Market Minutes for the week of April 22nd:
“In high school I wrote an essay on baseball and my teacher told me I had to rewrite it on a more serious topic. So I wrote an essay about the World Series and my teacher gave up.” – Tucker Elliot
Here’s what I’m thinking and hearing: *1.) Blaine Rollins CEO of 361 Capital: “Lots of talk about the 2019 melt-up last week. Fingers pointed at the very accommodating Federal Reserve, rebound in 2019 U.S. economic data, bottoming in China, and risk-off positioning of investors. With the market near its highs and the S&P 500 trading at 16 times next year’s earnings estimate of $180, I wouldn’t be the first to say that investors are scared right now. Private equity firms are taking in new capital by the truckload. Every unprofitable tech unicorn is looking to get public before the IPO window closes. And existing unprofitable companies are doing drive by secondary offerings anytime their stock jumps by a meaningful amount. What a great year to be an equity investment banker.” *2.) After expecting 1st quarter GDP growth to be essentially flat, CNBC/Moody’s Analytics Rapid Update survey of economists is now tracking at a stronger 2.4%. Retail sales, export data and business inventories have all combined to contribute to a sharp improvement in growth. First Trust Economics is calling for 2.6% growth in the 1st quarter while Goldman Sachs is calling for 2.8% growth for 2nd quarter GDP. Whoops. This just in…The Commerce Department said that U.S. 1st quarter GDP rose by 3.2%. Everybody got it wrong! What recession?? *3.) Over the years James Paulsen, chief investment strategist at the Leuthold Group, has developed and refined what he calls his behavioral-based “Worry Gauge.” The indicator is derived by taking the ratio of the relative price of gold to the overall GS Commodity Price Index divided by the ratio of price performance of small cap stocks to large caps. The theory being that investors flee to gold when they are risk averse and into small cap stock when they are more confident. Paulsen has found that since 1970, when the “Worry Gauge” has landed in the top quintile, powerful rallies in the S&P 500 (18.48% annualized return within three months) have followed. The current “Worry Gauge” now sits in the highest quintile once again as investors continue to worry and fret about a difficult future for the markets. Paulsen’s bottom line: a powerful rally can occur from here, even if we are only less than 1% from a record high in the S&P 500. *4.) So far, 1st quarter earnings season has been a big success with earnings “beats” over estimates by a solid three to one margin. What’s more impressive is that profits are topping estimates by 5.5% according to data from Refinitiv. Here are some comments from the earnings calls: United Rentals – “By reaffirming our guidance, we’re emphasizing our confidence in the cycle. The year is unfolding as we expected – customer sentiment remains positive, and feedback from the field points to healthy end-market activity.” Halliburton CEO Jeff Miller – “[The company] experienced pricing headwinds throughout the quarter…we believe the worst in the pricing deterioration is now behind us.” JP Morgan CEO Jamie Dimon – “If you look at the American economy, the consumer is in good shape, balance sheets are in good shape, people are going back to the workforce, companies have plenty of capital. It could go on for years. There’s no law that says it has to stop. We do make lists, and look at all the other things: geopolitical issues, lower liquidity. There may be a confluence of events that somehow causes a recession, but it may not be in 2019, 2020, 2021.” Blackrock CEO Larry Fink told Reuters, “The U.S. economy is speeding up again after a slowdown in recent months and cash could soon start rushing into stocks as most investors are underinvested in the markets globally…‘What we are seeing worldwide are clients just struggling to put their money to work.’” Stephen Schwarzman CEO of the Blackstone Group, the world’s largest alternative asset manager, says that the company has raised $43 billion in the 1st quarter of this year and $126 billion in the past 12 months. Also in the quarter, Blackstone’s assets under management crossed over the half a trillion mark at $512 billion. To Schwartzman, it was like “an out-of-body-experience” and such a contrast to the fundraising environment when he started the firm in 1985. *5.) JP Morgan equity strategists can see the S&P 500 trading at 3,000 before the end of the year. According to the bank, the driving forces behind the move in the index should come from better than expected profit growth, a budding global recovery led by China, a resolved trade agreement, wrongly positioned (too much cash) investors, and strong free cash flow that will push buybacks to a record $850 billion. *6.) In the last week, Investor Intelligence said that Bulls slipped by 1.4 points to 53.4%. Bears also fell to just 18.4% from 19.2% the week before. All went to the Correction side which rose to 28.2% from 26% the week before. The Bull side is still short of what is considered “extreme,” (a reading above 60%). Yesterday the CNN Fear/Greed index hit 75 for the first time this year, which is considered to be in the “Extreme Greed” territory. *7.) From the front lines of the trade war: According to research released by Fed economist Aaron Flaaen and University of Chicago economists Ali Hortacsu and Felix Tintelnot, it is estimated that consumers bore between 125% and 225% of the costs of washing machine tariffs. The authors calculate that the tariffs brought in $82 million to the United States Treasury, while raising consumer prices by $1.5 billion. “And while the tariffs did encourage foreign companies to shift more of their manufacturing to the U.S. and created about 1,800 new jobs, the researchers concluded that those [jobs] came at a steep cost: about $817,000 per job”, reports the New York Times. Treasury Secretary Steve Mnuchin and U.S. Trade Representative Robert Lighthizer will head to Beijing next week to conduct hopefully the final round of high-level talks that will result in a final trade agreement. *8.) I know that what follows is not necessarily pertinent to the financial markets, but it shines the light on not only a disgusting lack of corporate morality, but also a disregard for human life over profit. MSN reports, “The industry’s giants, Cardinal Health, McKesson and AmerisourceBergen, are all among the 15 largest American companies by revenue. Together, they distribute more than 90% of the nation’s drugs and medical supplies. New civil suits from the attorneys general in New York, Vermont and Washington State accuse distributors of brazenly devising systems to evade regulators. They allege that the companies warned many pharmacies at risk of being reported to the DEA, helped others to increase and circumvent limits on how many opioids they were allowed to buy, and often gave advance notice on the rare occasions they performed audits. Three-fourths of prescriptions at a Queens pharmacy supplied by Amerisource were written by doctors who were later indicted or convicted…For more than five years, Cardinal shipped to a pharmacy with the highest oxycodone volume in Suffolk County, N.Y., despite continually flagging its orders as suspicious. McKesson kept shipping to two pharmacies for six years after learning that they had been filling prescriptions from doctors who were likely engaging in crimes. The shipments stopped only last year, after the doctors were indicted. In summary, the three largest distributors, according to the New York Attorney General’s office, sold 1.6 billion oxycodone pills in New York alone between 2010 and 2018.” *9.) The Rochester Drug Co-Operative is one of the 10 largest drug distributors in the U.S. This week, the U.S. attorney for the Southern District of New York has filed suit against them for allegedly distributing tens of millions of doses of oxycodone, fentanyl and other opioids to pharmacies that its own compliance department found had no legitimate need for them. According to the U.S. attorney, the company identified about 8,300 potentially suspicious “orders of interest,” including thousands of oxycodone orders between 2012 and 2016, but only reported a total of 4. As a result, former CEO Lawrence Doud III and former Chief Compliance Officer William Pietruszewski have been charged with felony drug trafficking and if found guilty, could be sentenced to life in prison. *10.) The war is finally on.
The Commerce Department said that U.S. 1st quarter GDP grew at a 3.2% rate, far above any and all estimates. The boost came from increased state and local spending, increased business inventories and greater exports.
The Commerce Department stated that U.S. durable goods orders jumped by 2.7% in March, largest gain since July of last year. Orders for computers, electronic and transportation equipment fueled the rebound.
The National Association of Realtors (NAR) said that existing-home sales fell by 4.9% in March to a seasonally adjusted rate of 5.21 million units. Properties stayed on the market an average of 36 days during the month and the median price of a home sold was $259,400, a 3.8% increase over a year ago.
The Commerce Department reported that U.S. new home sales increase by 4.5% in March to a 1 ½ year high of 692,000 units (seasonally adjusted).
The Automobile Association of America (AAA) said that the price of a gallon of gasoline is now averaging $2.84, with prices hitting $4.70 in some parts of California.
From Zero Hedge: “A new report by Forbes states that 23% (nearly one in four) Americans are saving not even one penny from their paychecks. As part of its 2019 Savings Survey, the First National Bank of Omaha examined Americans’ habits, behaviors and priorities when it comes to saving, monthly spending and retirement planning…Nearly 80% of Americans live paycheck to paycheck…Only 40% of Americans prioritize their savings for their emergency fund with 27% saying their highest savings priority is saving for their retirement…63% of Americans do not set annual savings goals…49% say they only have enough liquid funds to cover living expenses for 0 to 3 months.”
According to a new Gallup survey, America ties for fourth out of 143 countries when it comes to stress levels. Apparently 55% of Americans reported they experience stress during a large portion of the day. These are the highest levels ever since Gallup started the survey. In addition, levels of anger and worry are also at record or near-record levels. Nearly half of all Americans (45%) said they felt worried a lot and 22% said they felt angered a lot. Certain age groups are feeling it worse than others with ages 15 to 49 feeling the most stress at 64.5%. They also feel the most worried at 51% and the most angry at 28.5%. The most stressed out nation: Greece at 59%.
In recent years, there has been hype about the strength of the consumer in recently, it seems that has been a bit of a credit-driven illusion. Income growth is weak, debt levels are elevated, and rent and healthcare costs keep chipping away at disposable incomes, so it comes as no surprise that car loans are now being stretched out to as long as 84 months (seven years) to maturity. The problem is since cars are typically turned over on average every 3 to 5 years, borrowers out 7 years are usually upside down in their vehicle when it comes time to trade it in. “Between the negative equity of the trade-in, along with title, taxes, license fees, and a hefty dealer profit rolled into the original loan, there is going to be a substantial problem down the road”, reports Zero Hedge. Moody’s adds: “The percentage of trade-ins with negative equity is at an all-time high, as is the average dollar amount of that negative equity. Lenders are increasingly faced with the choice of taking on greater risk by rolling negative equity at trade-in into the next vehicle loan.
According to the New York Times, more than one million American households have started camping each year since 2014, with millennials making up 38% of the 75 million (“Tin Cup Tourists”) active camping households. According to the Recreational Vehicle Industry Association, RV shipments saw their second-best year in 2018, with 483,672 units. Shipments were down slightly to 4.1% from 2017’s record-setting year of 504,600 units. Perhaps the most iconic of all RV’s on the road is the Airstream which resembles a large silver bullet on wheels. Airstream saw its fifth consecutive year of growth, with sales increasing 218% over that period.
According to Business Insider, McDonald’s said it is adding four “Worldwide Favorites” to its menu. The new menu items are the Grand McExtreme Bacon Burger from Spain, the Stroopwafel McFlurry from the Netherlands, the tomato-mozzarella chicken sandwich from Canada, and cheesy bacon fries from Australia. Tested at 50 locations in Florida, the Worldwide favorites will be available on McDonald’s menus around the same time that the chain’s “Signature Crafted” line will disappear in early June.
Disney’s Marvel Entertainment blockbuster “Captain Marvel” has gone past the $1 billion mark to become the biggest grossing female superhero movie ever. It soundly trounced DC Entertainment’s “Wonder Woman,” the previous record holder at $821 million worldwide.
Pier 1 Imports plans to shutter at least 45 stores, and possibly up to 100 more, as it seeks to cut costs after another disappointing holiday season. The company has a total of 970 stores currently in operation.
Canadian weed giant Canopy Growth has agreed to buy Acreage Holdings in a $3.4 billion deal after cannabis has been legalized in the United States. Acreage Holdings is New York based and is one of the largest multistate cannabis operators in the U.S. with a footprint in 20 states.
Occidental Petroleum has bid $76 per share for Anadarko Petroleum, trumping Chevron’s previous bid of $65 per share. The new bid is comprised of $38 in cash and 0.6094 shares of OXY.
Ford has announced that it has invested $500 million into electric truck maker Rivian and will use Rivian’s skateboard platform to develop the new truck.
Big week for Silicon Valley IPOs last week. Zoom was priced $36 per share and “zoomed” to $66 as it started trading. Pinterest was priced at $19 per share and debuted at $23.75 as it started trading.
Lockheed Martin reports 1st quarter earnings of $5.99 per share on revenue of $14.3 billion, an increase of 22.9% year over year.
United Technologies reports 1st quarter earnings of $1.91 per share on revenue of $18.4 billion, an increase of 21.1% year over year.
Verizon reports 1st quarter earnings of $1.20 per share on revenue of $32.13 billion, an increase of 1.1% year over year.
Edwards Lifesciences reports 1st quarter earnings of $1.32 per share on revenue of $993 million, an increase of 11.0% year over year.
eBay reports 1st quarter earnings of $0.67 per share on revenue of $2.64 billion, an increase of 2.3% year over year.
ServiceNow reports 1st quarter earnings of $0.67 per share on revenue of $811.3 million, an increase of 37.7% year over year.
PayPal reports 1st quarter earnings of $0.78 per share on revenue of $4.13 billion, an increase of 11.9% year over year. Venmo, owned by PayPal, has over 40 million users at the end of the 1st quarter and total payments volume increased by 73% year over year to $21 billion.
Visa reports 1st quarter earnings of $1.31 per share on revenue of $5.49 billion, an increase of 8.3% year over year.
Facebook reports 1st quarter earnings of $1.89 per share on revenue of $15.08 billion, an increase of 26.0% year over year. Daily active users were up 8% and monthly active users were also up 8%.
Microsoft reports 1st quarter earnings of $1.14 per share on revenue of $30.6 billion, an increase of 14.1% year over year. Azure, its Intelligent Cloud product grew by 24% year over year.
AT&T reports 1st quarter earnings of $0.86 per share on revenue of $44.83 billion, an increase of 17.8% year over year.
Boeing reports 1st quarter earnings of $3.16 per share on revenue of $22.9 billion, a decrease of 2.1% year over year.
Domino’s Pizza reports 1st quarter earnings of $2.20 per share on revenue of $835.96 million, an increase of 6.4% year over year.
Amazon reports 1st quarter earnings of $7.09 per share on revenue of $59.7 billion, an increase of 17.0% year over year. Revenue by product line: Online stores 14%, physical stores 1%, Third-party sellers 23%, Subscription 42% and AWS (Amazon Web Services) 41%.
Next week: Earnings from: Google, Spotify, Apple, McDonald’s, Mastercard, Square, Yum Brands, CVS, Activision Blizzard, Cognizant Technology and Expedia. Economic reports: U.S. ISM Non-Manufacturing Index for April, U.S. Purchasing Manager’s Index for April, U.S. Manufacturing New Orders for March, Case-Shiller Home Price Index/Composite 20 for February, ADP Private Payrolls for April and U.S. Non-Farm Payrolls for April.
WTI crude oil: $63.08 per barrel. 10-year U.S. Treasury note: 2.50%. Gold: $1,282 per ounce.
Sources: CNBC, Real Money Pro, 361 Capital, First Trust Economics, The Calafia Beach Pundit, Zero Hedge, Seeking Alpha, MarketWatch, The Wall Street Journal, MSN, Bloomberg, Estimize.com, Morningstar, Charlie Bilello and USA Today.
At the time of publication Cascade Investment Group and or its clients were long shares of MCK, CAH, ABC, BX, GS, JPM, BLK, MCD, DIS, PIR, CGC, OXY, CVX, F, PINS, LMT, UTX, VZ, EW, EBAY, NOW, PYPL, V, FB, MSFT, T, BA, DPZ, AMZN, GOOGL, SPOT, AAPL, MA, SQ, YUM, CVS, ATVI, CTSH, EXPE.
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.
A reminder to NEVER take Social Security early…
Unless of course you don’t plan on making it to a 7-handle.