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Project Cache

Earnings announcements wrapped up this week with the last remaining stragglers reporting.  Walmart, which some use as a proxy for retail in general, reported slightly better than expected earnings and revenue growth.  Its guidance is for a “slight increase” to FY20 adjusted earnings.  That is to say, while retail sales growth isn’t on fire these days, neither is it a fire sale.  Slow growth seems to be the theme across most sectors and most industries which isn’t necessarily a bad thing.  The alternative is declining sales and I don’t have to tell you how the market would view that.

The start of impeachment hearings on Capitol Hill garnered most of the media’s attention this week.  However, not widely reported is that talks between Washington and Beijing are thought to have hit a snag over agricultural purchases, while weak industrial output was reported in China and Germany narrowly avoided a recession.  At this point, there are more rumors than there are facts regarding talks to resolve the trade war. 

Perhaps more important, Fed Chair Jerome Powell signaled this week that the central bank isn’t eager to cut rates further until it assesses the effects of the three rate cuts it implemented this year.  He said, “We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook of moderate economic growth, a strong labor market, and inflation near our symmetric 2% objective.”  While he gave himself room to lower rates further, it is unlikely any of the conditions for that will happen in the next month or so.  Perhaps more telling is his comment, “I think the new normal now is low interest rates, low inflation, and probably lower growth.”  Where have I heard the term “new normal” before?  It was 2009 and PIMCO’s Mohamed El-Erian coined the term in the aftermath of the financial crisis.

While the economy may be experiencing the old “new normal,” businesses aren’t standing still.  In fact, a number of companies announced important news this week.

  • Alibaba set a new Singles’ Day record with sales growing 25% in the first nine hours to $23 billion.  For comparison, this amounts to roughly two thirds of Amazon’s online sales in the last quarter.  Total sales for the day topped $30 billion.
  • Amazon announced a plan to introduce a new grocery brand.  The store would be something between its Amazon Go concept and Whole Foods.  It will be 30K square feet and have conventional checkout lines, although the format is still under wraps.  However, one analyst put it this way, “Grocery is all about margin, and until you own the means of production it’s going to be hard to win on price.  Costco bought a poultry processing plant for that reason.  Walmart is opening its own dairies.  Kroger manufactures 43% of its own branded foods.  A bricks and mortar build out will be a huge cash outlay, and catching up on the manufacturing end will also be a big investment.” 
  • Disney launched the latest salvo in the streaming wars with its Disney+ service to compete against Netflix, Apple TV Plus, and HBO Max.  It is aggressively trying to capture market share with a $12.99 monthly plan that includes Hulu, ESPN Plus, as well as its own library of shows including the Marvel universe, Star Wars, and Pixar movies.
  • Lastly, how big is too big?  Google now wants to get into financial services, namely banking.  The company expects to offer checking accounts to consumers next year under a project code-named Cache (which is fitting since they already know everything about us).  Big tech companies, such as Apple and Facebook, see financial services to learn more about users and reap valuable data.
In closing I want to relay some positive news on a health issue that affects many.  The Center for Disease Control and Prevention (CDC) announced cigarette smoking among U.S. adults has reach an all-time low of 13.7% in 2018.  The CDC says that is a decline of approximately 66% in the more than fifty years since the first Surgeon General’s report warned of the health consequences of smoking.  In the early 1960s, roughly 42 percent of U.S. adults smoked. It was common nearly everywhere — in office buildings, restaurants, airplanes and even hospitals. If you know someone who has kicked the habit give them a high five.  If you know someone who is trying to kick the habit here’s a link to a website with tools and tips that could help.  Now you know.

 Bruce J. Mason, MBA