Browsing articles in "Weekly Market Update"

The Intersection of Politics and Investments

Jun 9, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

I know it has been a couple weeks since our last update and A LOT has occurred.  The good news is the market has been very resilient in the face of a lot of uncertainty.  Between the terror attack in London, British elections, the Comey testimony, and renewed Middle East tensions, the stock market continues full steam ahead.  Instead of predictions of collapse, the headlines suggest “Why The Dow Can Go Much, Much Higher,” “This is a Reagan-like Rally and Here’s How Much Higher Stocks Can Go,” and “Dow Rises: Why The Trump Stock Market Rally Will Continue.”  It goes without saying, the pundits think this bull market has room to run.  For now, it seems investors agree.

It’s hard to avoid politics these days.  Unfortunately, politics does impact various industries and companies in significant ways.  The House voted yesterday along party lines to pass a major rollback of Dodd-Frank regulations.  The bill will relieve healthy banks of some regulatory requirements and force failing banks into bankruptcy via the court system instead of a liquidation process spearheaded by regulators.  It goes without saying, bank stocks were some of the largest winners this week.  In other news, the “fiduciary rule” went into effect today requiring financial advisors to put their customers’ interests ahead of their own when providing advice about their retirement money.  As a registered investment advisor, Harvest Investment Advisors has acted as a fiduciary since its inception.  However, the rule could be killed by a provision in the Financial CHOICE Act which has widespread support in the House.  Putting client’s interests first should not be a difficult decision.  At least, that’s what we think.

While legislation shapes the economy, market forces also play an important part.  I’ve talked at length about automation and its impact on labor and productivity.  This week Boeing announced it is studying self-driving planes.  It is looking forward to a world where jetliners fly without pilots and aims to test some of its new technology next year.  Boeing’s VP of Product Development said, “the basic building blocks of the technology are clearly available.”  Honda announced its future strategy is to launch a Level 4 autonomous driving technologies in its cars by 2025.  Level 4 means the cars can drive themselves on highways and city roads under most situations.  To make this happen it has ramped up R&D spending, earmarking a record $6.8B for this year.

Technology isn’t only changing the face of transportation.  We also learned this week that robots are helping to boost production in athletic apparel.  Morgan Stanley forecasts that 20% of the production from Nike and Adidas will be through automated factories by 2023.  Adidas already has its next-gen Speedfactory in Germany up and running as well as an Atalanta Speedfactory site being built, while Nike has several automated platforms in development.  The International Robot Federation estimates that over 2.5 million industrial robots will be at work by 2019.

There were two other significant developments this week include Anthem pulling out of ACA in Ohio in 2018 citing uncertainty.  The insurer ticked off a list of concerns, including “continual changes in federal operations, rules and guidance” and “an increasing lack of overall predictability.”  The move will leave about 10,500 Ohio residents in at least 18 counties without an insurance option.  Anthem is currently reviewing its involvement in the fourteen states where it currently participates.  Insurers in New York requested double-digit increases as high as 47% for ACA policies next year as the debate rages in Washington on how to overhaul the law.  The other big development this week was the announcement that this administration would like to privatize air traffic control in the United States.  As far back as I can remember, there has been talk of overhauling the air traffic control system in this country.  Thirty years later, by all accounts it remains a major infrastructure weakness.  However, while some airlines applaud this move, others find it problematic.  Executives from United Airlines, American Airlines, and Southwest Airlines praised President Trump’s plan.  They believe the antiquated system we rely on today is inefficient and causes thousands of avoidable flight delays.  Those on the other side, including Delta Airlines, believe that privatization would not save money, but instead would drive up ticket costs and could create a national security risk.  Like I said above, while I don’t like talking about politics, politics does have a big impact on the industries and companies we invest in.  It’s hard to be an investor these days and not pay close attention to politics.

While I could go on about Apple’s WWDC conference this week, or how Alphabet’s (Google) shares joined Amazon in the $1,000 per share club or the elections in the U.K, or how the European Union is preparing a new defense union to potentially replace NATO or former FBI Director Comey’s testimony…  There simply isn’t enough time to discuss it all.  I appreciate your patience this past couple of weeks.  For the next couple of months, this weekly email will be more sporadic but rest assured it will return to its reliable consistency in August.

June 9, 2017

The Trump Slump

May 19, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Political jitters increased volatility this week.  Stocks suffered their worst one-day selloff since September, finally cracking after several weeks of little action.  The stock market had been counting on President Trump and the Republican-led Congress to deliver tax reform, deregulation, and infrastructure spending, but those plans now seem shaky as D.C. looks increasingly likely to become bogged down in investigations and finger-pointing.

While most weeks I can balance the good news with the bad, this week swung toward fear and concern.  From the President’s interactions with ex-FBI Director James Comey to allegedly leaking high-level intelligence to Russia and geopolitical problems in both Venezuela and Brazil, it wasn’t the type of week you really want to recap.

Let’s start with the concerted push to lower mortgage down payments.  The CEO of Bank of America, Brian Moynihan, was quoted this week saying, “Our goal – going back to regulatory reform – is should you move the down payment requirement from 20% to 10%?  It wouldn’t introduce that much risk but would actually help a lot of mortgages get done.”  You might recall, Bank of America was the top U.S. mortgage lender ahead of the 2008 mortgage crisis, causing it to face greater losses, both from defaults and litigation, than any other bank.

Along similar lines, a senior analyst at Wells Fargo downgraded the credit-card industry noting net charge-offs for the group rose to 3.5% in the first quarter.  There is a concern credit has become too easy once again, with subprime having the potential to become a problem.  The number of charge-offs is at a four-year high and this analyst expects it to stay elevated for the rest of the year, even in a benign economic environment.  A 1% increase in the provision for charge-offs would cut earnings for the sector by 27% on average, with Capital One faring the worst, followed by Discover, Synchrony, and American Express.

For those of you who were looking forward to the repeal of Obamacare, you may have to wait a bit longer.  For those looking to block the repeal, you got some good news this week.  Bloomberg reports that the House of Representatives may have to vote again on the Republicans’ repeal of Obamacare depending on how the Congressional Budget Office (CBO) estimates its effects.  House leaders want to ensure that the bill conforms with Senate rules for reconciliation so it can pass with a simple majority vote.  If GOP leaders hold onto the bill until the CBO releases its report, then majority leader Paul Ryan and his team can tweak it, if necessary, which would require another vote.

If you don’t follow the news, you might not know that there’s a problem brewing in Venezuela.  It’s actually quite serious and has been building for several weeks.  Earlier this week, a day that began with largely peaceful protests against Venezuela’s socialist government took a violent turn as fierce clashes between state security and demonstrators killed at least two people.  Unfortunately, the mood has spread to Brazil with suggestions of government corruption there too.  There are allegations President Michel Temer agreed to pay hush money to a key witness in the country’s biggest-ever corruption probe.  While we continue to like emerging markets, these developments are a concern and should be closely watched.  We do not have any direct exposure to either country at this time.

In closing, let’s turn to the luxury market.  Sotheby’s this week sold the world’s most expensive earrings for $57 million, topping the $17.7 million price of a pair sold by Christie’s last year.  The two pear-shaped stones are perfectly similar except for their color: one is pink while the other is blue.  Not to be outdone, Sotheby’s also sold a painting by late graffiti artist-turned-expressionist painter, Jean-Michel Basquiat, becoming the most expensive at an auction of any U.S. artist, fetching $110.5 million in New York.  We are living in very heady times.  Now you know.

May 19, 2017

Deconstructed Shoes

May 12, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

While it was a politically newsworthy week, in truth there wasn’t much to move the market.  Investor complacency appears to be the norm while simultaneously the volatility index fell to a multi-decade low.  With first quarter earnings announcements all but finished, it seems investors are waiting to see what comes next.

While there wasn’t any one big news story, there were lots of smaller, perhaps more interesting stories this week.  I’ll go in chronological order.  Perhaps the most newsworthy story of the week was the runoff election in France.  We learned on Monday that Emmanuel Macron won 66% of the vote and is poised to become the youngest president in France’s history.  This victory helps solidify France’s place in the European Union (EU) and helped reassure investors that the EU isn’t falling apart.

You no doubt are aware that the current administration is hard at work dismantling regulations in various industries from the energy sector to the financial services industry.  This week we learned that the FDA is delaying a rule requiring restaurants to post calorie counts.  Dr. Tom Price, Secretary of Health and Human Services, approved the FDA decision noting the rules would be burdensome for the food services industry.  So much for making America healthy again?

As noted in the opening, the volatility index (VIX) fell to a 24-year low of 9.7.  The downward swing in this fear gauge is likely tied to the result of the French election and the general sideways action in global markets.  Perhaps the best explanation I found was from Convergex chief market strategist Nicolas Colas.  He stated, “Volatility is ultimately a mathematical measurement of human emotion on stock prices.  Emotions are by their nature unpredictable, which makes the VIX equally inscrutable.  All we know is that human emotions still exist, and therefore volatility will return.”

For those of you following cryptocurrencies, Bitcoin hit a new all-time high this week.  Bitcoin soared passed $1,800 only two days after breaking the $1,700 level and rising more than 300% this year.  What could be driving this move is the recent move by Japan to legalize the cryptocurrency as a payment method.  Russia is considering doing the same.  I’m not sure if the recent trend in blockchain currencies is a bubble, but it sure has that feeling.

There isn’t a week that goes by that Amazon doesn’t have some new concept or project.  The company announced it is looking to open four massive warehouses to help it deliver bulky items like appliances and furniture.  The initiative is part of a strategy to expand furniture offerings and speed up delivery times.  A top Amazon executive said, “Furniture is one of the fastest-growing retail categories.”  While Costco has been doing this for some time, this move by Amazon is sending a shiver through the furniture and home furnishing sectors.

And we can’t end the week without some news out of the airline sector.  It seems airlines around the world are bracing for a possible expansion of an electronics travel ban to include many routes from Europe to the United States.  Representatives from Delta, United, and American met with national security officials in Washington to discuss threats to aviation security and the possible pre-emptive measures.

In closing, the story of the week has to do with distressed clothing.  Remember the trend in the 80’s when new jeans came looking pre-worn.  Stone washed jeans quickly morphed into jeans with holes in strategic places to make them look more fashionable.  Well, this trend reached new heights a month ago as Nordstrom started selling jeans caked in fake dirt for $425 a pair.  And just last week Neiman Marcus started selling battered and ripped sneakers for $1,425 a pair.  Don’t believe me? Check out the links.  I’m at a loss for words.  Now you know.

May 12, 2017

Fiscal Discipline Wilts

Apr 28, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Investors breathed a big sigh of relief this week as several potentially problematic issues were averted.  Voters in France are overwhelmingly supporting the more moderate candidate that isn’t calling for France’s exit from the European Union and Congress voted today to avoid a government shutdown, albeit for just one week.  With earnings announcements coming in generally better than expected, the market reversed the trend of the past six weeks and will finish the week higher.

While it is too soon to say what impact President Trump’s tax cut proposal will have on the economy, it has clearly drawn a line between those for it and those against it.  Unfortunately, many key details were not released when the White House made the announcement and it differs in four ways from the President’s campaign proposal.  The following are the main differences:

  • A smaller tax cut for top earners: The White House proposal would lower the top marginal rate for individuals from 39.6% to 35%, rather than the 33% proposed on the campaign trail.
  • A smaller tax cut for middle-income individuals: The proposal now calls for a standard deduction of $24,000 for couples rather than $30,000. This is still roughly twice as much as the current standard deduction.
  • Repeal of the state and local tax deduction: The Trump campaign proposal was unclear about which individual tax deductions might be eliminated. The deductions for mortgage interest, charitable contributions, and retirement savings would be maintained.
  • A territorial tax system for business income: The revised White House plan would adopt a territorial tax system, which exempts foreign earnings from U.S. tax.

Conspicuously absent was any mention of a border tax adjustment, which has been floated in Paul Ryan’s plan and widely accepted in the House of Representatives.  It also repeals the death tax and abolishes the alternative minimum tax (AMT).  Additionally, it would cut the corporate tax rate from 35% to 15%, and apply the same rate to pass-through entities which benefit most small businesses throughout the country.  I expect a long road ahead for tax legislation.  While there is a good chance that tax reform becomes law, the details will likely make this a tough piece of legislation to pass.

In other news, Gross Domestic Product (GDP) slowed more than expected in the first quarter.  The consensus was for GDP to come in at 1.2% which itself is lower than the 2.1% we saw in the fourth quarter of last year.  However, GDP came in at 0.7% which surprised many but didn’t seem to bother the market.  The culprit was consumer spending which softened considerably from 3.5% in Q4 to just 0.3% in Q1.  Spending on large-ticket items such as cars and home appliances dropped and possibly affecting results was the low level of heating due to moderate weather in large parts of the U.S.  Most economists believe Q1 is an anomaly and consumer spending will likely pick back up in Q2.

It was announced this week that China now holds the record for the world’s largest money market fund.  A Chinese money market fund set up as a repository for leftover cash from online spending has emerged as the world’s biggest, with $165.6 billion under management.  Alibaba’s four-year-old Yu’e Bao fund – which means leftover treasure – has overtaken JP Morgan’s U.S. Government Money Market Fund, which has $150 billion.  Yu’e Bao pays 3.93% and no, we can’t invest in it!

In the wake of the United Airlines beat down and the American Airlines issues with mothers traveling with children, it should come as a relief to know that both airlines are hard at work figuring out how to treat their customers like people.  Perhaps adding a helping hand, the Federal Communications Commission (FCC) is withdrawing its proposal that would have allowed air travelers to use their cellphones while in flight.  Despite new advances in in-flight communications, the value of quiet at 30,000 feet was deemed more important.  United will be able to use their slogan, “Fly the Friendly Skies” and possibly mean it.  Now you know.

April 28, 2017

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