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The Green Mountain State

Jan 4, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

I won’t lie, it was shaping up to be a pretty crummy week prior to today.  Fortunately, two things happened to turn the markets around.  The first is a bit of economic news and the second a message from the chairman of the Federal Reserve.  In recent months negativity and fear, largely due to uncertainty, overtook Wall Street.  Sentiment dropped and the markets finished the year on a low note.  I won’t say there wasn’t good cause for the market correction, but instead that the move went too far too fast.

The piece of economic news that jolted markets higher this morning was the jobs report which showed the economy added 312,000 jobs in the month of December.  This far exceeded expectations for 178,000 additions and was bolstered by upward revisions to both October and November’s numbers.  The bottom line is that this huge beat provides evidence that recession fears are overblown.

The second bit of news that sparked relief was the interview with Jerome Powell, in which he says the Federal Reserve (Fed) is “listening sensitively” to markets concern about risk, always prepared to shift policy.   He went on to say the market is pricing in downside risk well ahead of the data, but seems more mindful of investor sentiment whether due to recent market volatility or pressure from the White House.  Despite investors being ahead of the risk curve, he went on to say, “We’re always prepared to shift policy and shift it significantly if need be.”  This is quite the departure from his last speech in which he basically said, full steam ahead with rate hikes.  The market reacted favorably to this news, anticipating further rate hikes are off the table for now.  In an interesting aside, he also stated he would not resign if asked to by the President.  Seems everyone is a little on edge these days.

Before we move headfirst into 2019, let’s take a minute to re-visit some of the highlights of 2018.  There is the U.S. China trade war, Cambridge Analytica scandal, Iran deal exit, Brexit fireworks, Italian budget, ballooning U.S. debt ceiling, revamped NAFTA, iPhone estimates and patent battles, Disney-Fox deal and IBM-Red Hat, cannabis stocks, Amazon’s new headquarters, GE dropped from the DOW and the collapse of Sears, OPEC output cuts, end of European Central Bank (ECB) buying, rate hike drama, and the current government shutdown.  It was a rather tumultuous year in many respects.

In company news, we learned this week that more than three dozen pharmaceutical companies began 2019 by raising prices on hundreds of medicines by an average of 6.3%.  This was a surprise given the pressure put on the industry by the President.  Both Tesla and Apple had a difficult week after the former announced it failed to meet production expectations for the quarter (by a small margin) and the later lowered its forward guidance on first quarter revenue growth substantially.  It was also announced this week that Bristol-Myers Squibb aims to acquire Celgene for $74 billion in a combination of cash and stock.  The deal is expected to close in the third quarter.

There’s so much that happened this week.  It was discovered that Google shifted $23 billion to Bermuda in 2017 through a Dutch shell company to reduce foreign taxes in a move called the “Double Irish, Dutch Sandwich” tax strategy/loophole.  Also, the government shutdown enters day 14 today with no resolution in sight.  Kevin Hassett, head of the White House Council of Economic Advisers, said his estimate is that GDP will fall by 0.10% every two weeks that the government is shutdown.  However, he was quick to say he doesn’t expect a big economic impact assuming that it ends relatively quickly.

In closing I bring you an idea if you are inclined to move.  It seems Vermont, despite having the second lowest population of all states, has the highest proportion of people moving there from out of state compared to elsewhere in the U.S.  Most people moving to Vermont cited jobs (34.4%) and retirement (31.2%).  Four Western states filled out the top five: Oregon (63.8% inbound), Washington (62.4% inbound), Nevada (61.8% inbound), and Arizona (60.2% inbound).  Among those seeing the largest outflows include New Jersey, Illinois, Connecticut, and Kansas.  Now you know.

January 4, 2019

Bears Coming Out of Hibernation

Dec 21, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Hopefully you had a better week than the markets.  As was expected, uncertainty and fear led to further declines this week.  As of the writing of this piece, only two asset classes are barely positive for the year – cash and treasuries.   Much to the dismay of investors, 2018 is wrapping up to be a big disappointment.  Over 93% of all asset classes have a negative total return to date in dollar terms.  This is the highest percentage on record based on data going back to 1901.  Put simply, there was no place to hide.  Fortunately, these types of years don’t typically repeat and with any luck 2019 will shape up to be a better year.

Part of the decline this week can be directly laid at the feet of the Federal Reserve.  On Wednesday, the FOMC (Federal Open Market Committee) voted to raise interest rates another 0.25%, marking the fourth rate increase this year and eighth time since 2015.  Many, including President Trump, had hoped the Fed would show some caution and perhaps delay a rate hike this time around.  The FOMC did however lower the number of planned rate hikes next year from three to two, which is still above street expectations for just one.  For those searching their memories for the last time equity markets reacted so poorly on a Fed day, don’t worry about coming up empty.  It’s been nearly a generation since something like this week’s selloff occurred on the day of an FOMC meeting.  It was February 1994 when Alan Greenspan surprised markets with a rate hike, sending both stocks and bonds tumbling.  Let’s hope it’s another generation before we see a repeat of this week.

The other part of the decline this week is almost certainly due to uncertainty surrounding a government shutdown which as of this writing appears imminent.  Neither President Trump nor Congress is willing to compromise on the sticky issue of a border wall and more specifically, the $5 billion it will cost.  So much for Mexico paying for the wall.  While there could be a last-minute deal to temporarily extend a stopgap measure for 30 to 60 days, it feels like both sides have dug in and are looking forward to the media exposure in the coming weeks.  If a deal is not reached, there will be a partial government shutdown beginning this weekend.

In company news, Kroger is innovating in new and unexpected ways.  The company announced this week it will launch the first-ever unmanned delivery service.  In partnership with Nuro, Kroger has been trialing a self-driving grocery delivery service in Scottsdale, Arizona.  The fleet of autonomous vehicles has completed nearly one thousand deliveries to the general public.  It is just a matter of time before going into the supermarket once a week will be a thing of the past.  In other company news, stock buybacks hit an all-time record of $1.1 trillion in 2018.  As stocks turned down in the final quarter of the year, many companies announced new buyback programs, including some very large companies such as Johnson & Johnson and Boeing.  This trend is expected to continue in 2019 assuming that free cash flow is not an issue.

We understand this has been a frustrating year in the markets.  The best explanation I came across is an analyst with Deutsche Bank that noted, “peak quantitative easing moving to quantitative tightening and the Fed raising rates four times this year has been enough to reverse a significant amount of the liquidity-inspired asset price returns of the pre-tightening era.  A bit like Road Runner galloping off the cliff only to suddenly look down.”  Essentially, this is where we are.  Will the tightening continue into 2019?  Probably not, at least not to the extent it has this year.  However, this doesn’t mean that we’ve found a bottom in the market.  At the moment there is more pressure to the downside than there is to the upside.  We believe there could be a short-lived relief rally in the first part of 2019, but the pressures of a slowing economy could come to bear.  We are positioning portfolios to best weather the gale force winds we find ourselves in.  We wish everyone a very Happy Christmas and a safe New Year’s Eve.

December 21, 2018

Did the Grinch Steal the Christmas Rally?

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

Ordinarily, this time of year we would be talking about a Christmas rally in the markets.  However,this year feels a little different as talks of another government shutdown highlight the difficulties facing our nation and economy.  The honest to goodness truth is that much of the“problem” is self-inflicted with both parties jockeying for prominence before the transition of power in the House of Representatives.  It is unfortunate since the economy, albeit slowing, remains not far off the historical norm of 2.5-3% year-over-year growth.  The media, appealing to both extremes, flames the fire and causes a heightened sense of doom and gloom.  It is no wonder the markets can’t seem to gain any traction in this environment. 

Talk about self-inflicted, the trade war is starting to have a real impact on both China and the United States.  China reported it is on track for the first drop in auto sales since 1990.  Chinese automobiles sales fell 14% in November to mark the fifth month in a row of declining volume.  In the U.S., soybean sales (primarily to China) fell off a cliff and drove soybean prices sharply lower. China accounts for roughly 60% of all U.S. overseas shipments in deals valued at more than $12B.  Despite China making its first big buy of soybeans since the Trump-Xi meeting, inventories remain at historic highs. 

However, the issue runs deeper than just sales.  At risk is manufacturing in both the United States and China.  Several German automobile companies are evaluating their presence in the United States, most notably BMW, Volkswagen, and Mercedes who cumulatively employ over 50,000 American workers.  On the flip side, production of electronics in China may be moving elsewhere due to the slow slide toward a trade war.  Apple is exploring manufacturing opportunities outside of China given an estimated $1 per share,or roughly a 7.5% hit to earnings, if the U.S. imposes a 10% tariff on phones produced in China.  GoPro has plans on moving some of its production outside of China too by next summer also fearing the potential tariff impact.  While the balance of trade has been far from balanced these past three decades, righting the ship will necessarily cause pain in the near-term.  The negotiations between the U.S. and China will remain headline news for the foreseeable future and will likely be the cause for heightened volatility.

In company news, the battle between Apple and Qualcomm heated up this week.  Qualcomm won a preliminary ban in China on some models of Apple’s iPhone.  The People’s Court of China found Apple violated two of Qualcomm’s software-related patents.  Qualcomm is hoping China places a more permanent injunction on all iPhones until this issue is resolved.  Another story that caught my eye involves United Airlines.  It seems the company is considering charging more for some coach seats. “Preferred” seats will offer customers a seat closer to the front of the plane, giving them access to in flight services sooner and the opportunity to deplane sooner.  Yep.  The same economy seat, just more expensive depending on its proximity to the front of the plane.  While this is a subtle money grab, it seems United is simply following rivals American and Delta in making this change.

I could dedicate an entire email (and then some) to the issue of Brexit, Theresa May, and the European Union (EU).  However, to do it justice would require going into more depth than is warranted in this weekly synopsis.  So, to summarize this week’s developments,Theresa May survived a coup within her party to retain the title of Prime Minister.  However, she may lack support to pass the negotiated Brexit deal and it is unlikely the EU will renegotiate the deal.  The fate of the U.K. is very much up in the air.

In closing, I came across a story that surprised me.  California is often far out in front when it comes to issues like immigration, the environment, healthcare law, etc.  It was early in the fight against plastic bags and plastic straws, the size of soda containers, higher fuel efficiency requirement for cars, and legalized marijuana years before other states followed suit.  This week state regulators in California have proposed creating a surcharge on text messaging.  The goal would be to generate roughly $45 million annually to help fund phone service to the poor.  However, more surprising is that the regulators proposed making this surcharge retroactive going back five years and could amount to a bill of more than $220 million for California consumers.  Fortunately,we have the wireless carriers on our side telling the FTC they view text messaging as an information service like email, not a telecommunication service subject to the commission’s authority.  Now you know.

December 13, 2018

Countdown to Christmas: T-25 Days

Nov 30, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

After some weeks of downward pressure, the markets rebounded in a big way this week.  The spark that ignited things was a simple sentence from the chairman of the Federal Reserve.  Sometimes it is the little things that make the most difference.  Some of you may remember an old commercial from the 1970s and 1980 in which the actor confidently states, “When E.F. Hutton talks, people listen.”  It seems Mr. Powell is the modern day E.F. Hutton and this week he seemed to suggest the course of the Federal Reserve may be changing.

Earlier in the week we learned from the Washington Post that President Trump is “not even a little bit happy” with his appointment of Jerome Powell as Fed chair and believes the central bank is “way off-base with what they’re doing.”  I’d like to believe the Federal Reserve is completely independent of politics, but the pressure put to bear on the Fed has been unrelenting in recent weeks.  So perhaps it doesn’t come as a surprise that the Fed is telegraphing its intent to slow the rate of interest rate hikes it had planned.  While there remains a very high probability of a rate hike next month, the three hikes planned for next year have evaporated.  Instead, many analysts believe there could be as few as just one rate hike next year.  While most investors applauded the move, it does imply that raising rates further could jeopardize or perhaps even stall economic growth.  Whether for political or economic reasons, the Fed appears ready to transition to a new policy come 2019.

In other news, Cyber Monday sales topped $7.9 billion according to Adobe analytics, making it the single largest shopping day in U.S. history.  To put it in perspective, this represents a 20% increase over sales in the same period last year.  Also, in comparison, Thanksgiving Day and Black Friday brought in $3.7B (28% growth y/y) and $6.2B (23.6% growth y/y) in revenue, respectively.  Sales coming from smartphones also hit an all-time high of $2B and the “buy online, pick up in-store” trend spiked 50%.  The flip side of the coin is that consumer debt has increased substantially and will top $4 trillion (excluding mortgage debt) by the end of this year.  With defaults rates remaining low, it appears consumers haven’t overextended themselves yet.

In company news, we learned that General Motors plans to downsize 15% of its workforce.  This came as a surprise to many, including President Trump, who was not at all happy with this announcement.  In its announcement, the company said it plans on cutting production of several well-known sedans including, the Buick LaCrosse, Chevy Volt, Chevy Cruz, Chevy Impala, Cadillac CT6, and Cadillac XTS. Its goal is to shave $6 billion per year in costs by 2020 while transforming the company toward “battery-electric” vehicles.  Unfortunately, among the plants being closed is one in Ohio and another in Michigan, which have already experienced drastic cuts to manufacturing over the past two decades.  Some believe the trade-war with China and steel tariffs are to blame.  The company reported its costs increased by $1.5 billion due to higher steel and aluminum prices.  Others are more inclined to believe it is a strategic decision to move production outside the United States.  Either way, the Midwest looks like it will take the brunt of it again.

In closing, this weekend could be a significant one as far as economic policy goes.  President Trump plans to meet with China’s Xi to discuss the status of trade negotiations between the countries.  At the moment the odds are 50/50 they’ll be able to reach an agreement.  Goldman Sachs sees an escalating China-U.S. trade war as the “most likely” outcome from the meeting this weekend.  If an agreement is not reached, it could go one of two ways.  The path of escalation would include tariffs rising to 25% on all Chinese imports currently under tariff and tariffs placed on remaining imports.  The next most likely outcome is a “pause”, in which existing tariffs stay in place while negotiations continue.  Next week could be volatile regardless of which way the talks progress.  We’re hoping for an amicable solution soon.  Now you know.

And finally, tomorrow is the Olde West Chester Christmas Walk.  As in past years, we will provide refreshments and cookies, as well as, a balloon artist for the kids.  For those in town, we encourage you to stop by and say hello.  The event begins at 2pm with crowds growing steadily throughout the day, culminating in a parade from 6:30-8:00pm.  We hope to see you there!

November 30, 2018

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