Browsing articles in "Weekly Market Update"

An Ugly Jobs Report

Mar 8, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

All three major stock averages are heading for their fifth straight day of declines in the wake of a disappointing jobs report, persistent uncertainty over China-U.S. trade talks, and Brexit.  This week we are reminded that the markets rarely go straight up for very long.  A certain amount of volatility is to be expected and a reversion to the mean is part of the cycle and not an exception to it.

Today started off on a bad note after U.S. non-farm payrolls rose a seasonally adjusted 20,000 in February, sharply missing expectations of 180,000 new jobs.  It came as a huge surprise which no one seems able to fully explain.  Some economists suggest the cold snap that paralyzed much of the country is to blame, while others believe the government shutdown played a hand in the decline.  The number is so low that investors shrugged it off as an anomaly and perhaps even an accounting fluke.  The last time the number was this low was in September 2017 and before that May 2016.  It does happen occasionally, but is typically a one-month event with a large bounce higher the following month.

In company news, it seems Amazon won’t be satisfied until it revolutionizes every industry.  Despite acquiring Whole Foods in 2017, it now wants to roll out a new grocery store format going head-to-head with Kroger, Walmart, and Target according to the Wall Street Journal.  This $1 trillion industry is certainly large enough to accommodate another entrant, however, margins are already exceedingly low and even a small decline in profits can send a company’s stock sharply lower, i.e. see Kroger down 15% this week.  Amazon’s ace-in-the-hole is its own private label which it hopes to capitalize on, putting pressure not only on other supermarket chains but also package foods and household product companies such as Kraft Heinz, General Mills, and Kimberly-Clark among many others.

Aside from the weak jobs report, we also learned this week that U.S. credit card balances hit a record $870 billion in December.  Balances grew $26 billion in the fourth quarter marking the first time credit card balances re-touched the 2008 nominal peak according to the Federal Reserve.  Also, 480 million credit cards are in circulation, up by more than 100 million (+26%) since its trough after the 2008 recession.  Before you hit the panic button, household debt is significantly lower than it had been leading up to the 2008 financial crisis and delinquency rates are not at heightened levels at this time.  The bigger concern, and one that I have mentioned before, is the U.S. budget deficit which swelled 77% in the current fiscal year (YTD).  The shortfall in the first four months of this fiscal year widened to $310 billion.

Ironically, among the other news that sent markets lower this week was China reporting lower exports.  In a nutshell, the good news is that the trade tariffs are working.  The bad news is that trade tariffs are working.  Beijing reported exports in February tumbled 20.7% from a year earlier, far below forecasts of a 4.8% drop.  I said ironically because analysts are suggesting that this drop in exports is indicative of a global economic slowdown.  Policy, meet consequence.

In closing, I want to tell you about special precautions, the kind executives take.  We all know high profile executives often hire bodyguards to protect themselves and their families.  What you may not know is the lengths some go to.  New details emerged this week about the security plan for Mark Zuckerberg, CEO of Facebook.  It seems given his notoriety, he faces severe threats on a regular basis.  Unlike many CEOs, Mr. Zuckerberg works at a regular desk on an open plan floor at Facebook HQ but is said to always be surrounded by undercover security who pose as software engineers.  Also, the company garage is located just beneath his floor, but parking underneath the CEO’s desk is blocked due to the threat of a car bomb.  Most interestingly, it is reported that Mr. Zuckerberg’s desk is located next to a bullet proof conference room with a panic button and perhaps more strangely, a rumored “panic chute” leading to the parking garage below.  Now you know.

March 8, 2019

The Mysterious Surge in $100 Bills

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

The markets went largely sideways this week as trade talks with China appeared to hit a few speed bumps and economic indicators were decidedly mixed.  Given the exceptionally fast rise in the markets over the past few months, it is to be expected we might see the markets consolidate a bit while investors digest the data.

Part of what is helping support the market is testimony from the Federal Reserve Chairman, Jay Powell, who this week appeared before the Senate Banking Committee.  In his testimony he reiterated the Fed’s position that policy decisions will be data dependent.  Based on his comments, it seems the Fed is struggling with how to unwind its balance sheet in the face of a slowing economy and is reconsidering the viability of further interest rate hikes.  While these developments may not sound like great news, it is exactly what investors want to hear because it suggests the Fed is considering more than just economic data but also market volatility and investor sentiment.

Despite the media circus surrounding testimony by Michael Cohen, there was quite a bit of company news that warrants mentioning.  Tesla, which has been in the news more for its CEO’s transgressions than its cars, announced yesterday it is finally going to start selling a $35,000 entry-level Model 3.  The bulls insisted this is the beginning of the transformation of the mass-market electric vehicle in the United States.  The bears suggested that selling a car below costs is almost certainly a way to drive the company into financial trouble.  Even Mr. Musk himself stated the company would not turn a profit in the first quarter after having posted a couple quarters of profit last year.  One of the cost saving measures the company announced is the closure of most of its retail stores.  Going forward, the company will only sell its cars online with a seven-day return policy.  This could utterly transform the way cars are sold, or it could be a colossal failure.  Legislation regarding the sale of cars goes back to the advent of automobiles.  Time will tell how this idea pans out.

In other company news, Samsung announced its Galaxy Fold phone which marks the first phone that has a foldable screen.  The screen is 7.3 inches but folds in half and is small enough to fit in a pocket.  If this interests you, the phone will be available April 26th and will cost an eye-watering $1,980.  In another first of its kind, Boeing unveiled an unmanned fighter jet designed to fly alongside crewed aircraft in combat.  The company hopes to sell the aircraft, which has a range of 2,000 nautical miles and costs considerably less than a conventional fighter jet, to customers around the world.  And lastly, an innovation that could help many people was approved by the FDA this week.  Medtronic developed a radio frequency system for the ablation of nerve tissues which could be used to reduce chronic pain.  The device uses radio waves to heat up a small area of nerve tissue to stop it from sending pain signals.  Given the opioid epidemic and heightened awareness surrounding the use of pain medication, this could be a game changer.  Disabling pain lasting more than three to six months affects at least 100 million adults in the U.S. according to Medtronic, with treatment and lost productivity costs reaching $635 billion a year.

In closing, I bring you a mystery.  It seems the amount of $100 bills in circulation is surging and is leaving some economists scratching their heads.  The number of $100 bills has doubled since the financial crisis, with more than 12 billion of them across the world, according to data from the Federal Reserve.  There are so many that $100 bills have now passed $1 bills in circulation.  Generally, economists believe the surge is related to people around the world wanting to hoard cash.  While some purport it has to do with corruption and crime, others suggest it has become a store of value, in much the same way gold was in previous eras.  Also fascinating, the shelf life of a $100 bill is considerably longer at 15 years versus the $1 bill which on average lasts in circulation just under 6 years.  And perhaps most interesting, 60% of all U.S. bills and almost 80% of $100 bills are held overseas which is up from 15-30% in 1980.  If you have a theory on the rise of the $100 bill, please let us know.  Until then, the Treasury Department will just have to work its printing presses at capacity.  Now you know.

March 1, 2019

The Race (back) to Space

Feb 22, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

This week was one of the most boring I can remember.  Usually I can find something to write about between economic data, political, and corporate news.  I can’t remember the last time I looked down at my notes this late in the week and a rather blank page stared back at me.  Perhaps this will be the week I finally shorten this email to Marc’s satisfaction.

Perhaps the biggest cause for optimism is that President Trump signaled flexibility in a key deadline for trade talks with China.  According to the President, trade talks are going well and the current March 1 deadline isn’t a “magical” date, suggesting additional tariffs on billions of dollars of Chinese imports may be delayed.  There is no question the market is anticipating a positive development out of trade negotiations, however, more concrete details are likely needed to push stocks much higher.

You can tell I’m really stretching when I’m left to discuss topics such as “Space Force”.  President Trump signed a directive ordering the Pentagon to draft legislation creating a Space Force as the sixth U.S. military branch.  If approved by Congress, it would mark the first new military division in 72 years.  A renaissance of research and innovation in aerospace technology could be the stimulus for the next technological revolution.  Looking at how the Internet has changed our everyday lives, it is perhaps not much of a reach to think that this next technological leap could have an even bigger impact.  We are talking space travel after all.

Along those lines, you may be surprised to learn that after the U.S. ended its space shuttle program in 2011, it relies on Russia to transport its astronauts to and from the International Space Station (ISS).  Fortunately, NASA has been working hard to regain supremacy in a collaboration with SpaceX and Boeing.  While the mission may have changed, see mission to Mars, the importance of manned space travel is critical to its success.  The catch is that the contract between the U.S. and Russia will expire this summer.  Delays in both SpaceX and Boeing’s programs could leave U.S. astronauts unable to access the ISS and thereby cede control.  The clock is ticking.

In company news, Payless ShoeSource (yes, that is its full name) is filing for Chapter 11 bankruptcy again, Volkswagen is wringing its hands over the potential for huge auto tariffs, and Apple begins offering interest-free iPhone loans in China.  Oh, and Kraft Heinz took a $15 billion write-down which caused its stock price to fall 28% today.  Lest it not be forgotten, Nike also had a bit of a misstep this week when perhaps the best college basketball player today, Zion Williamson, blew out his Nike shoe, injuring his knee in the first few minutes of the Duke-North Carolina game which was broadcast on national television.  Talk about a PR nightmare.

In closing, let’s take a minute to talk about the Olympics.  In recent years, the Olympic Committee has decided to bring back some old sports and add some new ones.  At the moment there are 28 sports officially recognized by the Olympics.  Among those under consideration for the 2020 Olympic games in Tokyo is karate, baseball/softball, squash, and petanque (a game like lawn bowling or bocce).  However, the next one is what caught my eye.  It seems the committee is considering breakdancing for the 2024 Paris games to appeal to younger fans.  Yes, breakdancing is being proposed as an Olympic sport.  You read it here first.  Now you know.

February 22, 2019

$22 Trillion and Counting

Feb 15, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Political news notwithstanding, it was a good week for the markets.  The gains can be directly attributed to a break in the budget impasse with the president signaling he will sign the bill when it reaches his desk.  Uncertainty regarding this stalemate had been weighing on investors who feared another government shutdown would have a real and lasting impact on the economy.  Fortunately, our legislators realized the last shutdown didn’t garner either party much favor and they worked as would be expected to avoid a repeat.

Not widely reported this week was a new record as our national debt tops $22 trillion.  It stood at just under $20 trillion when President Trump took office on Jan 20, 2017, but has been rising following the passage of a $1.5 trillion tax cut and spending increases on domestic and military programs.  Worth noting is data released this week which shows 2018 individual income tax revenue grew to a new all-time high surpassing 2017 by $9.3 billion, while corporate tax revenue fell $95.2 billion or roughly 33% over the same period largely due to tax reform.  At the current rate, the national debt is growing by a little over $1 trillion annually.  To ensure that you don’t think I’m being partisan, President Obama’s administration racked up $9 trillion in debt over the eight years of his administration, nearly as much debt as in the entire 232-year history of the country before he took office.  National debt is a growing problem and appears to be non-partisan.

In company news, we learned Amazon is backing out of its second headquarter location in New York City after political and local pushback.  Depending on which side of the issue you are on, the nearly $3 billion in subsidies to Amazon was either too much to bear or the future of the borough.  The finger pointing is in overdrive.  However, worth noting, we also learned Amazon will pay zero corporate income tax in 2018 and is the second year in a row it will owe nothing.  In fact, it will receive a refund of $129 million which is an effective tax rate of negative one percent.  The company earned $11.2 billion in profits last year.

In other news, JP Morgan announced it is developing its own cryptocurrency to be called the JPM Coin.  Trials are set to begin in a few months to instantly settle payments between clients.  As of now, only institutional clients that have undergone regulatory checks will be able to use this new service.  Most banks currently use the Swift Network which dates to 1973.  Considering how technology has advanced over the past 46 years, it is amazing that this network has remained largely unchanged.  The major downside of the Swift payment network is that it takes 3 to 5 days for money to transfer between banks or financial institutions.  Blockchain technology, first introduced with Bitcoin, speeds up transaction time to theoretically minutes if not seconds.  Competing blockchains have been working on this problem for the past few years with Ripple (XRP) being the leader in the banking space.

Along similar lines, we also learned this week that payment with plastic is about to get more expensive.  With most services that rely on technology, we’d expect prices to fall as the technology matures.  While that may be the case in many industries, it seems credit card processing companies are bucking the trend.  Mastercard and Visa are set to hike certain existing fees that U.S. merchants pay starting in April.  Although there is nascent competition from the likes of Square and PayPal, the large players in this industry clearly have enough market share to dictate pricing.  While you may feel sorry for merchants having to pay more to process credit cards, this fee increase will almost certainly be passed on to consumers one way or another.

In closing, I bring you the story of a rather ingenious strategy to save money called “skip lagging.”  I first heard of this years ago but it wasn’t until this week that I heard of airlines fighting back.  Skip lagging is a money-saving method where passengers leave their flight at a layover instead of the final destination.  For example, a traveler going to Dallas could book a cheaper flight to Seattle with a layover in the Texas hub.  In some cases, the savings can be substantial.  Well, this week we learned Lufthansa sued a passenger for violating its terms and conditions by not completing the entire trip.  This is the first time I remember hearing an airline aggressively going after a passenger.  The airline lost the case but it is appealing the ruling.  Now you know.

February 15, 2019

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