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Happily Ever NAFTA

Aug 31, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

The markets drifted higher again this week.  While the news out of Washington D.C. continues to play out like a bad soap opera, the economy deserves an Oscar nomination for best picture.  It seems investors aren’t getting too caught up in the daily drama, tweets, rumors, and accusations.  Investors would do well to keep their eye on the destination and not focus too much on the hurdles along the way.

So this was the week that NAFTA was going to be resolved.  A deal was reached with Mexico on Monday, but as of this writing negotiations with Canada are faltering.  The White House wanted to reach a deal by the end of today so it could send the agreement to Congress for a 90-day review required by law.  Mexico will swear in its incoming president, Andres Manuel Lopez Obrador, on December 1.  If a pact isn’t signed before then, Lopez Obrador could demand changes – and a deal that took years to negotiate could unravel.  Trade between the three countries totals more than $1 trillion annually.  As it stands, the proposed terms would strengthen North American manufacturing, along with improving intellectual property, labor, and environmental standards that could benefit U.S. companies and American jobs.

While we’re on the subject of trade, no headway was made with either the European Union or China.  In fact, both offered concessions this week and were rebuffed by the White House out of hand.  It seems the current approach is to make them sweat a little with an additional $200 billion in tariffs being proposed as early as next week.  With some U.S. farm products getting slammed by retaliatory tariffs, the Trump administration is prepared to begin its emergency plan for agriculture right after Labor Day in a “three-pronged” approach that will initially include about $6 billion in aid.  Agriculture Secretary Sonny Perdue declared this week that, “farmers cannot pay their bills with simple patriotism.”  Indeed, they cannot.

In company news, Starbucks decided to roll out pumpkin spice in its earliest debut ever for the popular fall drink.  Starbucks introduced the drink in 2003 and it is now the company’s top-selling seasonal drink.  One wonders when it will become a permanent fixture on the menu.  In other news, Tesla lost its chief people officer.  I had never heard the term nor did I know such a position existed.  Apparently, the CPO is like an HR strategist and has become an important position for many Silicon Valley companies as they each pick off talent from one another.  Another interesting tidbit on Tesla is that Volkswagen wanted to take a $30 billion position in the company, according to the Wall Street Journal, but that Musk reportedly was uninterested in giving Volkswagen such a large stake in the company.  It makes one wonder if he really intended on taking the company private after all.  That will be one for the SEC and courts to figure out.

Before I finish this week, we need to talk about artificial intelligence (AI).  Innovation is moving quickly from automation, to self-driving cars, to the latest – AI.  I am seeing more and more stories about projects and developments regarding this field that it is becoming hard to ignore what seems inevitable.  Under the Defense Research Project Agency’s (DARPA) artificial intelligence program, Raytheon is developing a first of its kind neural network that explains itself.  It aims to help humans understand, appropriately trust, and effectively manage the emerging generation of “artificially intelligent partners.”  Along the same lines, JPMorgan poached a senior executive from Google who had headed up Google’s cloud-based artificial intelligence.  He will now be head of asset and wealth management artificial intelligence technology.  And Reuters reported this week that artificial intelligence will play a key role in the advancement of diagnoses and treatments across the healthcare spectrum.  Siemens has leveraged AI to develop a digital heart that mimics the electrical and physical properties of real cardiac cells enabling surgeons to run simulations before surgery, to see if a pacemaker is appropriate for a particular patient.  A shortage of doctors in China is stoking demand for AI tools to analyze medical images.  Alibaba is one of the early leaders, using cloud and data systems to develop AI solutions to analyze CT and MRI images.  AI is making progress on many fronts and at a rapid pace.  The technological singularity may not be as far in the future as you may think.

In closing I turn to a different type of innovation.  It seems Mondelez has been burning the midnight oil to come up with new flavors for Oreos.  While only available in China (thankfully), its latest releases are hot chicken wing flavor and wasabi-flavored Oreos.  However, in the United States we have two new permanent flavors, chocolate peanut butter pie and pistachio thins and three limited addition flavors, Good Humor strawberry, peppermint bark, and rocky road trip, which should be available by the end of the year.  While technological advances are great, it is sometimes nice to look back on our childhood memories, only to have them leapfrog forward into the future.  Now you know.

August 31, 2018

Can You Hear Me Now?

Aug 24, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

It was a pretty momentous week with the S&P 500 having broken the longest bull market in U.S. history.  At more than 3,500 days, the market has risen more than 320% since March 9, 2009.  It is a record few would have predicted when stocks struggled to find their footing after a 50% plunge during the financial crisis.  Yet here we are.  While there is no shortage of warnings as analysts debate the impact of a trade war vs the benefit of tax cuts, many investors instead choose to focus on what they experience daily.  To quote then candidate Bill Clinton, “It’s the economy, stupid.”

Before I touch on some of the more interesting things we learned this week, I’d like to close a chapter we first started talking about in 2009 and continued talking about until 2016.  This week was a historic one for Greece as nearly a decade of being on the verge of bankruptcy and three national bailouts comes to an end.  Athens will now be able to tap financial markets to fund its activities, marking the closure of the European sovereign debt crisis which also included Portugal, Ireland, and Spain. Opa!

In company news, Verizon acknowledged it erred in throttling wireless connections used by firefighters battling the California wildfires.  Firefighters repeatedly attempted to lift the throttle on their “unlimited” data connections as they battled the fires.  It seems the fire department chose a plan that throttled speeds beyond certain data usage, but regardless Verizon has a policy to remove data speed restrictions when contacted in emergency situations.  Santa Clara County’s fire chief said that when he contacted Verizon about the emergency, the company indicated it would only remove the throttling if the department would switch to a new data plan.  I believe I’ve heard that line before.  How about you?  Perhaps a better story is that Kroger aims to stop using plastic bags by 2025.  As the largest supermarket chain, this decision will have a large impact on both consumers and the environment.  If you’re anything like me, you probably have a cabinet in your home where there is a plastic shopping bag stuffed full of plastic shopping bags.  It is the reverse problem of the missing sock in the dryer.  Government studies indicate there are between 500 billion and 1 trillion plastic bags used each year worldwide.

In local news, Procter and Gamble is going after millennials in a new and innovative way.  This week we learned the company filed trademark applications in April with the U.S. Patent & Trade Office (USPTO) for the use of common acronyms such as “LOL”, “NBD”, “FML” and “WTF” to be used for marketing soap, detergent, and air fresheners.  As tech savvy millennials are an important potential consumer group for P&G, it seems the firm believes that under thirty-fives can be persuaded to buy its products branded with slang, LOL!

On a more serious note, there is a rather large debate brewing at the Federal Reserve about just how far to go in raising interest rates.  President Trump made known this week that he is disappointed Fed Chair Powell is moving forward with additional rate hike(s) this year.  The more dovish members of the board believe that inflation has not yet become a problem given its return to a more normal level this year.  Others, however, believe that by the time inflation becomes a problem the Fed’s ability to fight it will be too late.  Their approach is to attack the potential problem before it becomes a problem.  It is as much an intellectual battle as it is a political battle.  Higher rates will slow the economy and the President is rightly concerned for that prospect just in time for the next election.  On the other hand, the Fed needs some ammunition for when the economy does eventually enter a recession (remember we’ve just experienced the longest expansion in U.S. history).

In closing, it should be noted that Melbourne is no longer the world’s most livable city.  The top honor now goes to Vienna, the birthplace of the miniature sausage also known as the Frankfurter or Wiener (true story, look it up!).  It seems the two cities have been neck and neck in the annual survey for years, with Melbourne clinching the title for the past seven.  In case you were wondering where not to live, Damascus retained last place on the list, followed by the Bangladeshi capital Dhaka.  Now you know.

August 24, 2018

The Tweet Heard Around the World

Aug 10, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Earnings season is finally over and I’m happy to say the announcements were good for many if not most companies.  The ones that missed or guided lower were hit hard and you are probably already aware seeing as they made headline news, i.e. largest one-day market-cap drop by Facebook.  Investors are now turning to the third quarter and more importantly the back half of the year.  Trade tensions remain a concern as is much of the uncertainty regarding future interest rate hikes, a quickly rising budget deficit, the upcoming mid-term elections, and potentially rising inflation.  The first half of the year saw increased volatility and we anticipate the second half of the year to look the same.

Aside from earnings announcements, it was an interesting week for news.  Let’s start with Sears.  This company has been trying to remake itself for years (if not decades) into a more modern retailer to compete with the likes of Target and Kohls.  This week the company announced it will begin selling Hoover vacuum cleaners, Dockers, G.H. Bass & Co., Lucky Brands, and precious metals.  You read that right.  Precious metals.  In other news, the Wall Street Journal reported Facebook has asked big banks to share detailed financial information about customers as part of a plan to offer new services.  It talked to JP Morgan Chase, Wells Fargo, Citigroup, and U.S. Bancorp to get details including card transactions and checking account balances.  What could possibly go wrong?

Tesla made headline news this week with one tweet from Elon Musk.  Mr. Musk, the CEO of Tesla, tweeted that he has secured funding to take the company private.  Not only did this come as a surprise to investors and employees, apparently it came as a surprise to his own board of directors.  This is a very unusual situation, since there are rules and regulations regarding how material information is supposed to be disseminated, i.e. an 8K filing with the SEC.  Furthermore, Mr. Musk has yet to disclose the source of the $70 billion that will be needed to take the company private at the price of $420 per share as stated in his tweet.  As the most shorted stock, hundreds of millions of dollars, if not over a billion, was lost by investors who were squeezed when the stock price skyrocketed on this news.  If Mr. Musk was not being completely truthful in his tweet, he could be on the hook for both criminal and civil penalties.

On the subject of tariffs and the glacially moving trade war, China rattled its sabre some more this week.  One potentially large bargaining chip is Apple, which manufactures virtually all its products in the country.  Not only does Apple produce in China, but it sells a heck of a lot of phones there too.  Apple made $9.6 billion in revenue in China in just the second quarter of this year.  Another sector between a rock and a hard place is the U.S. automakers.  In a retaliatory move, China increased its tariff on U.S. automobiles to 25% while simultaneously dropping its tariff on European imports to 15%.  European manufacturers shipped 165K cars into China last month breaking the previous record of 134K set in July 2014 while U.S. manufacturers were relegated to only the wealthiest of Chinese consumers.  It’s a tough time to be Ford or General Motors.

Since having a trade war on one front isn’t enough, President Trump has increased levies on steel and aluminum imported from Turkey to 50% and 20% respectively.  The country is undergoing a slow meltdown with the value of its currency, the lira, falling over 13% in just one night to a new all-time low against the dollar.  Not unlike Greece some years ago, the European Union’s largest banks have significant exposure to Turkey and some fear Turkey’s problems could spill over into Europe.  Not to be ignored, Iran also made the news this week as sanctions are set to take effect.  The Trump Administration says it expects buyers of Iranian oil to begin winding down their purchases as of this week.  Furthermore, U.S. sanctions against Iran on sectors including automotive and aircraft returned on August 7, while oil companies have until November 4 to adjust.  Analysts say Iran’s losses could ultimately total 1 M bbl/day of oil which would presumably push up the price of both oil on the world market.

In closing, I encourage everyone to walk faster.  I came across a study this week that found that walking at an average pace was linked to a 20% reduction in the risk of mortality compared with walking at a slow pace.  Walking at a brisk or fast pace was associated with a risk reduction of 24% with similar results found for the risk of dying from cardiovascular disease.  If you’re thinking it’s too late for me, you’d be wrong.  The benefits are far more dramatic for older walkers.  Average pace walkers aged 60 years or over experienced a 46% reduction in risk of death from cardiovascular causes, and fast paced walkers a 53% risk reduction, the study found.  So, get out there and don’t dawdle.  Now you know!

August 10, 2018

Why a Bull and a Bear?

Aug 3, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Despite all the earnings announcements reported this week, the markets look to finish mostly flat.  This week was perhaps the busiest in terms of the number of companies reporting earnings and for the most part things continue to look good.  Having said that, investors remains focused on future growth not past growth, and in that light there were some disappointments as a handful of companies lowered guidance this week citing rising materials costs, labor costs, and the potential for tariffs impacting their bottom line.  For others, the rising value of the dollar has made it more difficult to sell overseas which creates a headwind that is being accounted for in forward guidance.  All said, the quarter that just ended was good and we expect continued growth albeit with the potential for more uncertainty on the horizon.

It is hard not to notice the significant rise in the technology sector this year.  What may come as a surprise to you is that roughly two-thirds of the S&P 500’s market return this year is attributable to five companies, otherwise known as the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google).  Put another way, this year’s returns do not have a broad base but are laser focused on one sector and more specifically, five companies.  In that light, it should be noted that Apple made history this week by becoming the first publicly traded company to break a market capitalization of more than $1 trillion.  To put this in perspective, Apple’s market cap is greater than the GDP of Sweden, Argentina, Switzerland, Saudi Arabia, The Netherlands, and Turkey.  It is also greater than the cost of World War I, the Vietnam War, and the Iraq War.  We remain optimistic regarding the economy, but would rather see the distribution of gains more widely dispersed among sectors and industries.

While we’re on the subject of the economy, it was announced this week that the U.S. Treasury Department plans to borrow more this quarter than it had previously estimated as tax reform and increased spending widens the nation’s budget deficit.  New projections put total net borrowing at $769 billion for the second half of 2018 and $1.33 trillion for the year.  What happened to the days when we were concerned about the spiraling national debt?  I guess the pendulum has swung to the opposite extreme with the belief the United States can borrow indefinitely.  It was also reported this week that healthcare spending in the U.S. will soon reach 20% of GDP, a significantly higher proportion than any other major economy.  The Wall Street Journal reports the key cost driver is price hikes, not increased demand.  Since 1960, the CPI has risen 700% while medical costs have exceeded 2000%.  Since 2000, prescription drug costs have grown 69%, hospital care 60%, and physician and clinal services 23%.

Now for the good news.  The Treasury Department is considering bypassing Congress to grant a $100 billion tax cut in a legally tenuous maneuver that would cut capital gains taxation and fulfill a long-held ambition of many investors.  By changing the definition of “cost” for calculating capital gains, taxpayers would be allowed to adjust the initial value of an asset (cost basis), such as a home or share of stock, for inflation when it sells.

Tariffs are still a growing concern with President Trump threatening an additional 25% on $200 billion of Chinese goods and China counter-threatening tariffs on an additional $60 billion in U.S. agricultural products.  Perhaps more positive is the olive leaf that new Mexican President AMLO has offered to wrap up NAFTA negotiations.  I’m sure Canada is wondering what just happened since it was not included in the latest round of discussions.  And speaking of tariffs, it seems BMW is looking to move some of its production out of the United States.  The company is planning on increasing production in Europe and has ruled out South Carolina for the site of a new manufacturing facility instead choosing Thailand.  Perhaps President Trump was right when he called trade a zero-sum game.  At least for now, it seems we’re on the losing end of that gambit.

In closing I came across an interesting picture this week that addressed something I had never considered.  Have you ever wondered why a bull represents a rising market and a bear a falling market?  I’m ashamed to admit that it had never really crossed my mind in all the decades I’ve been in this industry.  In a nutshell, the stock market got the names “Bear and Bull” because of the way in which these animals attack.  Bulls typically swipe up with their horns when attacking, while bears swipe down with their paws when attacking.  Seems obvious now but how did this never occur to me?  Now you know.

August 3, 2018


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