Browsing articles in "Weekly Market Update"

The Postal Illuminati

Oct 19, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

This week kicked off the start of earnings season and from the looks of it most reports were solid.  Admittedly it is still early, but there had been some concern by analysts that we might start to see companies lower revenue and earnings guidance in the face of rising material costs, labor, and tariffs.  Fortunately, we did not see anything suggesting a slowing of the economy or concerns regarding inflation.  Like I said, it is still very early into the earnings season, but this week pointed to perhaps a better outlook than some expected.

While this week was dominated by earnings announcements, there were other stories that didn’t get as much attention, but are nonetheless noteworthy.  Perhaps the biggest story of the week is that Sears filed for Chapter 11 bankruptcy.  It is hard to believe that a company that has been around for 130 years finally met a foe in online retail that it could not beat.  With over $5.5 billion in debt and a $134 million interest payment in arrears, it simply had to pull the plug on itself.  Chapter 11 bankruptcy is technically for reorganization and relief from creditors, but it is unlikely the company will emerge this time.  Expect the creditors to pick over the company’s assets like vultures on a carcass.  It is indeed a sad day for Sears.

In others news, I came across two stories that, on the surface, appear connected but leave one wondering.  The first appeared on Tuesday with the title, “U.S. Budget Deficit Widest Since 2012.”  The U.S. government closed out its 2018 fiscal year $779 billion in the red as tax cuts pinched revenues and expenses rose on a growing national debt.  Yet just a few days earlier I read, “Feds Collect Record Individual Income Taxes in FY 2018.”  So how can it be both the widest deficit AND record revenue?  It really is hard to wrap one’s head around the size and complexity of this issue.  The federal government collected a record $1.68 trillion in individual taxes this year.  One explanation for the difference is that while individual income tax collection hit a record, corporate tax collection fell by approximately $100 billion.  Also worth noting, interest service on the debt continues to grow as the size of the national debt increases and interest rates rise.  Future generations are going to have a very difficult time grappling with the consequences.

While we are on the subject of interest rates, it is also worth noting that President Trump is not very happy with his pick for Federal Reserve Chairman.  Mr. Powell has reiterated his commitment to normalizing interest rates which started prior to his appointment to the Federal Reserve.  President Trump went on the offense this week stating the Federal Reserve is “my biggest threat” because it is raising interest rates too fast and is “too independent.”  None other than Alan Greenspan came to Mr. Powell’s defense, suggesting on CNBC that perhaps the Fed Chair would be well advised to buy a pair of headphones to block out the political rhetoric.  The market expects the Fed to raise interest rates again in December, and perhaps as many as three more times next year.  I don’t think this is the last we’ll hear from the President on this subject.

In closing, I want to turn to a story I heard about on a podcast this summer.  Do you ever wonder why shipping on goods from China is so inexpensive?  In some cases it is cheaper to buy a product from China, including shipping, than it is to buy the product locally.  It turns out there is an international organization called the Universal Postal Union.  This entity is tasked with establishing international mailing rates between countries.  In a nutshell, once a package arrives onto U.S. shores, the U.S. postal service is responsible for delivering the package the “final mile.”  When these rates were set decades ago, the U.S. was a net exporter of our goods.  No one ever imagined that just a few decades later the U.S. would import such a large amount of goods.  When first implemented the rates benefited U.S. companies, however, the tables have turned and it now works against us.  To hear the story, listen to this podcast which first aired August 23, 2018 on NPR’s Planet Money.  It is a fascinating story.  Now you know.

October 19, 2018

Madness in the Markets

Oct 12, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

For as much volatility as we saw this week, you would think there would be a negative catalyst of some kind.  Nothing could be further from the truth.  What we actually saw this week was fear for the first time in some years.  Fear can come on quickly and is often irrational as was the case this week.  Additionally, in this day of computer trading and artificial intelligence, even the smallest ripples in the market can make significant waves.  Whether it was program trading creating a tsunami of sell orders or retail investors fearing the future, it is clear that there is an underlying unease in the markets.

Stocks were battered in two days of volatile trading amid growing concerns that rising interest rates, higher costs, and trade tensions would squeeze corporate profits.  The S&P 500 lost 5% this week which in the scheme of things isn’t as large a drop as it may feel.   For the year, the index remains up 4% (including dividends).  While this may be less than we’ve grown to expect, we should remember that the market has only been down in one of the last six years.

What made this week feel worse than it should is that the sell-off was widespread, with few areas of the market escaping unscathed.  However, the market sell-off is not a reflection of weak economic data.  U.S. economic growth, employment and wage data remain strong.  Furthermore, business and consumer confidence measures are high, and third-quarter corporate earnings are on track to post a record-setting 28% year-over-year gain.

So, what is at work here if not weak economic data?  It turns out that strong economic data, combined with the Federal Reserve’s ongoing tightening strategy, have caused U.S. interest rates to rapidly rise.  At the same time, wage growth and higher input costs suggest inflation pressures may be building, even though Thursday’s report on U.S. consumer prices came in lower than expected.  Ultimately, investors fear higher interest rates will cut into corporate profit margins.  In addition, stock investors view rising interest rates as a threat, because higher fixed-income yields may become more appealing than stock dividends.

Part of being an investor is understanding that the market can sometimes take on a life of its own regardless of the fundamental and economic data.  This week was a good example of this phenomenon.  With proper diversification, we can minimize volatility and downside risk, while allowing for the market to come to its senses.  As long as we don’t try to time the ups and downs of the market, in the long-run, we will come out ahead.  History teaches us that the key is to stay the course even when our emotions are telling us otherwise.  In fact, sometimes these events present the best buying opportunities for those courageous enough go against the tide.

In closing let’s talk about something a bit less serious.  When you think of the largest employers in the United States which ones come to mind?  For me it is General Motors, UPS, McDonald’s, and maybe General Electric.  Well it turns out the times have changed.  While I somehow forgot Walmart, which is the largest U.S. private employer with 2.3 million employees, it seems Amazon is the second largest with 541,000 employees!  Rounding out the top five are Kroger (443,000), Yum! Brands (420,000), and The Home Depot (406,000).  Would you guess that IBM comes in sixth with 380,000?  It seems the service and retail industries really have replaced manufacturing in this country.  Now you know.

October 12, 2018

Hello Fourth Quarter

Sep 28, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Investors held their breath this week as we headed into the end of the third quarter.  This period typically involves mutual funds and institutional money managers making last minute trades.  With large amounts of money shifting into and out of sectors, it is not uncommon to see large swings, however, that did not happen this quarter.  To a large degree politics took center stage with additional tariffs on China and soon Iran, the Federal Reserve’s vote to hike interest rates, and the Senate Judiciary Committee hearings on Supreme Court nominee Brett Kavanaugh.  There was enough to keep everyone occupied this past week.

It didn’t get much attention, but on Monday an additional $200 billion in tariffs were placed on China.  In retaliation, China imposed an additional $60 billion in tariffs on U.S. goods including liquified natural gas and certain aircraft.  Unfortunately, talks have broken down between our countries and each side believes it has the upper hand.  While tariffs can create opportunities and/or leverage in trade negotiations, they unfortunately also create higher prices for U.S. consumers.  We haven’t seen inflation rise sharply yet, but it is reasonable to think that if these tariffs persist, we could begin to see inflation rise next year.

Sanctions were also in the news this week as President Trump, speaking at the United National General Assembly, says the U.S. will reimpose nuclear sanctions against Iran to resume November 5th.  He spoke very directly to not only Iran, but also our European allies.  However, the EU isn’t thrilled with the new direction and is proposing a special payment channel allowing companies to legally continue financial transactions with Iran without exposure to U.S. sanctions.  The schism between the U.S. and the EU will almost certainly widen if this plan is implemented, allowing European companies to circumvent the sanctions.

An unintended consequence of these sanctions is that gas prices are creeping higher.  Prices as the pump have risen lately with a gallon of gas closing in on $2.90 locally and well over $3.00 in parts of the West.  To some extent this is due to fears regarding the Iran sanctions which mean 1.5M barrels per day of oil will be taken off the market.  Compounding the sanctions, OPEC leaders signaled they would not raise production and the Trump administration announced it has no plans to release strategic reserves to make up for the decrease in supply.  Needless to say, these events are putting pressure on oil prices which have climbed to $80/bbl and could climb as high as $90/bbl in coming months according to J.P. Morgan.

One industry whose fate rides on oil is the airlines which are beginning to feel the pinch.  Airlines had a difficult week but there was a silver lining of sorts.  The lobbying arm for the industry scored a victory in Congress as bipartisan congressional legislation dropped plans to mandate “reasonable and proportional” baggage and change fees.  Not wasting any time, many airlines raised baggage fees including Delta which now charges $30 for the first checked bag and $40 for the second.  United Airlines, Jet Blue, and American Airlines also raised fees which virtually guarantees that higher checked bag fees are here to stay.

Perhaps the biggest non-news this week is that the Federal Reserve decided to raise interest rates for the third time this year.  This was almost completely expected and therefore did not move the markets.  Based on the minutes from the meeting, the Fed anticipates hiking rates again in December, with as many as three more hikes next year.  Its goal is to bring the federal funds rate to 3% by the end of next year, but could possibly overshoot the mark a bit if the economy looks like it can handle it.

In closing, I want to talk a little bit about the blockchain.  Over the past two years you may have heard a lot about blockchain technology and not realized it.  The mathematics behind the blockchain was initially proposed by Satoshi Nakamoto (whose real identity remains a mystery to this day) and is the foundation for cryptocurrencies like Bitcoin.  However, there are real world applications for this technology that go beyond the original premise of an alternative currency.  For example, Walmart announced this week that all suppliers of leafy green vegetables to its stores will be required to begin uploading their data to IBM’s food safety blockchain by this time next year.  Doing this will make the food supply chain more transparent and traceable in the event of an illness outbreak.  What used to take over a week to trace will now take 2.2 seconds according to IBM.  While Bitcoin may be a nonstarter for most, blockchain technology will likely be widely adopted by companies in the years ahead.  Now you know.

September 28, 2018

Paging Larry

Sep 14, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Despite the would-be hurricane, it was a pretty good week in the markets.  Apple introduced its next round of product updates, Tesla looks like it just might meet its production goals, and the nastiness of politics didn’t rear its ugly head this week.  Truthfully, while mainstream media focused on Hurricane Florence, the Dow Jones Industrial Average (DJIA) quietly gained a couple hundred points.

Let’s get the economic news out of the way.  The Federal Reserve released its Beige Book this week and it showed that economy continues to expand at a “moderate” pace.  Labor markets remain tight around the country, with most districts experiencing widespread shortages of both high-skill and low-skill workers.  Wage growth is mostly moderate, but some districts are seeing big wage gains for construction workers.  I think the takeaway is that things are continuing to improve moderately.  Along the same lines, the University of Michigan Consumer Sentiment Index jumped above 100 in September which is the second strongest read since 2004.  For now, it’s full steam ahead.

In company news, Apple held its annual WWDC event during which it announces its new products.  If you’re in the market for an iPhone or an Apple Watch, you’ll be pleased by the new offerings.  I am still somewhat unhappy about the lack of a headphone jack and its push to Face ID, but truth-be-told, they make good products at a very premium price.  In other company news, it seems Larry Page, CEO of Alphabet (otherwise known as Google), has been missing for some time now.  He’s not missing in the literal sense, but it seems he has quietly stepped aside from the day-to-day operations to instead spend time on his private Caribbean island.  Sources say Page’s absence is “bordering on emeritus, invisible to wide swaths of the company.”  Mr. Page hasn’t presented at a product launch in five years or participated in a press interview in over three.  Perhaps he just needs a break, but investors are beginning to wonder.

In a bit of further intrigue, there is a possible coup afoot.  We learned this week there may be a plot to oust Theresa May, the Prime Minister of the U.K.  The BBC reports that a group of fifty lawmakers in Theresa May’s government, who oppose her proposals for a post-Brexit deal with the EU, have met to discuss how and when they could force her out of office.  A leadership contest could ensue if fifteen percent of conservative lawmakers, currently 48, demand a vote of no confidence.  Creating further intrigue, the U.K. government met yesterday to discuss the eventuality of a “no-deal” Brexit.  It is reported they are readying a second set of documents outlining further preparations in case it leaves the EU without an agreement in March 2019.  Brexit chief Dominic Raab warned that the U.K. will not pay the $51B break-up fee if there is no final Brexit deal.

In closing, let’s talk about Amazon.  The company has come under some scrutiny lately about its workplace policies and treatment of its employees.  Mr. Bezos was worth $108 billion at the end of last year and has gained over $50 billion in net worth since the start of this year.   So, we have the richest person in the world and an internet retail giant that reportedly took in $5.6 billion in U.S. profits last year.  However, it might come as a surprise, as it did to me, that Amazon paid zero dollars in federal income taxes last year.  In case you might be wondering how this is legal, it seems the company’s global headquarters is not in Seattle as you might think, but instead in Luxembourg, a country of 1,500 people.  So, while President Trump may demonize Mr. Bezos for his ownership of the Washington Post and Amazon’s use of the U.S. Postal system, it seems there could be another reason you might not like the man.  Going back to 1995, Mr. Bezos originally wanted to build Amazon’s U.S. headquarters on a Native American reservation near San Francisco to skirt U.S. federal income taxes, but California stopped the deal from going through.  Instead he made the headquarters Luxembourg.  Now you know.

September 14, 2018

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