Browsing articles in "Weekly Market Update"

One Small Typo

Mar 3, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Twelve straight record closes and a move above 21,000 marks another milestone for the market this week.  Much of the appreciation since the election is due to the anticipation for deregulation, increased government spending, and tax reform.  Some actions have been taken, but much more are in the pipeline (no pun intended) and could be difficult to gain traction not only with Democrats but also within the President’s party itself.  We continue to enjoy the market appreciation but have been taking gains as part of the general rebalancing process.  Diversification means owning those positions that may not be doing well at the moment, i.e. fixed income, but whose lack of correlation to the equity markets will provide respite when the tide eventually turns.  And it will.

Has the market gotten a little ahead of itself?  The answer depends on whether you believe President Trump will be able to achieve healthcare reform, tax reform, immigration reform, infrastructure spending, et al.  Aerospace and defense names such as Boeing and Lockheed Martin rose after Trump proposed a $54 billion boost to defense spending.  His plans regarding $1 trillion in infrastructure spending helped move shares of Caterpillar and other industrial stocks.  Financials continue to rank among the top performers this year on anticipation of deregulation and interest rate hikes.  These areas have become ubiquitously known as the “Trump Trade” and have outsized gains.  While President Trump may giveth, he can also taketh away.  Sectors like retail took it on the chin this week with renewed talk about a border tax on goods produced in Mexico and China.  Utilities which have been spending billions upgrading to natural gas, oddly enough, are also hurting with a renewed focus on coal.

It was a good week for investors for another reason.  The major brokerage companies, starting earlier this year, decided to cut trading costs.  Just one month ago Schwab announced it was lowering its trading commission on stocks and ETFs to $6.95.  This week Fidelity rose to the challenge and announced It is lowering its trading commission to $4.95.  The same day, Schwab announced it would match Fidelity’s rate.  The new commission rate is 50% lower than that at E-Trade and TD Ameritrade.  As described in an article in Forbes, investment management fees are one of the smallest headwinds investors face.  In fact, trading costs and taxes eat up even greater shares of returns than fees.  This week marks a small victory for investors everywhere.

Let’s switch gears for a moment and talk about TV.  For years the largest players in communications industry had a stranglehold on its consumers.  Whether from a lack of competition or poor service and ever rising package prices, consumers had little choice.  However, things are changing.  Sling TV and Hulu were early innovators in streaming TV.  This week we learned Google (Alphabet) is taking it to the next level.  It plans on rolling out TV service this Spring, including thirty channels, local TV, and unlimited Cloud DVR for only $30 per month.  The industry, reluctant to change, is being forced into a new future of streaming media and TV on any device anywhere.  Fortunately, we all have a free front row seat to this coming attraction.

In closing, I came across another story about details.  Last week was about an email sent by mistake that led to a substantial lawsuit.  This week, it’s a typo that shut down some of the largest websites.  The problem was traced back to Amazon’s hosting platform as part of its Amazon Web Services (AWS) a multi-billion dollar division within Amazon.  And you thought they only sold stuff!  After recovering from the problem, Amazon put up a post explaining what happened.  While attempting to fix an issue with their billing system, “an authorized team member using an established playbook executed a command which was intended to remove a small number of servers for one of its billing subsystems.”  There was just one problem with this: “Unfortunately, one of the inputs to the command was entered incorrectly, and a larger set of servers was removed than intended.”  If there’s a moral to this story, it’s probably that even the best and most reliable can make mistakes.  The other moral is details matter.  Now you know.

March 3, 2017

The Jobsite

Feb 24, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Today the market recorded its eleventh straight record close.  Investors, fearing they’ve missed the rise in the markets, continue to put money in, pushing it to new heights.  Like I said last week, let’s enjoy it while it lasts.

Earnings season is winding down, and it looks like growth was a little better than expected.  Revenues grew, in aggregate, by 5% while earnings grew by 7.5% year-over-year.  Optimism on Wall Street, among corporate managers, has helped boost full-year estimates for 2017.  However, the recent run has led some to wonder if the market has run a little too far.  One analyst is warning stocks have become pricey relative to their historical averages; the S&P 500’s 12-month forward PE ratio is at its highest level since 2004.  Not to put too fine a point on it, the market hit its tenth consecutive rise this week marking the longest run of record closes since 1987.

Enough about that.  Let’s talk company news.  Tesla remains a market favorite despite the many challenges it faces, including the money it is burning through with reckless abandon.  The company announced this week it had revenue of almost $2.3 billion in the fourth quarter.  However, it posted an earnings loss of $0.69 per share.  The company’s insatiable appetite for capital spending remains strong as management announced later this year it will finalize locations for Gigafactories 3, 4, and possibly 5 (Gigafactory 2 is the Tesla solar plant in New York).  In other news, Unilever rejected KraftHeinz’s $143 billion bid citing the sum of its parts are worth more than what’s being offered.  While this explanation makes sense, it left Unilever shareholders wondering why management hasn’t done more to unlock this value.  Unilever shares fell 10% on the news but recovered roughly half by week’s end.  Speculation is rampant regarding KraftHeinz’s next move.  Two names that keep surfacing are Mondelez, the maker of Oreos and Cadbury, and Danone, with brands like Dannon yogurt and Evian water.

Apple’s new spaceship-looking headquarters is opening to employees in April.  After six years of construction and $5 billion, the new office space is just about ready to open.  It sits on 175 acres and will hold all 12,000 employees, although it could take over six months to transition the employees to the new space.  The 2.8 million square foot building is ring-shaped and utilizes the largest curved glass panels in the world.  For those of you who are green, the location is powered by 100% renewable energy, running 17 megawatts of rooftop solar panels.  Some of the more amusing nicknames floated are SteveHenge, The Jobsite, The Glass Donut, and Appcot.  Let’s hope the new headquarters inspires some innovation.  To read more about how this building was designed and the insane attention to detail click here.

Without getting too much into politics, some things are beginning to shape up.  Based on speeches President Trump has made in recent days, it appears his priority is first to repeal and replace the Affordable Care Act (ACA).  Later this year, perhaps a lot later, he’d like to reform both the corporate and individual tax code.  And infrastructure spending has been delayed until 2018.  Given the atmosphere surrounding his presidency, it appears he has a lot on his plate with the ACA and likely just as much when it comes to tax reform, specifically his own party’s ideas on a border tax.  My gut is telling me these issues will take a lot longer than the president expects and may require more compromise than he wants to accept.

In closing, this week’s story is about details.  Everyone, at one time or another, has sent an email or a text to the wrong person.  Perhaps they hit the reply all button erroneously.  It seems a company providing components for Uber’s self-driving car project inadvertently copied Google engineers.  The email revealed drawings of Uber’s technology including drawings of 3-D sensors.  The problem is, the drawings looked remarkably like Google’s own.  Shortly after receiving this email, Google filed a suit in federal court against Uber, claiming Uber stole patents and trade secrets.  The moral of the story is, don’t steal.  And also, check your email recipients twice.  Now you know.

February 24, 2017

2016 Wastebook: PORKemon Go

Feb 17, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Major stock market indexes carved out new highs as investors relaxed some of their concerns over trade wars and instead focused on the potential for large corporate tax cuts.  The S&P 500 index reached a new high of 2,351 this week and crossed over a market cap of $20 trillion for the first time.  Solid gains for Apple, JPMorgan, and Caterpillar helped push the Dow Jones Industrial Average (DJIA) to a new record of 20,635.  While we don’t anticipate these gains to continue forever, we should enjoy them while they last.

Last week I talked about the House GOP border tax proposal.  We looked at what effect it may have on the economy and the U.S. dollar.  This week the CEOs of some of America’s largest retailers, including Target, Best Buy, Gap, and AutoZone, headed to Washington to make their case that an import tax would raise consumer prices and hurt their businesses.  Best Buy circulated a flyer to lawmakers, which cites an analyst forecast that a 20% tax would wipe out the company’s projected annual net income of $1 billion and turn it into a $2 billion loss.  However, not everyone is unhappy.  A group of major executives including Boeing, General Electric, and Pfizer has formed a coalition to support the import tax.

In company news, Delta Airlines reported this week it would pay out more than $1.1 billion in profit sharing after its record-setting 2016.  On tap for 2017, employees will receive a 6% raise in base pay, resulting in a total pay rate increase of 25% in two years.  In other news, Apple has reclaimed its throne as the only $700 billion publicly-traded U.S. company.  It is riding high on expectations for its 10th anniversary iPhone to be released later this year.  And lastly, Amazon has announced plans to shake up the video conferencing market.  It is taking on Skype, WebEx, and GoToMeeting with a new service called Chime.

If you haven’t been paying attention, you might not know that the insurance industry is in chaos at the moment.  With costs skyrocketing in the Affordable Care Act (ACA) marketplace, many of the largest insurers have decided to scale back or in some cases exit completely.  Humana, one of the largest health insurance companies, announced it would exit the ACA Marketplace in 2018.  However, there is even more going on here than meets the eye.  Mergers have been underway between Anthem and Cigna, and Humana and Aetna.  In recent weeks, courts have ruled against both mergers because the combined companies would be too large and could exert monopoly power.  With the mergers scuttled and the ACA foundering, the insurance industry is in a tough spot.

Of mild concern is a recent report showing FHA delinquencies are on the rise for the first time since 2006.  The seasonally adjusted rate rose to 9.02% in the fourth quarter, according to the Mortgage Bankers Association.  What could be at work is an easing in the underwriting.  The FHA’s minimum credit score is 580, but average credit scores rose to 700 in the immediate aftermath of the housing crash.  They have since dipped to 675.  Another area of concern is student debt.  Total U.S. student debt hit a record $1.31 trillion last year, the 18th consecutive year education debt rose.  Since 2008 mortgage debt is down 8%, home equity debt is down 33%, and credit card debt is down 10%.  However, auto loan debt is up 46%, and student loan debt is up a whopping 105%.

In closing, I turn to a controversial topic: government spending.  Each year, Senator Jeff Flake compiles a book of what he terms egregious government spending.  This year it is 200-pages and includes a $450,000 grant to research whether dinosaurs could sing and $1.5 million to analyze what happens to fish if they find themselves on a treadmill.  The Internal Revenue Service spent $12 million on an email archiving service despite failing to install the activation software.  If you’re interested in some of the more unusual ways our government spends our tax dollars, pull up a chair and download the “2016 Wastebook: PORKemon Go.”  Now you know.

February 17, 2017

Corporate Tax Reform

Feb 10, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Markets closed higher this week, sparked by President Trump’s comments that he will make a “phenomenal” tax-related announcement in the coming weeks.  In his acceptance speech, Trump talked about infrastructure and deregulation.  In the weeks since the inauguration, several proposals for deregulation have emerged, but little in the way of things that excite the market.  His return to talking about tax cuts, both corporate and personal, is seen as reigniting the Trump trade and was largely responsible for investor enthusiasm this week.

Whether you like tax cuts or not, they have a way of impacting the economy and by extension the stock market.  The House GOP proposal on corporate taxation is particularly important for the U.S. outlook.  While a bit wonky, the proposal is what’s called a “destination-based cash flow tax” (DBCFT).  A DBCFT taxes output where it is consumed, rather than taxing income where it is reported; and disallows deductibility of interest expense.  This proposal would effectively convert the U.S. from a worldwide income tax jurisdiction to a territorial system, and adopt a type of value-added tax.  The implications would be transformational: imports by U.S. firms would no longer be deductible, export revenues of U.S. firms would no longer be taxed, and foreign income would not be taxed.  What this type of plan hopes to accomplish among other things:

  • Eliminate incentives to locate business operations outside the U.S.
  • Reverse the pattern of tax inversions (when U.S. companies reincorporate overseas for tax purposes)
  • Eliminate incentives for firms to “strip” income out of the U.S. with the use of inter-company debt, transfer prices, and other similar means
  • Increase incentives for capital spending relative to incentives to borrow

For this system to work, the theory suggests the value of the U.S. dollar would have to increase by approximately 25% from current levels.  Needless to say, it is very complicated and while in theory could work, in practice has not been tried.

As for company news, there were quite a few interesting stories.  Airbnb, the marketplace for enabling people to list or rent short-term lodging, has been pretty successful in stealing market share away from traditional hotels.  This week Marriott announced it would soon introduce communal hotel rooms that could hold between six and sixteen guests.  Guest have their bedrooms and bathrooms but will share a kitchen, dining room, and lounge area.  That’s outside the box thinking for an old-school hotel company.  In other news, Kroger announced it is acquiring Murray’s Cheese which is a New York staple.  The company has changed hands several times since its opening in 1940, but under the leadership of Rob Kaufelt, has become an iconic cheese shop.  Kroger hopes to offer a wider variety of cheeses and thinks this is a way to differentiate itself.

For something a little different, I often talk about the future of self-driving cars.  The industry is in its infancy, yet seems almost within reach.  Companies from Nvidia to Tesla and General Motors to NXP Semiconductors are all racing to perfect the hardware and software to make this future possible.  But this week I came across a twist on this story.  Uber is stepping up its efforts to make flying cars a reality.  The company hired a thirty-year NASA veteran and engineer to spearhead its research into airborne vehicles.  Now that seems like a stretch.

Here’s another one for you.  How about a bank branch without employees?  Bank of America has opened three completely automated branches over the past month, where customers can use ATMs and have video conferences with employees at other offices.  BofA is set to open 50 to 60 new branches over the next year.  Perhaps I’m showing my age, but this might be one innovation too far.

For the story of the week, I turn to Harvard.  We all know Ivy League schools have huge endowments.  How those schools invest the money is not often reported, instead, the focus being on the amount of donations.  In 2016 Harvard raised a record $1.2 billion from donations.  What you probably didn’t hear is that the college had $2 billion in investment losses last year.  So much for being the best and brightest.  Now you know.

February 10, 2017

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