Browsing articles in "Weekly Market Update"

The Bank of Starbucks

Oct 21, 2016   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

With seventeen days to go before the election, investors are cautious.  Earnings announcements took center stage, as the first wave of companies reported earnings.  Many are doing better than expected, albeit expectations are quite low.  Others are struggling to find growth in an environment where costs are increasing faster than sales.  With a heightened sense of uncertainty, underperforming companies are not being given the benefit of the doubt.  I expect we’ll see more of this behavior over the next few weeks as the bulk of earnings announcements remain ahead.  Coupled with a presidential election that has frayed the nerves of voters, the next few weeks could be emotionally taxing.

There was an uptick in merger and acquisition activity this week with two big deals in the works.  In a low growth environment, like we’ve experienced the past six quarters, it is exceedingly hard to grow revenues organically.  That is to say, marketing products can only go so far if consumers aren’t buying.  For these companies, one alternative is to literally buy growth.  Buying a competitor is one way to increase market share and sales, create synergies and lower costs.  Another strategy is to add a complementary business as a way of diversifying growth in a faster-growing industry.  This week we saw examples of each of these types of activities.  British American Tobacco is in talks with Reynolds American in a deal worth $47 billion.  Late this week, another story emerged of an acquisition of Time Warner by AT&T for upwards of $71 billion.  Presumably, AT&T wants the content that Time Warner could provide.  While deals such as these make sense, it is often more difficult than expected to merge companies’ cultures and management.  A strong regulatory environment is another hurdle these companies face.  So despite tremendous potential, not all mergers work as intended.  These two will no doubt be scrutinized in the weeks to come.

In other company news, it seems Apple may be shuttering plans to build a car.  For the past couple of years, rumors have abounded that Apple was secretively working on a car to rival Tesla.  This week we learned that Project Titan is moving in a new direction, with software now constituting the main focus of the program.  Hundreds of employees have been reassigned, laid off or have voluntarily departed.  As for Tesla, you have to give it to Elon Musk.  Despite recent setbacks with its autopilot feature, it was announced this week that every Tesla car will now come equipped with enhanced autopilot hardware (not just the high-end cars).  In the face of rising criticism, the company appears to be betting its future on the success of autopilot and the autonomous car.

We’re now ten months into the year and you may be wondering what sectors have performed the best.  One of the best-performing sectors, which may come as a surprise, is energy.  The energy sector, which did poorly much of 2014 and all of 2015, has done very well this year.  Oil prices bottomed in the first quarter and have risen consistently throughout the year.  Energy companies scaled back production as prices declined and only recently began bringing production back online.  The lag in production and supply has caused prices to rise considerably from a low of $27 per barrel in February to just under $50 per barrel today.  The second best performing sector is utilities, which likely did well because of the dividends they pay.  In uncertain times, and particularly in a low-interest-rate environment, investors needing income go to utility companies.  The third best performing sector is technology, which probably doesn’t come as much of a surprise.  When you think of growth, which sector comes to mind?  The weakest performers this year have been consumer services and healthcare.

The story of the week is about Starbucks.  No, it’s not about coffee or coffee prices (at least not directly).  I came across a story earlier this year that made a claim I found astounding.  The title of the story was, “Starbucks Has More Customer Deposits than Many Banks.”  The Wall Street Journal, using data from Standard & Poor’s Global Market Intelligence, discovered that Starbucks held more than $1.2 billion for customers in the first quarter of 2016.  This figure represents funds that were deposited to reloadable prepaid cards, as well as, money that had been added to accounts on Starbucks’ mobile app.  Starbucks benefits in a number of ways from holding such significant amount of deposits.  It mainly gives them access to a large and cheap amount of capital that they can use to further the company’s growth.  Unlike banks, Starbucks can avoid the expense of paying interest on the balances.  It also isn’t required to insure the deposits with the Federal Deposit Insurance Company (FDIC).  Now you know.

October 21, 2016

Samsung Issues Heating Up

Oct 14, 2016   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Another week closer to the presidential election and the market didn’t have much to tell us.  With earnings announcements set to start in earnest next week, it seems investors are on hold.  We had a few early announcers this week and if we extrapolate their reports we’d find a mixed picture indeed.  A lot is riding on the next few weeks and it’s not just the run up to the polls I’m hinting at.

In company news, let’s start with Samsung.  You have probably heard by now the company is having problems with its phones catching fire and in some cases causing injury.  The company announced this week it is halting production of the Galaxy Note 7 and does not plan on resuming its production.  If you happen to have one of these devices, you are advised to turn it in to your wireless carrier for a full refund or exchange it for another phone.  The beneficiary of this unfortunate problem could be Apple, with one analyst estimating it could lead to eight million additional iPhones being sold.

In other news, Germany said nein to internal combustion engines this week.  The German Bundesrat voted to ban vehicles powered by gas and diesel by 2030.  This resolution will place more pressure on the European Commission to promote zero-emission cars throughout the region.  Volkswagen, Mercedes-Benz, and BMW are all working hard to bring electric cars to market and given the ease of which this bill passed, it seems likely it was with their support.  Not to fear, the ban is solely for the sale of new cars after that date.  If you happen to have a “vintage” gasoline powered car, you’ll still be able to drive it (if you happen to move to Germany).

It may be hard to believe, but Facebook has only been around since 2004.  And while it remains wildly popular, the latest research suggests it is becoming less relevant with teens.  Piper Jaffray survey shows a decline in usage from 60% last spring to just 52% this fall.  While still a large percentage, the speed of the decline is surprising.  It seems teens are much more interested in Snapchat and Instagram these days.  Some analysts believe monetization from Instagram could eventually top that of Facebook.  Before you scold me for stating the obvious, you already know this and a simple Google search indicates this trend has been going on since at least 2013.  Two frequently cited reasons are that there are too many adults on Facebook and teens are tired of the drama.

Got milk?  In closing, it was reported this week that America’s dairy farmers have an oversupply of 43 million gallons or almost 370 million pounds of the stuff.  That is to say, 43 million gallons have been dumped in just the first eight months of this year, resulting in lots of farmers crying over spilled milk.  The glut has cut milk’s price by 22% since spring, to $16.39 per cwt (hundredweight or hundred pounds).  At this price, some farmers can’t afford to truck the dairy to market.  From the early 1980’s through the mid 90’s the price stayed around $12.50 per cwt.  If we adjust that price for inflation, the price in today’s dollars would be around $28 per cwt or approximately 70% higher than it is today.  If you know a dairy farmer, he may need a hug.  Now you know.

October 14, 2016

Is Someone Reading Your Emails?

Oct 7, 2016   //   by Marc Henn   //   Weekly Market Update  //  No Comments

First and foremost, our thoughts and prayers go out to those who are being impacted by Hurricane Matthew.

It was a busy week. The jobs number for September was reported on Friday and came in below expectations at 156,000 new jobs being created, while August’s number was revised upward from 151,000 to 167,000, and the unemployment rate rose slightly to 5.0%. More importantly, however, is that since the beginning of the year, 3,000,000 people have entered back into the work “pool”. The ISM services index also jumped in September which sent interest rates higher. This, along with the jobs number, still puts in play a December interest rate hike by the Federal Reserve.

In company news, Reuters reported on Monday that Yahoo built a secret customer program to search incoming emails for specific information at the request of U.S. intelligence officials. CEO Marisa Mayer’s compliance with the directive caused friction within the company and is rumored to have led to the departure of then Chief Information Security Officer Alex Stamos. In response to the story, the company stated, “Yahoo is a law abiding company, and complies with the laws of the United States”. Following this report, operators of Microsoft and Google email services issued statements stating they are safe from this type of intrusion. Separately, Sears is looking for bidders for its Craftsman brand. The list of potential buyers includes Black & Decker, Techtronic Industries and Husqvarna. Google also had multiple announcements including its new Pixel phones, Daydream View headsets, Chromecast Ultra and Google Home.

Overseas, the British Pound hit a 30+ year low against the U.S. Dollar as the Brexit decision continues to loom over that country. In addition, the European Central Bank will likely wind down its bond purchase program ahead of schedule. Global interest rates edged higher on the news. European bank woes have been highlighted by the Deutsche Bank situation and calls into question the use of negative interest rates to boost the economy in Europe. A quote by bond trader Jeffrey Gundlach sums it up nicely, “You cannot save your faltering economy by killing your financial system and one of the clear poster children for this is Deutsche Bank’s stock price. If you keep these negative interest rate policies for a sufficient future period of time you are going to bankrupt these banks”.

In other news, in response to the regular renewal of sanctions against Russia over Ukraine, Russia this week suspended a plutonium pact with the U.S., put on hold a research agreement and terminated a uranium conversion deal. Also, U.S. regulations to clamp down on companies trying to reduce taxes by relocating abroad could be finalized shortly. The so-called “anti-inversion” rules would make it difficult to shift profits overseas.

For the story of the week, many of you, as I can too, remember when stocks traded in 1/8 increments. Fifteen years ago the decimalization of stock trading was introduced and we began quoting stock prices in pennies. Earlier this week, a pilot program to widen “tick sizes” to five-cent increments rather than pennies began. This move was set in motion by the SEC a few years ago and is designed to see whether nickel increments can boost trading in smaller-cap stocks. The program began this week with 10 stocks and by the end of October will include about 1,200 companies. Higher trading costs is definitely a possible downside to this as the liquidity benefits to smaller companies seems overstated. Now you know.

October 7, 2016

Cash is King

Sep 30, 2016   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Stocks finished the week and the quarter on a high note.  After this week’s presidential debate, House Financial Committee hammering of Wells Fargo CEO, and a stopgap spending bill averting a government shutdown, investors have lots of reason to be hopeful.

Perhaps the biggest announcement this week was the agreement by OPEC countries to cut oil production for the first time in eight years.  The group has agreed to drop production to 32.5 million barrels per day which would be almost a million lower than that produced in August.  This deal could not have been reached without an agreement between Saudi Arabia and Iran which is significant considering they back opposite sides in the Syrian conflict.  While Russia attended the meeting, it is not an official party to the deal and its output hit a new post-Soviet record of 11.1 million barrels per day this month.  Oil prices shot higher on the news.

The news that was plastered everywhere this week was the testimony of Wells Fargo CEO, John Stumpf, in front of the House Financial Services Committee.  If you thought the Senate Banking Committee took it hard on Mr. Stumpf last week, you didn’t see what happened to him this week.  Trying to get out ahead of the damage, its board announced Mr. Stumpf will forfeit unvested equity awards valued at $41 million and his salary while the investigation is ongoing.  The bank added, he will not receive a 2016 bonus.  While the bank will survive, its reputation has been tarnished.  The state of California announced it will suspend business with Well Fargo, which is headquartered in the state.  It is actively working with CALPERS and CALSTERS (two of the nation’s largest pension funds), which have a combined $2.3 billion invested in Wells Fargo, to pursue governance reforms.

It seems this week was all about banks.  Deutsche Bank has been under pressure for some time, culminating in speculation of a collapse this week.  It is one of the last banks to settle with the Department of Justice (DOJ) over the subprime mortgage scandal.  Analysts believed the DOJ was looking to hit the bank with a $14B fine which is more than the bank’s working capital.  Upon hearing the news, several prominent hedge funds proceeded to liquidate their accounts sparking a further selloff in the stock.  It wasn’t until a rumor that Germany was working on a bailout plan that the stock slowed its decline.  Since its peak just over a year ago, shares have fallen more than 65%, and the company has erased more than half of its market value, from nearly $50 billion to just $16 billion.  It’s not a good time to be a bank.

The last bit of banking news has the potential to hit U.S. banks.  In prepared remarks before the House Financial Services Committee, Janet Yellen says the financial condition of U.S. banks has strengthened, but the Fed is nevertheless mulling even larger capital requirements for the largest lenders.  This new requirement is being called a “stress capital buffer.”  These new rules are set to take effect next year and could raise capital requirements by 3 or 4 additional percentage points.  Looking at the big picture, it seems the Fed isn’t at all confident that the “too-big-to-fail” banks pose less of a hazard than they did in 2008.

Since this week is all about banks, the story of the week regards cash.  Specifically, the trend pushing cash to the verge of extinction in some countries.  You’ve no doubt heard the phrase “cash is king” or “hold onto it” when the economy gets tough.  But what if some day we look back on this phrase as an anachronism.  In the Netherlands, cash has ceased to be recognized as legal tender.  More and more Dutch stores take only credit or debit cards.  In countries moving toward a cashless society, banks charge for making deposits.  Therefore, small businesses, looking to cut expenses, have moved away from taking cash.  Further making cash less desirable, some supermarkets have moved to make cash-only lines, which tend to have long waits.  For now, this phenomenon appears to be isolated to Scandinavian countries, but it isn’t hard to imagine this catching on here for a whole host of reasons.  It’s hard to say if the move away from cash is being orchestrated or simply an organic change, but some day in the not too distant future we might all wonder why “cash was king.”  Now you know.

September 30, 2016

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