Market Minutes for the week of August 27th:
“I can’t wish my opponent luck but I do wish him well.” – John McCain on Barack Obama at the 2008 Alfred Smith dinner.
Here’s what I’m thinking and hearing: 1.) The Market Realist: “I wrote last week that I did not think Trump’s legal woes would affect the market (SPY [S&P 500]) much. I also said two weeks ago that Turkey wouldn’t either. Macro worries are almost always overblown. So far, so good. Yes, volume is low, but market participation is broad and stocks are acting well. But, ultimately valuation will hit the market, and probably hit it hard. When I say valuation, I don’t mean it in a vacuum. A stock and market is only expensive relative to its forward growth rate. And I know, that will change. Companies will beat. Others will miss. But unless there is a huge economic problem, numbers are probably broadly too low, but not by a large factor.” 2.) Meanwhile, on the front lines of the trade war: The U.S. and Mexico have reached a trade agreement. President Trump said the deal would be called The United States-Mexico Trade Agreement, getting rid of the NAFTA name, and would be “very special” for U.S. farmers and manufacturers. It also appears likely that Canada will agree to a trade deal with the U.S. according to the Canadian American Business Council. 3.) In light of these recent trade breakthroughs, Brian Wesbury, chief economist at First Trust has an enlightening viewpoint on tariffs and taxes and why Trump has taken the stance that he has: “For decades the United States has, directly and indirectly, subsidized global growth. For example, after World War II, the U.S. provided direct economic aid to Western Europe with the Marshall Plan, while also helping to rebuild Japan. And since then, we have provided never-ending direct aid to foreign countries, which has been a constant political football. But in the economic scheme of things, the biggest subsidies have all been indirect. For decades the U.S. has held trade tariffs below those of most foreign countries. And until recently, the U.S. has maintained a corporate tax rate significantly above the world average. At the same time, the U.S. hindered, through regulation, its production of energy…The slowing of energy production in America became a direct subsidy to those who produce energy. Russia, Saudi Arabia and the Middle East, Venezuela and Mexico all benefited as the U.S. bought most its crude oil from overseas…But, more to the point, cutting the U.S. corporate tax rate to 21% and boosting tariffs on select countries and products is removing a huge subsidy to growth for the rest of the world. The U.S. is the dominant economy in the world and when it stops subsidizing foreign countries, who have not followed free market principles, economic pain spreads [in those countries]. The impact of all this is to put pressure on other countries to come back to the table and about more equal [and fair] trade. It also forces countries that previously were able to have high income taxes, huge government budgets and lots of red tape to rethink their fiscal polices. The global establishment have never been under attack like they are today. The world order is changing for the better.” 4.) Just as the market was finding its footing again with good trade news about Mexico and Canada, Trump threatens to pull the U.S. out of the World Trade Organization (WTO) if they don’t help him in dealing with tariffs from China, EU, Canada, Mexico and Turkey. Negotiating ploy? Maybe, maybe not. He has had a bone to pick the WTO because of its labeling of China as an “emerging” economy even though it has the second-biggest economy in the world and therefore allowed to charge higher tariffs than the U.S. It’s unfair for sure and maybe his real goal is to get China kicked out of the WTO if they don’t come to the table to negotiate fairer trade. 5.) Anyway, August has been a good month for equity investors with most sectors moving higher. The U.S. economy is the strongest anywhere in the world today. U.S. consumers and U.S. companies feel very confident about today and the future. The rest of the world realizes this too and I think U.S. stocks are benefiting from a global allocation shift out of emerging and developed international markets into U.S. equities. Can it continue? Maybe, as long as economic growth remains strong and earnings continue to grow in the 3rd and 4th quarters. I agree with the Market Realist, there will ultimately be a valuation adjustment, there always is, but unless there is a major economic problem around the corner, the U.S. market is fairly price and remains the best “house on the block.”
The Atlanta Fed’s GDPNow gauge raises the 3rd quarter GDP forecast to +4.6%.
The Commerce Department said that 2nd quarter GDP was revised higher to +4.2% from the initial reading of +4.1%.
The Conference Board reported that U.S. consumer confidence jumped to 133.4 in August from 127.9 in July to the highest reading in 18 years. The “Present Situation” index, a measure of current conditions, rose to 172.2 which is also the highest level since October 2000. The big picture says that rarely have Americans felt this good about the economy. “Millions of people have found work, layoffs have fallen to levels last seen in the late 1960s, incomes are rising and businesses are investing”, according to MarketWatch’s Jeffry Bartash.
The Bureau of Economic Analysis announced that consumer spending rose in July by 0.7% and has increased by 0.4% or more every month since March. In July, Americans spent more on hotels, eating out and prescription drugs.
The Fed said that its Personal Consumption Expenditures Index (PCE) rose by 0.1% in July and the 12-month increase for the index was 2.3% vs 2.2% in June. The PCE is the Fed’s favorite measure of inflationary trends because it is composed of a broad range of household expenditures and is also weighted by data acquired through business surveys, which tend to be more reliable than consumer surveys used by the CPI.
The Commerce Department said that the U.S. trade deficit widened in July by 6.3% to $72.2 billion, the highest level in five months as exports of capital and consumer goods declined. An advanced look at wholesale inventories estimated a 0.7% increase and retail inventories are forecast higher by 0.4%.
The National Association of Realtors (NAR) said that signed contracts to buy existing homes for July fell by 0.7%. The NAR Pending Sales index for July fell by 2.3% when compared with July of 2017, marking the 7th straight month of decline. A shortage of supply combined with sky-high prices continue to drive the decline.
The Case-Shiller Home Price Index/Composite 20 showed slower home-price growth again in June, rising 0.1% for a 6.3% year over year gain. Price growth is decelerating but prices are not declining. The West is still the best with Las Vegas showing a +13.0% year over year increase followed by Seattle +12.8%, San Francisco +10.7%, Denver +8.3% and Los Angeles +7.4%.
Many Californians who lost homes in the Santa Rosa and Napa fires last October have found themselves drastically underinsured because homeowners failed to update their polices annually to keep up with home price appreciation in those areas. In a number of cases, the shortfalls between what the insurance company will pay and what it cost to rebuild today, are running between $200,000 and $300,000. In Santa Rosa, the hardest hit city where entire neighborhoods burned to the ground, as of late August, only nine homes have been rebuilt and 520 are under construction out of the 2,700 homes that were lost, according to the city’s permitting office.
MarketWatch’s Alicia H. Munnell reports that, “The IRS released a private letter ruling that could make it easier for employers to use their 401(k) plans to assist their employees who are attempting to repay their student loan debt…The recently issued ruling affirmed that, under certain circumstances, an employer can link the amount of its 401(k) matching contributions for an employee to the amount of student loan repayments made by the employee outside of the plan.”
According to the Texas Energy Regulator, Texas oil production dropped in June for the first time in 16 months, an indication that the lack of pipeline capacity in the Permian Basin may be affecting production.
According to the Lundberg Survey, the average price of regular-grade gasoline decreased by $0.02 per gallon over the past two weeks to $2.91 and that’s more than 50% higher than last year at this time. Lundberg said that the price is likely to continue downward because refiners have increased capacity and demand is down.
Let’s be glad that we don’t live in Argentina. The central bank of the third-largest economy in Latin America just raised its short-term interest rate to 60% as inflation is running at 25.4% and its peso is down 45% against the dollar. The rate increase also comes after Argentina’s government unexpectedly asked the International Monetary Fund (IMF) for an early release of a $50 billion loan.
Sotheby’s said that they recently auctioned off the most expensive car in their history at $48 million at the Pebble Beach Concours d’Elegance. The 1962 Ferrari 250 GTO was owned by Greg Whitten, who joined Microsoft in 1979 as its 15th employee. The car was the third GTO Ferrari made and still maintains many of its original parts.
Denver International Airport (DIA) will soon become the 4th airport in the country to offer service to more than 200 destinations worldwide. There are currently nonstop flights to 175 destinations in 46 states and the District of Columbia, one destination short of Chicago O’Hare and Dallas Forth Worth (DFW).
Chipotle says that customers can now purchase their burritos and guacamole via the Chipotle app and website and have the meal delivered to their doorstep via DoorDash. The service is available in all 70 markets that DoorDash serves and includes over 1,800 Chipotle locations in the U.S.
According to data from CNBC’s latest study, Austin and Dallas, Texas have the strongest shot at landing Amazon’s $5 billion second headquarters. The other top contenders include Atlanta, Boston, Denver, Miami, Nashville and Northern Virginia.
According to Bloomberg, Amazon is in talks with Sony’s studio division and Viacom’s Paramount Pictures to bring more films to its streaming service. Amazon will spend more than $5 billion this year alone on video programming.
Morgan Stanley has raised its price target for Amazon to $2,500 per share. At that price, the valuation of the company would reach $1.2 trillion.
Toyota said it will invest about $500 million in ride-sharing service Uber as part of an agreement to work together on autonomous vehicle development.
According to the Wall Street Journal, Goldman Sachs and Silver Lake Partners had Volkswagen lined up as one of the investors willing to pitch in to help take Tesla private. The German automaker was said to be among the group willing to come up with the $30 billion in financing to do the deal before Musk changed his mind. The Ambien must have worn off.
Sky News said that Aston Martin is planning an IPO that will value the company at £5.1 billion or U.S. $6.4 billion. The 1964 Aston Martin DB5 is the car that James Bond drove in the movie “Goldfinger.” Current sales at Aston Martin are being powered by the $200,000 DB11 and the $300,000 Vanquish.
SurveyMonkey has filed for a proposed $100 million IPO with a currently undetermined number of shares and price range. The company lost $27 million on $121 million in sales in the 1st half of 2018. Hmmm. I don’t think I’ll snatch that one up right away.
According to Bloomberg, Apple will announce in September, three new iPhones, including one with the largest display ever in an iPhone with a 6.5-inch screen. All of the new iPhones are said to use Face ID, which lets you unlock the phone just by looking at it, instead of using a fingerprint reader.
Google’s Assistant and smart speaker will now be capable of allowing users to switch back and forth between two different languages and is the first of the popular platforms to introduce the bilingual mode. Users will be able to set their assistant to understand any pair of languages within English, German, French, Spanish, Italian and Japanese.
Goldman Sachs has teamed up with San Francisco-based startup HouseCanary to roll out a new tool that will help potential borrowers estimate how much an addition to a home will affect the value of the property. The tool is part of a home loan portal that the consumer banking side of Goldman introduced earlier this year.
Warren Buffett said that his Berkshire Hathaway had recent bought “just a little more” Apple following his earlier purchases that put his investment in the company at 5%. He also said that Berkshire Hathaway had begun to buy back “a little” of its own stock.
Microsoft said that it will begin requiring U.S. business partners and suppliers to offer paid family leave of up to 12 weeks a year at up to $1,000 per week. Microsoft will assist partners in complying with the policy and realizes the potential increase in cost to the company.
The Defense Department said that Boeing has won a major contract to build new MQ-25A Stingray drones for the U.S. Navy that will fly from aircraft carriers to refuel combat jets. The initial contract is for four drones with an additional 72 drones in the future that could bring the total contract value to about $13 billion.
Enbridge Energy Partners has announced that it will acquire Spectra Energy Partners for $3.3 billion in an all stock deal. Spectra Energy shareholders will receive 1.111 shares of Enbridge for each share of Spectra.
DexCom has purchased diabetes management solutions developer TypeZero Technologies for an undisclosed sum.
VMware has announced that it will acquire startup CloudHealth, a software platform that lets companies juggle different public cloud vendors like Amazon Web Services and Microsoft’s Azure. The amount was not disclosed but Reuters said that VMware would have paid roughly $500 million.
Salesforce.com reports 2nd quarter earnings of $0.57 per share on revenue of $3.2 billion, an increase of 27.1% year over year.
Box reports 2nd quarter earnings of -$0.05 per share on revenue of $148 million, an increase of 20.5% year over year.
Hewlett Packard Enterprises reports fiscal 3rd quarter earnings of $0.44 per share on revenue of $7.8 billion, an increase of 4.0% year over year.
Next week: Earnings reports from: Broadcom, Workday and Restoration Hardware. Economic reports: U.S. Purchasing Manager’s Index for August, ADP Private Payrolls for August, U.S. Non-Farm Payrolls for August, ISM Non-Manufacturing Index for August and U.S. Manufacturing Index for August.
WTI crude oil: $70.30 per barrel. 10-year U.S. Treasury bond: 2.86%. Gold: $1,210 per ounce.
RIP: John McCain, Robin Leach, Neil Simon and Ed King (guitarist for Lynyrd Skynyrd and co-song writer of “Sweet Home Alabama”).
Brian Wesbury, chief economist for First Trust: “Since March of 2009, the predictions of economic, and stock market collapse have been non-stop. Doom-and-gloomers have been unrelenting. And it’s doubly frustrating since you can’t disprove a negative until it doesn’t happen.”
Sources: CNBC, Real Money Pro, Seeking Alpha, MarketWatch, 361 Capital, First Trust Economics, Bloomberg, The Wall Street Journal, Estimize.com, The Market Realist, The Calafia Beach Pundit and Real Investment Advice.
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.