Market Minutes for the week of April 2nd
“War, huh, yeah. What is it good for. Absolutely nothing.” — Edwin Starr
Here is what I’m hearing and thinking: 1.) The Orange Swan’s (DJT) behavior is now beginning to impact the capital markets – both the averages and individual stocks. The markets are growing weary of a president that is acting on impulse, becoming unhinged and growing increasingly isolated. The Supreme Tweeter has become an Orange Swan headwind. 2.) Trade war talk has really taken a bite out of the market. The S&P 500 declined 6% during the week of March 18th, the steepest one-week loss in nearly 2 years. 3.) During the last week in March every single one of the 30-largest companies in the S&P 500 was down 8% on average from their March 9th near-term high. The worst YTD damage could be found in the Consumer Staples (-10.10%), Telecoms (-8.41%) and Materials (-7.10%). 4.) For the 1st quarter: DJIA (-2.5%), S&P 500 (-1.2%), NASDAQ (+2.3%), STOXX Europe 600 Index (-4.7%), NIKKEI 225 (-7.1%), Investment Grade Corp. Bond (-3.4%) and the 7-10 Year Treasury Bond (-2.3%). There was no place to hide as both stocks and bonds performed poorly. 5.) Earnings for the S&P 500 are expected to rise by 17.2% in the 1st quarter, the best rate of increase in seven years. I have always said that it is earnings that ultimately determine stock prices so…if stocks are down -2.0% in price for the quarter but earnings are supposed to be 17% higher, I’d say that’s multiple (P/E) compression that I would like to be a buyer of, not a seller. 6.) According to FactSet, top-line sales gains are expected to grow more than 7.2% and 50 plus companies have revised their guidance upward, the highest since mid-2016 when FactSet first began keeping track. For Q2, FactSet sees +19.1% earnings growth, +20.8% for Q3 and +17% for Q4 for a full year 2018 EPS growth rate of +18.4%. Hmmm…again see point #5 above. 7.) Brian Wesbury, Chief Economist for First Trust: “Stock market volatility scares people. But, volatility itself isn’t necessarily bad. Only if there are fundamental economic problems, something that could cause a recession, would we think volatility itself is a warning sign. So, we watch the Four Pillars. These Pillars – monetary policy, tax policy, spending & regulatory policy, and trade policy – are the real threats to prosperity. Right now, these Pillars suggest that economic fundamentals remain strong.” 8.) Eighty-eight-year-old Jack Bogle, Founder of Vanguard Funds and 66-year veteran says that this renewed regime of volatility is like nothing he has ever seen before: “I have never seen a market this volatile to this extent in my career. Now that’s only 66 years, so I shouldn’t make too much about it, but you’re right: I’ve seen two 50% declines. I’ve seen a 25% decline in one day and I’ve never seen anything like this before.” 9.) Global mergers and acquisitions had their best start ever in Q1 of 2018, totaling $1.2 trillion in value, powered by U.S. tax reform and faster economic growth in Europe. The value of global M&A deals increased by 67% year over year while the number of actual deals dropped by 10% to 10,338. 10.) According to Renaissance Capital, Q1 was the best quarter for the U.S. IPO market in 3 years and the best Q1 in eight years. $15.6 billion was raised by 43 IPOs (Initial Public Offerings). 11.) According to data at Standard & Poor’s, S&P 500 companies spent a record amount on dividend payments in the first quarter of 2018. Dividends for U.S. common stocks rose by $18.6 billion in the quarter compared with $10.9 billion in the first quarter of 2017. On an aggregate basis, investors received $109.2 billion in dividends in the first quarter and on a per share basis, dividends were at $12.79 per share, an all-time record. 12.) Jon Gold of the National Retail Federation: “Around 42% of clothing and 72% of footwear sold in the U.S. comes from China. It’s the U.S. consumer who will lose at the end of the day.” 13.) Paul Price: “Now, with China retaliating by raising tariffs on American goods coming into their country, it will result in Chinese consumers who end up paying more for goods over there. Does the Chinese government really want to make things more expensive for their own use? No, it only hurts them to pay more for the same item. Actions on both sides are negotiating tactics. Neither side gains from making products more expensive for their own citizens.” 14.) Is Trump’s attack on Amazon (some factual, most of it not) really a payback to Jeff Bezos (Amazon CEO and owner of the Washington Post) for the paper’s criticism of his presidency? 15.) Finally, Doug Kass, CEO of Seabreeze Partners nails it: “There will likely be multiple policy surprises ahead from an autocratic Presidency – some of which, hastily crafted with little forethought (and accompanied by unintended consequences), may even provide “shock and awe” and most will be market disruptive, destabilizing and market unfriendly.”
After Trump’s initial tariffs on steel and aluminum, China has initially retaliated with 128 new tariffs on U.S. products, including meat, fresh and dried fruits, wine, nuts, steep pipe, modified ethanol and ginseng. All in all, the total import value of the taxed goods was close to $3 billion at the end of 2017.
Next: China upped the stakes in a budding trade war by announcing $50 billion of new tariffs on automobiles, aerospace and soybeans. Although Boeing can handle the tariffs due to their big book and backlog of business, these new taxes will crush the automakers (GM sold 4 million cars in China last year) and America’s farmers who grow and export 849 million bushels of soybeans to China annually.
Next: Trump ups the stakes and “trumps” China once again by “doubling down” proposing a new round of tariffs totaling $100 billion, an announcement that surprised even his chief economic advisor Larry Kudlow.
Next: Stay tuned to find out what China’s response will be.
Payroll processor ADP said that the U.S. economy generated 241,000 private payroll jobs in March. Wall Street estimates were for 205,000 and the gain marks the fifth straight month of gains above 200,000. Service providers created 176,000 new jobs while goods-producing industries added 65,000.
The Labor Department announced that the U.S. economy generated 103,000 new non-farm sector jobs in March against an estimated 193,000. Professional and business services added 33,000 jobs and manufacturing added 22,000. Over the last 12 months, the manufacturing sector has added 232,000 jobs. Wages grew at an annualized rate of 2.7% which should keep wage inflation on the sidelines for now.
The Fed reported that industrial production jumped 1.1% in February marking the largest increase in four months. A rise in construction and oil output from the nation’s oil and gas fields contributed to the gain.
The Fed also stated that manufacturing output rose 1.2% in February for the biggest gain since October. Factory utilization rose by 0.7% in February to 78.1%, the highest level in more than three years.
According to Macroeconomic Advisers, first-quarter GDP grew at just 1.7% (vs. 2.9% in the 4th quarter) and most of that growth came from the accumulation of unsold goods. Final sales have possibly risen only 0.5% in the quarter, down from 3.4% in the 4th quarter. In the 1st quarter, consumer spending climbed 1.1% (down from 4% in Q4), capital spending climbed 3.4% (down from 11.5% in Q4), and housing investment dropped 5.6% (down from 12.8% in Q4).
The Commerce Department said that U.S. personal incomes rose by 0.4% in February for the third straight monthly gain while U.S personal spending rose by 0.2% for the second straight monthly gain.
The Fed’s favorite inflation indicator, the personal consumption expenditure (PCE), rose to 1.6% in February from 1.5% in January, the biggest jump in the indicator since February 2017. That said, the PCE is still below the central bank’s 2.0% target and has been so since mid-2012.
The Institute for Supply Management said that its ISM services sector index moved lower in March to 58.8. Growth in the sector slowed for the second month in a row but has seen continued expansion for 98 consecutive months.
The Institute for Supply Management (ISM) said that its index of national factory activity (non-service) for March, fell to 59.3 from 60.8 in February. “Seventeen industries including fabricated metal products, computer and electronic products, machinery and chemical products reported growth last month. Apparel, leather and allied products was the only industry reporting a decrease.” Prices paid hit a seven-year high but much of that was attributed to shortages created by “panic buying” ahead of the tariffs.
The Commerce Department reported that new orders for U.S.-made goods increased 1.2% in February boosted by demand for transportation equipment, mining, oil field and gas equipment.
MarketWatch’s Andrea Riquier reports, “The S&P/Case-Shiller national index [of home prices] rose a seasonally adjusted 0.5% in the three-month period ending January, and was up 6.2% compared to a year before. The 20-city index rose a seasonally adjusted 0.8% for the month, and 6.4% for the year…The West is still the best: Seattle [+12.9%], Las Vegas [+11.1%] and San Francisco [+10.2%], all notched double-digit price increases. Only one city, Washington D.C., had a negative monthly reading.”
According to a new report from Black Knight Data & Analytics, because of rising home prices, homeowners are able to tap over $5.4 trillion of equity, the highest level on record. “Unlike during the last peak, homeowners today are far more conservative and lenders are stricter. Last year, even with record equity, homeowners took out only $262 billion via cash-out refinances or home equity lines of credit, or HELOCs…[That] is less than 1.25% of all available equity, a four-year low,” reports Diana Olick of CNBC.
The Commerce Department said that February housing starts fell by 7.0% to a seasonally adjusted annual rate of 1.236 million units. A second straight month of decline in multi-family construction drove the starts lower.
The National Association of Realtors (NAR) said that U.S. pending home sales rose by 3.1% in February. A chronic shortage of supply continues to be a problem and is the main reason for pending sales to be down by 4.1% over a year ago.
Zillow says that rents across the U.S. are rising across the nation at the fastest pace in almost 2 years. The median rent in the U.S. rose by 2.8% over the past year to $1,445. The housing shortage is forcing potential buyers to rent longer as they are having a difficult time finding an affordable home. Rents are rising the fastest in Seattle, Sacramento, Minneapolis and Atlanta.
The Wall Street Journal reports that empty space in regional shopping malls reached a 6-year high in the 1st quarter. It’s an intricate equation for the retail sector as a decline in foot traffic is partially neutralized by lower rents offered.
The Baker Hughes active drilling rig count fell by 2 over the last week to a total of 993 which follows the previous week’s gain of 5 rigs. Active oil rigs fell by 6 to 798 and gas rigs climbed 4 to 194.
Peter Boockvar, Chief Investment Officer for Bleakley Advisory Group has this to say about rising transportation costs: “I’ve discussed a few times over the past week about the dramatic rise in transportation costs that I’m seeing and that will inevitably work its way fully thru the supply chain for any goods that get trucked. Bloomberg news has a story this morning [Monday the 2nd of April] titled ‘Trucking Prices to Rise Still More as U.S Driver Hours Squeezed.’ On Sunday, police nationwide began enforcing rules requiring most big rigs to use electronic logging devices to record driver hours. While truckers have long been barred from driving more than 11 hours a day, the new ELDs prevent them from fudging their times on paper logs. To quantify the impact, spot trucking rates are up 28% year to date and year over year. Longer term contract rates are estimated to be higher by 12% in 2018. This will take some time to filter thru to prices charged to the consumer but I don’t see how it inevitably doesn’t.”
Scott Grannis of the Calafia Beach Pundit has something to say about debt and deficits: “Although the $706 billion that the government has borrowed in the past year sounds like a lot, it is a smaller percentage of GDP than the Reagan deficits were in the 1980s…the burden of deficits (their size relative to GDP) always declines during periods of growth, while it always increases during periods of economic weakness…I’ve explained before that the deficit has been increasing of late not because the economy has been weak, but rather because people have been anticipating tax reform and consequently accelerating expenses and postponing income. Now that tax reform is not only a reality but significantly pro-growth, we should see faster economic growth, more jobs, and a bigger tax base that should ultimately result in an improving fiscal situation (i.e., a declining deficit/GDP ratio).”
According to the Recording Industry Association of America, the digital revolution in music has all but wiped out the sales of CDs, LPs, Cassettes, DVDs and Videos. Recorded music sales in hard copy format have gone from 100% in 2003 to 17% in 2017 while digital subscriptions, streaming and downloading have increased by 83% over the same period.
According to Harper’s, of the world’s top 100 Scrabble players…28 live in Nigeria!
Fashion footwear company Nine West Holdings Inc. plans on filing bankruptcy in the near future with a plan to sell its intellectual property to Authentic Brands Group. The proceeds from the sale will help to pay down some of Nine West’s $1.5 billion in debt. Competitor Aerosoles Group filed for bankruptcy last year.
Blue Cross Blue Shield Institute is partnering with Lyft, Walgreens and CVS to offer rides to the pharmacies. The test markets will begin soon in select Walgreens locations in Chicago and select CVS locations in Pittsburgh.
Microsoft has announced that it is doubling down on cloud related products like Azure, its public cloud platform, with planned spending of $5 billion over the next four years. CEO Satya Nadella said that Windows is a key part of Microsoft’s legacy, but its not what’s growing the most. Nadella has been talking about the emergence of a “cloud-first” world since replacing former CEO Steve Ballmer in 2014.
Facebook has What’s App and Instagram to stem the bleeding while the company deals with it’s personal data mining scandal but CEO Mark Zuckerberg doesn’t promise a quick fix. He says: “I think we will dig through this hole, but it will take a few years. I wish I could solve all these issues in three months or six months, but I just think the reality is that solving these questions is just going to take a longer period of time.” Zuckerberg also added that Facebook has not yet seen any meaningful advertiser or user impact from the data scandal.
Apple has announced that it has broadened its health records product to 40 hospitals and it’s also opening it up to all iOS (iPhone) users.
Amazon has said that plans to open a new fulfillment center in North Las Vegas, Nevada. The company employs over 3,000 people at its three other existing centers in the state. The new facility will employ 1,000 new workers.
According to Reuters, Amazon may be planning a rival bid for Indian e-commerce firm Flipkart, which is currently in tie-up talks with Walmart. Both retailing giants are elbowing for position in India’s booming online sales industry.
Spotify has opened for trading at $165.90 per share on the NYSE. With 177 million shares outstanding, that equates to a valuation of $29.4 billion.
Brookfield Properties has announced that it will acquire U.S. mall owner General Growth Properties for $9.25 billion in cash and will become the second-largest mall owner behind Simon Property Group.
GlaxoSmithKline is buying Novartis out of its consumer healthcare venture for $13 billion and will take full control of products including Sensodyne toothpaste, Panadol headache tablets, muscle gel Voltaren and Nicotinell patches.
GE has agreed to sell specific information technology assets in its health care business to private equity firm Veritas Capital for $1.05 billion.
According to Melanie Evans with the Wall Street Journal, Walmart is discussing a possible acquisition of health insurer Humana. “Walmart has been a very sophisticated negotiator as it buys health benefits…[the company] in recent years has increased its use of direct contracting, offering to send employees from around the country to a small group of hospitals that agree to a fixed price and submit data on performance for review.”
Salesforce.com is planning its first ever offering of its corporate debt through a two tranche, $2.5 billion bond deal. The company is raising funds needed to finance its acquisition of MuleSoft. Oracle and Adobe’s 10-year notes trade at about 3.25% currently and it expected that Salesforce.com’s debt will be priced at a similar yield.
The New York Stock Exchange is talks to acquire the Chicago Stock Exchange for $70 million. Chinese-led North American Casin Holdings was previously trying to acquire CHX but the SEC (Securities and Exchange Commission) rejected the deal.
BlackRock says it will now offer investors new funds that don’t include companies who sell firearms. The company says it has responded to customer interest and not political pressure in making the decision.
Qantas Airlines is considering using part of the cargo hold of its long-range jets for a new class of cabin that will feature an exercise room and sleeping pods. “Project Sunrise” would be available on 20-hour non-stop flights from Sydney to New York and the U.K.
Walmart is in negotiations to acquire online pharmacy start-up PillPack for less than $1 billion. “PillPack’s focus on making it easier for customers to order and fulfill medications is an attractive proposition for Walmart and other e-commerce companies that are looking to enhance their health care offerings,” reports Carl Surran of Seeking Alpha.
General Motors U.S. sales up 16% in March to 296,341 units. Units by model: Equinox +32,000, Silverado-C/K pickup line +52,000, Traverse +15,000.
Ford unit sales for March up 3.4% to 244,306 units. SUV sales +7.5%, Truck sales +6.7%, Passenger car sales -8.1%.
Fiat Chrysler unit sales for March up 13% to 216,063 units. By brand: Fiat -47%, Chrysler +15%, Jeep +45%, Dodge -2%, Ram -13%, Alfa Romeo +364%. The newly redesigned Jeep Wrangler sold 27,829 units in March, a 70% increase over a year ago.
Bed Bath & Beyond has announced that it will exchange Toys R Us and Babies R Us gift cards for store credit for a very limited time. A $100 Toys R Us gift card will be $64.20 in store credit at BBBY.
Lennar Homes reports 1st quarter earnings of $1.11 per share on revenue of $2.98 billion, an increase of 27.4% year over year.
Ollie’s Bargain Outlet reports 4th quarter earnings of $0.51 per share on revenue of $356.7 million, an increase of 25.9% year over year.
Next week: Earnings from: Delta Air Lines, Bed Bath & Beyond, Pier 1 Imports, JP Morgan, Citigroup and Wells Fargo. Economic reports: U.S. Producer Price Index (PPI) for March and U.S. Consumer Price CPI) Index for March.
WTI crude oil: $62.20. 10-year U.S. Treasury note: 2.78%. Gold: $1,332 per ounce.
Real Money Pro, 361 Capital, CNBC, Seeking Alpha, MarketWatch, Bloomberg, The Wall Street Journal, Reuters, Estimize.com, Ritholtz Wealth Management and The Calafia Beach Pundit.
P.S. – Congratulations to our former colleague Jan Weiland for winning the 2018 Athena Award. Well deserved.
P.P.S. – From Barry Ritholtz of Ritholtz Wealth Management:
Disclosure: This publication shall not constitute an offer to sell or the solicitation of any offer to buy or sell any securities of the companies mentioned. This publication is solely a compilation of recent news releases from the sources cited above.
Ken Beach, President and Managing Partner of Cascade Investment Group, member FINRA & SIPC. Cascade Investment Group is not a tax or legal advisor. You should always consult with your tax advisor or attorney before taking any actions that may have tax consequences.