Market Minutes for the week of December 10th:
“Hatred corrodes the container it’s carried in and humor is the universal solvent against the abrasive elements of life.” – Former Senator Alan Simpson (Republican – Wyoming) from his eulogy at the funeral for George H.W. Bush.
Here’s what I am thinking and hearing: *1.) Billionaire hedge fund manager and founder of Omega Advisors Leon Cooperman hears me, speaking to CNBC: “I think your next guest ought to be somebody from the SEC to explain why they have sat back calmly, quietly, without saying anything and allowing these algorithmic, trend-following models to wreak havoc with what has, up to now, been the best capital market in the world.” Former floor trader and president of Sarge986 LLC hears me: “Something needs to change…Now, as volatility has exploded, it has become all too apparent that the speed of not only execution but also the speed with which these algorithms can cancel one side or the other, causes excessive imbalances, and thus overshoots in both directions…Something is going to have to change in order to re-establish the public trust, and to indicate that markets can function well, in a stabilized fashion more often than not.” Marko Kolanovic, global head of macro quantitative and derivatives research for J.P. Morgan shared his thoughts with CNBC, “Automated trading strategies from quant hedge funds and the massive shift to passive investing have helped to remove liquidity from the system in times of panic…index and quant funds made up two-thirds of assets under management globally and the majority of daily trading.” Jim Cramer hears me: “This economy is either going from 90 mph to minus 30 mph, or this stock market isn’t functioning right. I am usually reluctant to say the market isn’t functioning right. But we all know it isn’t…The algorithms are the machines now and they are overwhelming everything, very ’87-like and, like 1987, no one seems to know how to shut them off, least of all the government.” Institutional Investor Hall of Famer and legendary Wall Street analyst Richard Bernstein sees a disconnect as well: “The fundamentals really don’t argue for a bear market. In fact, I would even argue the fundamentals don’t argue for the correction we are seeing.” *2) From the frontlines of the trade war: J.P. Morgan’s Marko Kolanovic estimates that the destabilizing impact of Trumps trade policies has shaved about 10% off the return of the S&P 500 in 2018. GoPro announced it is moving production of U.S.-bound cameras out of China to avoid being caught up in the tariff fight. International-bound camera production will however remain in China. The trade war is really beginning to hurt the Chinese economy. Chinese export growth slowed dramatically in November as the effects of shipment frontloading ahead of the tariffs has started to unwind. Chinese automobile sales fell 14% to 2.55 million units to mark the fifth straight month of declining volume in the region. Total vehicle sales in China for 2018 are on track for the first annual decline since 1990. Industrial output in China fell to a 3-year low, and retail sales rose at the weakest pace since 2003. Beijing is reportedly planning to scale back its “Made in China 2025” policy that will allow foreign countries greater access to its economy by eliminating the currently required joint venture policy. U.S. grain traders say Chinese state-owned companies have recently bought at least 500,000 metric tons ($180 million) of soybeans from U.S. producers, the first major purchase since President Trump and President Xi met earlier this month. The New York Times and sources close to the investigation say that the Chinese government was involved in the hacking of 500 million Marriott customers over the past four years. *3.) In an interview after his appearance before Congress where he had to repeatedly explain that Google doesn’t make the iPhone, Google CEO Sundar Pichai said that more conversations need to happen between Mountain View (Calif.) and Washington. *4.) Is a Santa Claus rally coming to town? According to the latest American Association of Individual Investors survey, pessimism among retail investors is at the worst level in about 5½ years. Bulls fell by 17 points last week to 20.9%, the lowest reading since 2016, while the bear camp rose to 48.9% for the highest reading since April 2013. Over the years the AAII survey has been a reliable contrarian indicator. Although pessimism among retail investors is high, opportunity seems to be knocking for corporate insiders who are buying their stock with both hands at levels seen only five other times in the past decade. An open insider Buy/Sell ratio of 152.0 in each prior case has occurred at or near market bottoms. *5.) Nothing like price to change sentiment. According to Lipper Analytics, “U.S.-based stock funds posted a $46 billion outflow in the week ended Wednesday; the largest withdrawals on record, dating back to 1992. U.S.-based money market funds attracted $81 billion [in the week ended Wednesday, the] largest inflows on record dating back to 1992.” Hmmm, Santa Clause could be coming to town.
The Bureau of Labor Statistics said that producer prices (PPI) for November rose by 0.1% for an annualized rate of 2.5%. Consumer prices (CPI) were unchanged in November for an annualized rate of 2.2%. Prices were held in check by a sharp decline in gasoline prices. November’s reading on inflation is the lowest in eight months.
The Commerce Department reported that November retail sales rose by 0.2%, but excluding gasoline, the rise was 0.5%. October retail sales were revised higher to 1.1% from 0.8%. The strength bodes well for a good 4th quarter GDP number.
The Federal Reserve announced that industrial production rose by 0.6% in November while capacity utilization held steady at 78.5%. Most of the gain in production came from utilities.
The Job Openings and Labor Turnover Survey (JOLTS) showed that job openings stood at 7.08 million for October, the second-highest level on record.
The Atlanta Fed’s GDPNow model is now showing Q4 real GDP growth of 2.4%, down from its prior forecast of 2.7% based on a lower contribution from inventory investment.
The Federal Reserve said that consumer credit in October grew at the fastest rate in 11 months. Consumer credit rose by $25.38 billion or at an annual rate of 7.7% in the month. Revolving credit such as credit cards grew by 10.7% and non-revolving credit like student and auto loans grew at a 6.7% rate for October.
St. Louis Fed president James Bullard has become the first central banker to say that the Fed could consider a delay in the anticipated December rate hike. He cited the inverted yield curve as the reason for his caution.
Real Money Pro author Tom Graff: “Hear again I encourage readers to think like the Fed and not like a trader. Data dependent to them is going to mean ’is unemployment still falling?’ Not ‘are company earnings growing?’ If they really only care about the former, they will be hiking until unemployment is rising, and by then it is likely that they’ve caused enough economic damage that it’s too late to avoid a recession. The bottom line is this: A more data dependent Fed is just a less predictable Fed, it isn’t a more dovish Fed.”
According to CNBC, “tightening financial conditions and intensified skittishness over trade will cause the Federal Reserve to follow a less aggressive path when it comes to hiking rates [in 2019]…[Goldman Sachs] economists still think the market has it wrong on Fed policy, and they see three increases in 2019.” They went on to say that a December hike has a 90% chance of occurring, another move in March now seems unlikely.
CoreLogic reports, the average homeowner with a mortgage saw an increase of $12,400 in home equity (price appreciation plus mortgage balance pay-down) between the third quarter of last year and the end of the third quarter of this year. That number is down from the second quarter year over year gain of $16,000 and is the smallest gain in two years. California accounted for almost 75% of the decline in tappable equity.
According to Attom Data Solutions, the house-flipping game has cooled dramatically. For the third consecutive quarter, flipping volume has declined and the average return has crashed to a six-year low. A total of 45,901 homes and condos were flipped in the 3rd quarter, a 12% drop from a year ago.
Despite investor worries, top CEOs told the CNBC Business Roundtable last week that they don’t see an economic downturn on the horizon. Despite worrisome indicators such as an inverted yield curve, J.P. Morgan CEO Jamie Dimon, AT&T CEO Randall Stephenson and Boeing CEO Dennis Muilenburg were overwhelmingly optimistic on the state of the economy. Randall Stephenson: “It feels like we’re almost talking ourselves into a downturn.” Boeing CEO Dennis Muilenburg: “We think about the tax reform passed last year, ripple benefit to our economy is extraordinary. The biggest thing we’re doing with that tax reform benefits is we’re plowing it back into innovation and R&D. That’s creating jobs and that’s creating competitive advantages.” Jamie Dimon: “[Clouds] have always been there…People act like buying back stock is a bad thing. It’s not. We have to educate the American public and my Democratic friends about how that benefits America.”
Baker Hughes said that the total count of active drilling rigs in the U.S. edged lower by 1 to 1,075. Oil rigs fell by 10 to 877 but gas rigs rose by 9 to 198.
The U.S. Energy Information Administration has cut its 2018 and 2019 forecasts for WTI and Brent crude oil prices and increased its forecast for U.S. production. According to the EIA monthly report, the WTI 2018 price is expected to average $65.18/bbl., down 2.4% from its November forecast and for 2019, the EIA forecasts $54.19 /bbl., down 16.4% from 2018. Brent crude is pegged at $61.00/bbl. for 2019. The EIA expects the U.S. to produce 12.06 million barrels per day of oil in 2019 up by 1.18 million barrels per day in 2018.
The Japanese economy decelerated by 2.5% in the third quarter, more sharply than the forecasted decline of 1.2%. The decline was blamed on weaker-than-expected capital spending by companies impacted by the U.S.-China trade dispute.
According to a study by Georgetown University and NYU’s Stern School of Business, college and university endowments have “badly underperformed” the market benchmarks. In a sample of 28,000 endowment funds, the median annual return for the entire sample was just 3.75% or 1.14% below the 10-year Treasury note and 5.53% below the standard annual return for a 60% equity – 40% bond allocation.
At $39 billion, Harvard University’s endowment is the largest in the world. According to Reuters, over the past 5 years the endowment’s wholly-owned subsidiary Brodiaea, has been quietly buying vineyards and farmland in Santa Barbara and San Luis Obispo counties. The investments which went on the books at $60 million, are now worth according to the endowment, $305 million. Why the wonderful return on investment? Apparently, the vineyards sit on top of massive underground aquifers which Brodiaea has acquired the water rights to.
According to Business Insider: “The U.S Farm Bill passed on Wednesday legalizes hemp, a plant that is roughly identical to marijuana and is a key source of the highly-touted wellness ingredient CBD. The move alters the language of a major drug law that had previously remained unchanged for half a century. The new bill exempts hemp from that law and defines it as an agricultural product. That means farmers and researchers of hemp now get some of the same benefits as farmers and researchers of other crops, like the ability to apply for insurance and federal grants.”
Seeking Alpha reports: “Online retail sales for the period of November 1 to December 6, was up by 18.6% year over year for a total of $80.30 billion, according to tracking by Adobe Analytics…The number of shoppers who bought items online to be picked up in store was up 46% from a year ago…Sales from smartphones were up 55% to $23.7 billion during the period.”
According to a recent survey by Finder.com, American workers said that they spend on average 1.7 hours per work day shopping online while on the clock. Overall 57% (2,000 polled) confessed to shopping while at work which amounts to a total of 234 million hours per day browsing the internet.
Apple has said that it has hired between 40 and 50 doctors in recent years as it continues to push further into healthcare. “The hires could help Apple win over doctors – potentially its harshest critics – as it seeks to develop and integrate its health technologies with the Apple Watch, iPad and iPhone”, reports CNBC.
Apple has announced that it will invest $1 billion in a new campus in Austin, Texas. CNBC says, “The 133-acre campus will be located in North Austin and will accommodate an initial 5,000 employees, with the capacity for 15,000 employees total.” The company also said that it will open new sites in Seattle, San Diego and Culver City, Calif. over the next three years.
More from CBNC: “Delta Air Lines has been quietly offering it most restrictive tickets to loyal travelers on some routes. Delta has been offering SkyMiles members no-frills basic economy award tickets, along side those for standard coach class and first or business class.”
For “simplicity” reasons, Delta Air Lines has announced a new boarding process that consists of 8 categories based on the type of ticket purchased. Delta “One” (elite) passengers board first, followed by Delta “Premium” economy and first-class, followed by Delta “Comfort +” in coach and other lower tier frequent flyer elites. The following and final four boarding calls will be for low-cost, no-frills fliers.
Delta Air Lines has also announced “…it will ban all emotional-support animals on flights longer than 8 hours and will ban all service and support animals under 4 months of age on flights no matter the duration”, reports MarketWatch.
According to Seeking Alpha, “Wells Fargo must continue to restrict its growth until the bank has hardened its risk management policies…Wells Fargo has so far failed to satisfy the Fed and is months behind on submitting an acceptable reform plan.”
Starbucks has said that through a partnership with Uber Eats it anticipates delivery to about 25% of its stores across the U.S. by the end of the second quarter of 2019. A delivery program in China is already in place.
Costco reports fiscal 1st quarter earnings of $1.61 per share on revenue of $35.07 billion, an increase of 10.3% year over year. Costco also said that sale store sales increased by 7.5% in the 3rd quarter and e-commerce sales jumped by 26.2% during the quarter.
Adobe Systems reports 4th quarter earnings of $1.87 per share on revenue of $2.42 billion, an increase of 21.0% year over year.
Stitch Fix has reported fiscal 1st quarter earnings of $0.10 per share on revenue of $366.24 million, an increase of 23.9% year over year.
Next week: Earnings from: Oracle, FedEx, Paychex, General Mills, Accenture, Nike and ConAgra. Economic reports: FED’s Empire District Manufacturing Survey for December, Philly FED’s Manufacturing Survey for December, U.S. New Home Starts for November, U.S. Existing Home Sales for November, U.S. Leading Economic Indicators for November and U.S. Durable Goods Orders for November.
WTI crude oil: $51.50 per barrel. 10-year U.S. Treasury note: 2.91%. Gold: $1,248 per ounce.
Sources: Real Money Pro, CNBC, Bloomberg, 361 Capital, The Wall Street Journal, Seeking Alpha, MarketWatch, First Trust Economics, Morningstar, Estimize.com, Reuters, Business Insider and ZeroHedge.
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.
At the time of publication Cascade Investment Group and /or its clients owned shares of GS, JPM, T, BA, ADBE, AAPL, WFC, SBUX, COST, SFIX, GOOG, BHGE
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.