Market Minutes for the week of April 29th:
“Your big opportunity may be right where you are now.” – Napoleon Hill
Here’s what I am thinking and hearing: *1.) Bloomberg reports, “as equities surge to all-time highs, volatility has all but vanished. Hedge funds are betting the calm will last, shorting the CBOE Volatility Index, or VIX, at rates not seen in the last 15 years. Large speculators, mostly hedge funds, were net short about 178,000 VIX futures contracts on April 23rd, the largest such position on record”. What does this all mean? If volatility were to “suddenly” return to the markets and the VIX spiked higher, hedge funds would be forced to quickly “cover” the bad bets, and the resulting losses would have to be offset with the selling of profitable stock positions. Hmmm. *2.) From CNBC, “Federal Reserve officials are considering a new program that would allow banks to exchange Treasurys [bonds and notes] for reserves, a move aimed at ensuring liquidity during difficult times that also would help the central bank decrease the size of its nearly $4 trillion balance sheet. The so-called standing repo facility is in its early discussion phases. Respected St. Louis Fed economists David Andolfatto and Jane Ihrig have authored two papers on the plan, which they say would ease the regulatory burden for banks that feel pressured into holding ultra-safe assets.” *3.) The Fed also announced on Wednesday that they will now “begin to pare back the pace at which they let Treasuries roll off the balance sheet. As of April, the Fed was reducing the size of the balance sheet by $50 billion per month [$30 billion from Treasury securities and $20 billion from mortgage-backed instruments]…Moving forward, reductions…will be cut in half to $15 billion a month. Mortgage securities will continue to be reduced at a rate of $20 billion per month. This will continue until October, at which point the Fed will stop balance sheet reductions”, according to Brian Wesbury, Chief Economist at First Trust Economics. *4.) From the front lines of the trade war: According to the Commerce Department, personal incomes for farmers dropped by the most in three years in the 1st quarter. On an annualized basis, farm proprietors’ incomes plunged by $11.8 billion in the quarter. There are reports out of the White House that a trade deal with China could come as soon as next Friday. *5.) So, Fed Chairman Powell doesn’t elude to a rate cut on Wednesday and the programmed algorithms hit the sell button and knocked almost 1% off the averages in a couple of days. Jim Cramer: “That’s all I could think of yesterday when the stock market plunged on the lunatic theory that, somehow, Jay Powell, would agree with President Trump that it’s time to cut rates and when he didn’t, ‘they’ sold…What matters to me is that if people really are disappointed that Powell didn’t cave to the president and they sold futures then they are truly living in a parallel and stupid universe.” *6.) There are however, a couple of things that bother Cramer and me. One: The movement of three recent IPOs. Beyond Meat prices at $25 and goes immediately to $65.65 (50x sales). Zoom prices at $36 and trades to $75 (40x sales) in one week. Pinterest prices at $19 and trades to $34 (22x sales) in a week. This is not a good sign and these moves are examples of reckless and undisciplined behavior that often occurs at the peak of cycles. Two: Qualcomm says things are not as rosy in 5G as people think, so the stock goes up on a downer of a forecast and Tesla…it rallies on a $2 billion capital raise?? These are not reasons for a stock to move higher. *7.) Another one goes down! On Thursday in Boston federal court, the founders of Chandler, Arizona-based Insys Therapeutics were found guilty of bribing doctors to prescribe the drugmaker’s addictive painkiller Subsys. 75-year-old billionaire founder John Kapoor and his co-defendants were also found guilty of racketeering conspiracy for a scheme that also misled insurers into paying for the drug. “In one instance, the company paid nearly $260,000 to two New York doctors who wrote more than $6 million worth of Subsys prescriptions in 2014. Insys employees also posed as doctors to give insurance companies invented diagnoses to get approval for payments for the drug” according to Reuters.
The ADP/Moody’s Analytics private payrolls report said that private-sector employers added 275,000 new jobs in April, far above the estimate of 180,000. Of the total, the service sector added 223,000 jobs. Small business added 77,000, medium-sized companies generated 145,000 and big business accounted for 53,000 jobs.
The Labor Department said that the U.S. economy created 263,00 new nonfarm payrolls in April pushing the unemployment rate to a 50-year low of 3.6%. Average hourly earnings increased 0.2% for an annual increase of 3.2%.
The Bureau of Labor Statistics said that U.S. worker productivity jumped by 3.6% in the first quarter and pushed the year over year increase to the highest level since 2010. Companies increased the amount of goods and services they produced (output) by a solid 4.1% in spite of hours workers spent on the job climbing by only 0.5%.
The Commerce Department said that U.S. consumer spending rose by 0.9% in March, its highest one-month gain in 9 and a half years.
The Bureau of Economic Analysis said that the Fed’s preferred gauge of inflation, the Personal Consumption Expenditures Index (PCEI), at the core level was flat in March and up 1.6% year over year, still well below the Fed’s target of 2.0%.
What is the difference between the CPI and PCE? The Consumer Price Index over weights housing while the Personal Consumption Expenditures Index over weights price fixed healthcare costs.
The Commerce Department said that personal incomes rose a scant 0.1% in March. Year over year, personal incomes are up 3.8% while the personal savings rate fell to 6.5% in March, the lowest increase since November of last year.
The Commerce Department said that construction spending fell 0.9% in March to a seasonally adjusted rate of $1.282 trillion. The decline was broad based, but all residential construction was down by 1.8% for the month and 8.4% for the year so far.
The Institute for Supply Management (ISM) said that its April manufacturing index dropped to 52.8 from 55.3 in March and was well below the estimate of 55.0. This is the weakest print since October of 2016. New Orders fell by 5.7 points but backlogs were higher by 3.5 points. Of the 18 industries surveyed, 13 saw growth vs 16 in March and 5 industries saw a contraction vs 2 in March.
The Dallas Fed Manufacturing Survey for April came in at a +2 versus the consensus estimate of +10 and +6.9 in February. Production and New Orders were higher.
The Chicago Fed Manufacturing Survey for April fell to 52.6 from 58.7 the month prior. New orders and production (weakest since May of 2016) dropped but backlogs moved back across 50. The employment component fell to the lowest reading since October of 2017.
The University of Michigan Consumer Sentiment Index for April slipped to 97.2 down from 98.4 in March. Consumer’s personal finance outlook rose to the highest level since 2004. When asked about longer-term financial prospects, 60% reported that they expect to be better off financially over the next five years.
The Conference Board said that consumer confidence for April climbed 5 points month over month to 129.2. Both the Present Situation Index and Expectations components were higher. Those who said jobs were Plentiful jumped by 4.3 points to the highest level since January of 2001.
The S&P CoreLogic Case-Shiller Home Price Index showed that national home prices rose 4% in February vs a year ago and down slightly from January’s 4.2%. The 10-City Composite rose 2.6% annually and the 20-City Composite posted a 3% year over year gain. The cities of Las Vegas (9.7%), Phoenix (6.7%) and Tampa (5.4%) had the largest increases.
The National Association of Realtors (NAR) said that pending home sales jumped by 3.8% in March, driven by the lowest mortgage rates in a year.
The Fed announced on Wednesday that it was holding rates steady for the time being. Brian Wesbury, Chief Economist at First Trust Economics commented: “There was little change to the Fed statement itself, on net, with stronger language on economic activity and weaker language on inflation. Arguably the most dovish change came in noting that household spending and business fixed investment have slowed since the Fed last met. But here too, [Fed Chairman] Powell stated that signs already suggest this will move higher in the quarters ahead. In part, this improved forecast comes from the global outlook, where growth prospects are improving, China trade negotiations appear nearly complete, and concerns about Brexit have been put on hold with the delayed deadline date. With virtually every comment, Powell tilted decidedly hawkish.”
The Baker Hughes weekly U.S. drilling rig inventory fell by 21 rigs last week to a total of 991. Active oil rigs fell by 20 to 805 and natural gas rigs dropped by 1 to 186.
Strong demand for Texas oil and gas in the first two months of the year increased the state’s export activity which outpaced the national rate. Texas accounted for nearly 20% ($50.9 billion and +9.0% year over year) of all U.S. exports in the January-February time period, while California made up an 11% share.
Barclays estimates that the total U.S. cannabis market, if legalized today, could be worth $28 billion, increasing to $41 billion by 2028. The bank goes on to say that at $41 billion and taxed at the same level of tobacco, the market would generate $28 billion of tax revenue across all levels of government.
Disney’s “Avengers: Endgame” raked in more than $1.2 billion globally in just 5 days in the theaters and has the chance to become the highest-grossing film of all time. The current highest-grossing film is “Avatar” which totaled $2.78 billion after being released in late 2009.
Spotify said that it has gained 100 million paid users, a record for any online music service. In the first quarter it added 4 million new customers but losses widened due to payments to the major record labels.
According to the Wall Street Journal, Marriott is preparing to launch a home-rental business that will focus on courting business travelers. Assuming it follows through, Marriott could steal market share in what is seen as a critical growth market for Airbnb.
Ford Motor on its earnings call last week discussed its move further away from cars and more towards trucks and SUVs. According to Jim Cramer, the company sees that the bargain of car ownership is disappearing because of the rise of Uber and Lyft, especially among millennials who are heavily tuition- indebted, post-college grads. They are taking Uber and Lyft. When you add in the cost of parking, insurance and gasoline, it’s just much cheaper.
Uber Technologies plans to raise up to $9 billion in its IPO when it goes to the public with an offering price of between $44 and $50 per share. 180 million shares will be sold publicly and $500 million of its stock will be sold directly to PayPal at the offering price. With 1.68 billion shares outstanding, Uber will be valued at about $83.85 billion once it goes public.
The IPO markets stay hot as Chewy.com (the online arm of PetsSmart) and WeWork have filed S-1s. Chewy.com looks to become valued around $5 billion and WeWork, based on a recent capital raise, could be worth around $47 billion making it the second-largest IPO so far this year.
Doug Kass, CEO of Seabreeze Partners on Amazon’s quarter: “Amazon, the ‘Supreme Disruptor’ has established an insurmountable first-mover advantage and a deepening competitive moat. Amazon’s profit runway is lengthy and underestimated. I see the company about two years away from ‘hockey stick’ EPS growth that will far exceed consensus expectations. Amazon will likely be the first $2.5 trillion company.”
More Kass: “The shares of Amazon have not been materially embraced and exploited relative to other peer stocks by institutional investors. As an example (and anecdotally), in my Bull/Bear debate with Tobias Lefkovich at Citigroup on Monday, the audience of largely institutional investors was asked how many held the shares of Amazon. Only five out of about 30 investors answered the question affirmatively. In terms of the other three FANG constituents, Amazon has the lowest component of institutional ownership: Institutional Ownership as a Percentage of Shares Outstanding: *Google – 81%, *Netflix – 77%, *Facebook – 75% and *Amazon – 57%.”
Amazon has announced that it will expand its “Tech Hub” in Denver and will double the size of its workforce in the area by creating 400 new jobs. Amazon opened an office in Boulder last fall.
Occidental Petroleum says that Berkshire Hathaway has committed to invest $10 billion in the company, contingent on Oxy completing the purchase of Anadarko Petroleum. This was rumored to occur after an Occidental jet was spotted parked at the airport in Omaha.
ESPN (Disney) will be shutting down its ESPN magazine after 21 years. “Sources told Sports Business Daily that the magazine has lost money for several years, ‘not close to a break-even proposition’.”, reports Seeking Alpha.
Honeywell announces that it will buyback $10 billion of stock under a new repurchase authorization, including a remaining $2.3 billion under its previously announced $8 billion buyback program.
Costco has announced that it is increasing the quarterly dividend by 14% from $0.57 per share to $0.65 per share. The board also announced a new $4 billion share buyback program.
Caterpillar has announced that it is increasing its quarterly dividend by 20% from $0.86 per share to $1.03 per share.
According to an SEC filing, GrubHub CEO Matthew Maloney recently purchased nearly $1 million of the company’s stock.
Cerner reports 1st quarter earnings of $0.61 per share on revenue of $1.39 billion, an increase of 7.8% year over year.
Starbucks reports fiscal 2nd quarter earnings of $0.60 per share on revenue of $6.31 billion, an increase of 4.6% year over year.
Restaurant Brands (Burger King’s parent company) reports 1st quarter earnings of $0.55 per share on revenue of $1.27 billion, an increase of 1.6%.
Spotify reports 1st quarter earnings of -€0.79 per share on revenue of €1.51 billion, an increase of 32.5% year over year.
Google reports 1st quarter earnings of $11.90 per share on revenue of $36.34 billion, an increase of 16.7% year over year.
Apple reports 1st quarter earnings of $2.46 per share on revenue of $58.02 billion, a decrease of 5.1% year over year. The company also announced that they are increasing the quarterly dividend by 5.5% to $0.77 per share and now has cash on hand of $225.4 billion, down $25 billion from the last quarter. BTW, sales of the Apple Watch increased 49% in the 1st quarter.
GrubHub reports 1st quarter earnings of $0.30 per share on revenue of $323.77 million, an increase of 39.2% year over year.
GlaxoSmithKline reports 1st quarter earnings of £0.30 on revenue of £7.66 billion, an increase of 6.1% year over year.
Square reports 1st quarter earnings of $0.11 per share on revenue of $489 million, an increase of 59.3% year over year.
Dine Brands Global reports 1st quarter earnings of $1.90 per share on revenue of $237.18 million, an increase of 26.1% year over year.
CVS Health reports 1st quarter earnings of $1.62 per share on revenue of $61.65 billion, an increase of 34.8% year over year.
Macquarie Infrastructure reports 1st quarter earnings of $0.73 per share on revenue of $482 million, an increase of 3.2% year over year.
Next week: Earnings from: Priceline (Bookings Holdings), PetMeds Express, Lyft, Disney and CenturyLink. Economic reports: Consumer Price Index (CPI) for April and Producer Price Index (PPI) for April.
WTI crude oil: $61.60 per barrel. 10-year U.S. Treasury note: 2.52%. Gold: $1,273 per ounce.
Sources: CNBC, Real Money Pro, First Trust Economics, 361 Capital, The Calafia Beach Pundit, Seeking Alpha, MarketWatch, Zero Hedge, Estimize.com, Morningstar, The Wall Street Journal, Bloomberg and MSN Money.
At the time of publication Cascade Investment Group and /or its clients owned shares of QCOM, ZM, TSLA, PINS, BHGE, DIS, SPOT, MAR, LYFT, F, AMZN, GOOGL, FB, NFLX, OXY, BRK, APC, CVX, HON, COST, CAT, GRUB, CERN, SBUX, QSR, AAPL, GSK, SQ, DIN, CVS, MIC, BKNG, PETS, CTL.
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.