever.  On that note, it seems Phillip Morris is looking toward a future without cigarettes.  Andre Calantzopoulos, CEO of Phillip Morris, told the BBC that the company could eventually stop selling conventional cigarettes.  It is launching a smokeless product that heats the tobacco without burning it.

For the better part of this year, OPEC countries tried to reach an agreement on reducing oil production.  With each meeting, failure ensued.  Certain holdouts, including Russia, Iran, and Venezuela were unwilling to reduce production because of their dependence on oil for revenue.  Saudi Arabia did not want to reduce production single-handedly.  Without much in the way of details, a deal was struck, and output will be cut by 1.2 million barrels per day.  For perspective, this only represents a cut of 3.5% of total output.  The price of crude oil shot up 7%, to $51 per barrel, on the news.  However, the biggest beneficiary of this move could be the U.S. shale industry.  Production costs have been cut roughly in half since 2014, and rising prices could unlock some of the thousands of drilled but uncompleted wells in the United States.

The economic news this week was upbeat.  We learned U.S. Gross Domestic Product (GDP) grew a strong 3.2% in the third quarter and today it was announced the unemployment rate fell to 4.6%, it’s lowest since August 2007 (before the financial crisis).  Consumer confidence rose to 107 in November versus expectations for 101 and third quarter corporate earnings grew by 5.2%.  Lastly, the Fed released the November Beige Book which showed steady economic improvement across a majority of districts across the country.  The report also found that labor markets are tightening and staffing services are having difficulty finding workers.  All these metrics bode well for the economy and point to an almost guaranteed interest rate hike in a couple of weeks.

In closing, the story of the week is about a Chinese dish many consider a staple.  It seems the inventor of General Tso’s chicken, Peng Chang-Kuei, has died this week at the age of 98.  What caught my eye is the history of this dish.  According to an interview with the China Times, Peng told the reporter the dish was created in 1952 during a four-day visit by U.S. Seventh Fleet commander Admiral Arthur W. Radford.  After three days, he had run out of dishes to make for the Admiral.  In a moment of genius, he threw together some ingredients and the idea was born.  The admiral was so impressed he asked Peng what it was called and on the spot, General Tso’s chicken came into being.  Peng chose the name to honor General Tso, a famous military leader from Hunan (Peng’s hometown).  In 1973, Peng opened a Chinese restaurant in NYC where it gained prominence in the shadow of the United Nations.  The rest of the story is history.  To learn more about this story click here.  Now you know.

December 2, 2016

The Gimmick that Changed the World

Nov 18, 2016   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

After several weeks of solid gains, the market took this week to digest what a Trump presidency will mean for the country.  Investors are wrestling with everything from energy policy to health care policy and tax cuts to infrastructure spending.  The truth is, we’ll have to wait until after the inauguration in January to know what Mr. Trump’s priorities are for his first hundred days in office.  Until then, we will have to rest on what we think he might do and plan accordingly.

President-elect Trump’s cabinet is starting to take shape but is far from complete.  What we know so far is as follows:

  • Reince Priebus (Chief of Staff) – Former head of the Republican National Committee (RNC)
  • Steven Bannon (Chief Strategist & Senior Counsel) – Executive Chairman of Breitbart News (a controversial online news source)
  • Jeff Sessions (Attorney General) – Current Senator from Alabama & former U.S. Attorney
  • Mike Pompeo (CIA Director) – Current Representative of Kansas and former Army officer
  • Michael Flynn (National Security Advisor) – Retired Army lieutenant general

Here’s what’s being strongly speculated

  • Mitt Romney (Secretary of State) – Former Governor of Massachusetts and 2012 Republican Party nominee for President of the United States (other suggestions include John Bolton, Bob Corker, Rudy Giuliani and Stanley McChrystal)
  • Jamie Dimon (Treasury Secretary) – CEO of JP Morgan (other names include Jeb Hensarling, Steven Mnuchin, and Tim Pawlenty)
  • Tom Cotton (Defense Secretary) – Current Senator from Arkansas
  • Rudy Guiliani (Homeland Security Secretary) – Former Mayor of New York City

As for what’s been doing well the past couple of weeks, it shouldn’t come as much of a surprise that the energy and financial sectors have been on fire.  A recent look at stocks hitting new 52-week highs on stronger-than-normal-volume includes the following: Bank of New York Mellon, JPMorgan, SunTrust Banks, Bank of America, Citigroup, Citizens Financial, Discover, First Republic, Goldman Sachs, Humana, Manulife, Northern Trust, PNC Financial, Regions Financial, and Schwab.

In company news, Coca-Cola is on watch after a report of a potential takeover bid by AB InBev (BUD).  65 top executives at Anheuser-Busch InBev stand to share $350 million in bonus money if $100B in annual revenue is brought in by the company before 2020.  The CEO has acknowledged that it’s looking at beverage companies outside of beer since hitting the target through organic growth is virtually impossible.  In other news, McDonald’s is now implementing self-ordering kiosks across its stores as had been tested earlier this year in a few select locations.  The company also is talking about table service.  I’m just wondering when I’ll be able to order a McSteak and some McMashed Potatoes.  Kellogg announced it would soon be introducing Cinnamon Frosted Flakes.  Wait… they don’t already offer that you say?  I couldn’t agree more.

To close out the week, I came across a story that I think may interest you.  New Jersey is a state that distinguishes itself in many ways.  One way that might surprise you is that it is illegal to pump your gas in the Garden State.  Enacted in 1949, the Retail Gasoline Dispensing Safety Act and Regulations banned drivers from pumping their gas in New Jersey.  The passage of the act was motivated by something a little less pure than safety: money.  In the 1940’s, when self-service was unheard of in most of the country, a gas-station owner named Irving Reingold offered lower prices to customers willing to pump their gas.  The gimmick was wildly popular and soon became a threat to competing gas stations.  According to Bergen County’s The Record, “rival station owners reacted by persuading state lawmakers to outlaw self-serve.”  To this day, you still cannot pump your gas in New Jersey.  Now you know.

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