Around the World in 245 Days

May 11, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

If the market closes higher today, it will mark the seventh straight day of gains.  In fact, the Dow Jones Industrial Average has risen 1,000 points this week which also corresponds with the end of first quarter earnings announcements.  For the most part, companies announced earnings and revenue growth at or above analysts’ expectations in large part due to lower corporate tax rates.  However, much of this news was already priced in which meant prices didn’t rise as much as we might have wanted.  At this point, I expect attention will return to trade negotiations with China and NAFTA, rising oil prices due to the developing situation with Iran, and ultimately the number of interest rate hikes telegraphed by the Federal Reserve.

As has been headline news most of the week, the United States has withdrawn from the Iran nuclear deal brokered under the previous administration.  At this point it isn’t clear whether this is another of President Trump’s negotiating tactics or the start of serious sanctions against Iran and possibly even our European allies.  Fearing the latter, crude oil broke $71 per barrel this week marking the highest level since 2014.  One analyst at Bank of America Merrill Lynch went so far as to predict $100 per barrel oil over the next 18 months citing the Iranian sanctions, collapse in Venezuelan production, and the ongoing OPEC-led supply cuts. Not surprisingly, gas prices headed higher this week averaging $2.86.

Company news seemed more prominent this week perhaps due to the dwindling of earnings announcements as the week progressed.  We learned definitively that Starbucks is entering an alliance with Nestle to the tune of $7B, allowing Nestle the right to market Starbucks’ coffee products.  Starbucks announced it will use the proceeds to buy back shares.  We also learned this week that Walmart is buying an online retailer in India named Flipkart for $16B.  Walmart hopes to tap into a potentially huge market giving it diversification outside the United States.

Tesla hit a bit of a brick wall this week when its CEO, Elon Musk, refused to answer certain questions from analysts on a conference call.  He went one step too far by belittling several analysts and suggesting they want to see the company fail.  In his defense, Tesla is the most shorted company in the Russell 3000 with shorts accounting for 31.25% of the free float.  He walked back some of his comments but seems overly sensitive to the criticism that Model 3 production is far behind schedule.  Perhaps he should stop releasing unrealistic production numbers time after time, if he wants analysts to take him seriously.  Speculation is rampant about the amount of cash the company is burning through with many believing the company will have to go to investors again for another round of funding.  Mr. Musk vehemently denies this speculation but this week the company did amend the terms of its borrowing agreement with banks to allow it to pledge its Fremont factory – the production hub of its Model 3 sedan – as collateral.

Perhaps a better development for Tesla is that California has become the first U.S. state to require solar panels on nearly all new homes built after Jan. 1, 2020 as part of new energy efficiency standards adopted by the California Energy Commission.  While this is a boost to the solar industry, critics say it will add $8K-$12K to the cost of buying a new home in the state.  The solar power industry already provides 16% of California’s electricity, this highest rate in the U.S.

I was going to finish this week off by talking about how Social Security beneficiaries top 62 million for the first time, or how a record 95 million people are not in the labor force as Baby Boomers retire, but I’ll save that for another week.  Instead, let’s talk about the world’s longest cruise.  Viking just unveiled an epic eight-month round-the-world trip.  If you can afford to take that much time off work, it will only cost $93,000 per person, but includes all business-class airfare, transfers to and from the ship, all gratuities and service fees, and pretty much all the alcohol you’d like to drink on board.  The 245-day journey hits 59 countries and hits every continent except Antarctica.  The trip departs London on August 31, 2019 and returns to London on May 2, 2020.  It’s not too late to book your tickets.  Now you know.

May 11, 2018

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