“Comedy is tragedy plus time” – Steve Allen
Note: This will be the last edition of Market Minutes until September 23rd. The author will be out for two weeks.
Here’s what I am thinking and hearing: 1.) One of the most controversial topics to come out of last week’s news flow appears to be a decision from the Business Roundtable CEOs where almost all of the participants signed a statement saying that they were no longer going to run their companies with the primary goal of serving shareholders first. Instead, CEOs would lead their companies to benefit all “stakeholders,” including “customers, employees, suppliers, communities and shareholders.” The Business Roundtable is a 47-year old, 200-member organization, chaired by JP Morgan CEO Jamie Dimon. Brian Wesbury, chief economist at First Trust doesn’t like it: “This is an outright rejection of what’s come to be known as the Friedman Doctrine, named after free-market icon, Milton Friedman, which suggests that a firm’s only objective should be to act on behalf of its shareholders. In turn, if shareholders want to use their wealth to pursue pet personal or social causes, they’re free to do so themselves with their earnings from corporate profits. ‘Insofar as a [corporate manager’s] actions, in accord with his ‘social responsibility’, reduce returns to shareholders, he is spending their money’ Friedman wrote.” *2.) According to the Sunday Times, Queen Elizabeth is upset with President Trump. Apparently, the president’s helicopter Marine One, left scorch marks and divots on the lawn at Buckingham Palace when it landed twice in one day during the June D-Day celebrations. Apparently, her lawn at the palace is the centerpiece of her annual garden parties and when Australian PM Scott Morrison visited the Queen during the D-Day anniversary, she took him directly out to the gardens and said: “Come look at my lawn. It’s ruined.” The poor old “Orange Swan,” he is getting it from every angle. *3.) From the front lines of the trade/cold war: Tweets, tweets and more tweets. Trump says that China called him over last weekend to restart negotiations. China says that no one from China called Trump in an attempt to get talks going again. Someone isn’t telling the truth here. From the Chinese Ministry of Commerce: “We firmly reject an escalation of the trade war, and are willing to negotiate and collaborate in order to solve this problem with a calm attitude.” Gauti Eggertsson is a Brown University economics professor and a former New York Fed economist. He attended last week’s Fed sponsored global central banker’s powwow in Jackson, Wyoming and here was his takeaway: “The big policy uncertainty now, of course, is Trump. It’s obvious…When Powell was giving his speech, I could see everybody on their iPhones, refreshing Twitter, waiting for the tweet from Trump…The most powerful central bankers in the world, all in the same room, would – rather than listen to Powell, they’re checking on Twitter waiting for when Trump is going to tweet.” Josh Bolten, the president CEO of the Business Roundtable said that many CEOs were already “poised right on top of the brake.” Mr. Bolten said the president’s latest moves could “disrupt trade and commerce in a way that would cause huge damage – not just to the Chinese economy, but to the global economy and the U.S. economy…The risk is that everybody’s going to slam on the brake, and that would be a disaster.” *4.) From Dr. Ed Yardeni of Yardeni Research: “President Donald Trump seems to be playing simultaneous games of chicken with Fed Chair Jerome Powell and Chinese President Xi Jinping. Last Friday, he raised tariffs again on U.S. imports from China and ordered U.S. companies to leave China. He also said that Fed Chair Jerome Powell is a greater enemy than Xi. Trump’s game plan is to create more uncertainty about trade, thus increasing the risks for U.S. economic growth so that the Fed will have to respond with more interest rate cuts. At the same time, he hopes that Xi will relent by agreeing to a trade deal that is good for the U.S. economy. Games of chicken are often reckless and dangerous, with dire consequences. The S&P 500 tumbled 2.6% last Friday. In the classic movie “Rebel Without a Cause” (1955), Jimmy (played by James Dean) agrees to a “chicken-run” to settle a dispute with Buzz, the leader of a local gang. Both race stolen cars towards the edge of a cliff. The first to jump out is branded a “chicken.” Jimmy flings himself out an instant before the cars reach the edge of the cliff. Seconds into the race, Buzz discovers that his jacket is stuck on the door handle. So he goes over the cliff and dies. The question for all of us is whether Trump is Jimmy or Buzz. Is Trump trumping Powell and Xi, or is Trump trumping Trump?…Welcome to the New Abnormal, where everyone loses their minds! Trump has the amazing ability to make sane people go insane.” *5.) Along those lines, on Tuesday, former New York Fed President Bill Dudley penned an opinion piece on Bloomberg News. He suggested in the article that the Fed should not “enable” President Trump by offering to offset economic negatives from tariffs with easier monetary policy. Tom Graff, senior fixed income strategist at Brown Advisory says: “Dudley is in effect arguing that the Fed should commit a dereliction of duty because they disagree with a political decision. The Fed’s independence has not been under this much threat since the Nixon days. Following Dudley’s advice would actually give the president reasonable cause to fire Powell and/or politicize the Fed even more than he is now. Beyond that, the members of the Fed take their congressional mandate extremely seriously. I can’t imagine a single one of them seriously considering Dudley’s idea.” *6.) According to the Taiwan News, supporters of the Hong Kong protests, including the Taiwanese Democratic Progressive Party and Wang Ting-yu, are praising former Cathay Pacific CEO Rupert Hogg for taking a principled stand and protecting his employees at the expense of his own position. According to local Hong Kong media reports, Beijing authorities asked Hogg to hand over a list of Cathay Pacific employees who had taken part in the anti-extradition bill protests in Hong Kong. Instead of betraying his employees and endangering their safety, he only provided a list with one name on it – his own.” *7.) Indianapolis Colts quarterback Andrew Luck, surprisingly and suddenly retired from pro football last Saturday at the age of 29. Walking away from $60 million over the next three years, Luck said his body could no longer take the weekly pounding that the 16-week NFL season dishes out. “It’s taken my joy of this game away” he said. When asked by longtime Washington Post sportswriter John Feinstein what’s next, Andrew Luck said: “Honestly, I think I could be very happy teaching high school history.” Good for you Andrew!
The Commerce Department said that the U.S. trade deficit for July narrowed to $72.3 billion from $74.2 billion in June. Exports were higher fueled by consumer goods exports. Imports were lower led by fewer capital goods imports.
The Conference Board reported that U.S. consumer confidence fell slightly in August to 135.1 from 135.8 in July. The Present Situations Index rose to the highest level since late 2000.
The University of Michigan consumer sentiment index for August fell to 89.8 from 98.4 in July, the largest monthly drop since December of 2012. Trade war worries were to blame.
The Commerce Department said that consumer spending in July rose by 0.6% as Americans spent more on cars, trucks and recreational vehicles. Personal incomes rose by 0.1% and the savings rate fell to 7.7% from 8.0% in June.
The Fed’s Personal Consumption Expenditures Index (PCEI) rose by 0.2% and has increased by just 1.4 in the past year. The PCEI is the Fed’s preferred inflation measurement tool.
The Chicago purchasing manager’s index rose to 50.4 in August from 44.4 in July. Any reading above 50 represents expansion.
The S&P CoreLogic Case-Shiller national home price index rose by 3.1% in June, down from +3.3% in May. The 10-City Composite increased by 1.8%, down from +2.2% in May. The 20-City Composite rose by 2.1%, down from +2.4% in May. All told, home prices rose by 5.0% in the 2nd quarter from the 2nd quarter a year ago. Once again, Phoenix, Las Vegas and Tampa reported the highest annual price increases of the 20-city index.
“The collective amount of money borrowers could pull out of their homes, while still retaining 20% equity, hit a record high $6.3 trillion in the second quarter of this year, according to a new reading from Black Knight, a mortgage data, technology and analytics company…The total is 26% more than the mid-2006 peak of $5 trillion, reports CNBC.
The National Association of Realtors (NAR) said that pending home sales fell by 2.5% in July. The drop follows two straight monthly gains. Pending sales were lowest in the West, down 3.4%.
The Commerce Department said that July durable goods orders rose 2.1%, the second straight monthly increase. Orders were led by transportation, up 47.8%, mainly from Boeing’s orders for aircraft and parts. A key metric, orders for non-defense capital goods, rose by 0.4% in the month.
According to the Wall Street Journal, “companies in the S&P 500 repurchased about $166 billion of their own stock in the second quarter,…down from $205.8 billion in the first quarter and $190.6 billion in the same period a year ago…That is a sign that corporations are potentially tightening their wallets as executives grapple with new tariff threats in the long-simmering trade dispute with China; weakening corporate earnings; signs of a downturn in global growth; and uncertainty over the Federal Reserve’s interest-rate policy. ”
According to Brian Wesbury, chief economist at First Trust, the U.S. exported $171 billion worth of goods to China in the four quarters ending in Q1 (the most current data available), representing about 7% of total U.S. exports. By contrast, about 12% of U.S. exports went to Mexico, 14% to Canada and 23% to the European Union. The trade war is far and away tougher on the Chinese economy than is ours.
The Baker Hughes weekly drilling rig survey showed that the number of active drilling rigs fell by 19 in the last week for a total of 916. Oil rigs shed 16 down to 754, the lowest total since January of 2018. Natural gas rigs fell by 3 to 162. A year ago, there were a total of 1,044 rigs working, 860 oil and 182 gas.
On Monday, an Oklahoma judge ruled against Johnson & Johnson in a landmark opioid distribution case. J&J was ordered to pay the state $572 million for misleading marketing and promotion of opioids, finding those actions compromised the health and safety of thousands of Oklahomans. Although I applaud the judge’s ruling, the state of Oklahoma was seeking more than $17 billion from J&J. The fine could have been stronger.
On Tuesday, Purdue Pharma and the Sackler family offered between $10 and $12 billion to settle with 10 state attorneys general and plaintiffs, the collective case which accuses the company and family members of starting and sustaining the opioid crisis. Mediation continues.
Cowen health-care analyst Dr. Josh Jennings says in reaction to the J&J opioid ruling: “I don’t think anyone in the health-care community can honestly look in the mirror and say opioids weren’t addictive and it wasn’t known clearly…As a resident in 1998 to 2002, in my intern year, I knew opioids were addictive…In emergency rooms, 40% of my patients were coming in seeking opioids…It’s one of the reasons I left clinical medicine, actually.”
CNBC reports, “Shoe retailer, Cole Haan, is preparing for an IPO. The company is currently owned by private equity firm Apax Partners, which purchased Cole Haan from Nike in 2013.”
Peloton, best known for its exercise cycles and treadmills, intends to go public later this year. According to financials filed with the Securities and Exchange Commission, the company reported sales of $915 million for the fiscal year ended June 30th, 2019, up from $435 million in fiscal 2018. For 2019, the company’s fiscal loss widened to $245.7 million from $47.9 million in 2018.
Philip Morris has confirmed that it is having discussions with Altria regarding a potential all-stock, merger of equals.
Amgen has agreed to acquire Celgene’s Otezla business for $13.4 billion in cash. Otelza accounted for 11.2% of Celgene’s revenues in the 2nd quarter.
KFC has announced that its Atlanta, Georgia roll out of a plant-based fried chicken “Beyond Fried Chicken,” supplied by Beyond Meat, sold out in 5 hours. Plans to roll-out to other locations should begin soon based on the success of the Atlanta rollout. Beyond Meat has announced deals with other chains like Subway, Del Taco and Dunkin’.
Ollie’s Bargain Outlet reports 2nd quarter earnings of $0.35 per share on revenue of $333.87 million, an increase of 15.9% year over year.
Workday reports 2nd quarter earnings of $0.44 per share on revenue of $887.8 million, an increase of 32.2% year over year.
Next week: Earnings from: DocuSign and Zoom Media. Economic reports: U.S. Purchasing Manager’s Index for August, ADP Private Payrolls for August, U.S Non-Farm Payrolls for August and ISM Non-Manufacturing Index for August.
WTI crude oil: $56.53 per barrel. 10-year U.S. Treasury note: 1.52%. Gold: $1,538 per ounce.
Sources: CNBC, Real Money Pro, 361 Capital, First Trust Economics, Seeking Alpha, MarketWatch, The Wall Street Journal, Zero Hedge, Bloomberg, The Calafia Beach Pundit, Ritholtz Wealth Management and The Business Insider.
At the time of publication Cascade Investment Group and /or its clients owned shares of: JPM, BA, BHGE, JNJ, NKE, PM, MO, AMGN, YUM, DNKN, OLLI, WDAY, DOCU, ZM.
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.