Market Minutes for the week of December 17th:
“Common sense is not too common” – Voltaire
Here’s what I am hearing and thinking: *1.) What is going on? Where the heck is Santa Claus? What’s driving this action is negative price momentum (profound Ken). Seriously, the selling is feeding on itself and that is all that matters. The individual merits of stocks are irrelevant and the fact that some stocks are extremely cheap doesn’t matter. What matters is that people are afraid of losing even more money, so they are selling to escape the misery, while the illiquidity created by algorithms and ETFs is only making matters worse. *2.) The three legs of the stool are well intact. The Fed seems aware of the consequences of getting too tight after the December rate increase. Corporate profits remain strong (Monday alone, 4 major U.S. companies announced share buybacks and dividend increases) and those profits are forecast to be up 8% to 9% in 2019. The major banks are well capitalized and very healthy. Remember, algorithms and risk parity strategies are agnostic to economic and company fundamentals, they are what continues to drive this action and it is creating some absurd pricing of great companies. *3.) As we have seen over the years, sometimes “liquidity events” happen for no real fundamental reason. They become technically driven. Now seems to be one of those times where there is no solid fundamental economic reason for such a decline. Economist Scott Grannis of the Calafia Beach Pundit (see chart at the end of Market Minutes): “Compare truck tonnage with equity prices. Here we see a dramatic divergence between physical activity and the mood of the stock market. Financial markets appear to be completely out of step with the economy’s physical fundamentals.” Doug Kass founder of Seabreeze Partners: “The accumulation of fear and the response in bearish investor sentiment – while not perfect timing influences – may set the stage for the aforementioned end of the year advance. When lemmings sell in response to the Fed’s comments and actions, that’s when we should consider buying.” Bargains seem plentiful now and could be rewarding purchases in the future for the courageous. *4.) Warren Buffett has been know to pull out a 19th century Rudyard Kipling poem during times like this and the last time was when he put it in his 2017 Berkshire Hathaway newsletter: “ If you can keep your head when all about you are losing theirs…If you can wait and not be tired by waiting…If you can think – and not make thoughts your aim…..If you can trust yourself when all men doubt you…Yours is the Earth and everything that’s in it.” More Buffett: “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.” *5.) More on algorithms, ETFs and high frequency trading: Treasury Secretary Steve Mnuchin says that there is a simple reason for the worst December for the stock market since the Great Depression. The Volker Rule (banning banks from trading for their own accounts) and algorithmic high frequency trading have sapped liquidity from the markets and inserted unprecedented volatility. Gary Smith from his new book The AI Delusion: “Computers can do many difficult tasks (like calculating cube roots and searching the Internet) much better than humans, but computer ‘intelligence’ is very different from human intelligence in that computers do not have the common sense, wisdom, and critical thinking skills that humans have accumulated by living. Stock trading algorithms are particularly dangerous because computers are so efficient at discovering statistical patterns – but utterly useless in judging whether the discovered patterns are meaningful or merely coincidental and therefore fleeting and useless.” How do we kill high frequency, algorithmic trading? If the SEC doesn’t care to lend a hand, then other options include making it illegal to sell a stock unless it is held for some amount of time – a minute maybe. A tax of a $0.01 per trade would slow things down. And hey SEC, how about bringing back the “uptick” rule you thought was such a good idea to get rid of! *6.) More from the front lines of the trade war: About 1.4 billion pounds of cheddar, American and other cheeses is socked away in cold-storage warehouses across the country, bringing the stockpile of cheese to the biggest level since federal record keeping began over a century ago. Cheese exports have suffered since Mexico and China began putting tariffs on U.S. cheese. This from Zero Hedge: “China’s holdings of U.S. Treasuries fell to the lowest level since mid-2017 as the world’s second-largest economy sold U.S. reserves to stabilize the yuan which has been depreciating in recent months due to the ongoing trade war.” *7.) Everything Federal Reserve Chairman Jerome Powell touches turns to “sold.” According to Bloomberg, “The S&P 500 Index has declined on all seven days the Fed has announced policy decisions during Powell’s tenure as head of the U.S. central bank, which began in February…that’s the longest such losing streak [of any Fed chairman] on record.” I wonder if President Trump is regretting his decision to “trade-in” Janet Yellen for Jerome Powell. *8.) Not only did the Fed raise the short-term lending rate by 25 bps to a range of 2.25% to 2.50%, they didn’t consider pausing their rate hikes to give the economy a breather. They instead, said that they see 2 increases in 2019 as opposed the previously announced 4 as they see the economy growing at 2.3% vs their previous estimate of 2.5%. Adding insult to injury, QT (quantitative tightening) will remain in place in 2019 with another $600 billion coming off the balance sheet. This is truly not the news the markets (which are already in a bad mood) wanted to hear. *9.) Tom Graff, head of fixed income Brown Advisory, once again helps us to understand what the Fed is thinking: “If you look only at hard economic data: things like unemployment, inflation, retail sales, etc., there isn’t much case to stop hiking rates. The items that have shown slight weakness (housing starts, jobless claims, core inflation) are either too volatile to draw much conclusion or the move is too small to get excited about. In other words, if not for the weakness in financial markets, these sporadic weaker data points wouldn’t be getting much attention. So then the debate at the Fed comes to which to believe? The 3.7% unemployment rate or the 13% decline from the peak in the S&P 500? For today, the hard data won out. However, I’d say more broadly that the Fed tends to prefer hard data to “feeling the market.’ That isn’t to say they ignore the market, but I think readers would be wise to assume that until the hard data turns, the Fed is predisposed to continue hikes.” *10.) How bad of a year has it become since October 4th when Fed chairman Powell lit the match with his speech? Of the 15 major asset classes ranging from stocks to bonds to REITS to gold and commodities, only one is higher in 2018: cash (see the chart at the end of Market Minutes). In summary, I have been in the business of investing money for 36 years and rarely have I felt a market so far out of step with economic fundamentals as this current one. Common sense is not too common. Extremely frustrating.
On a brighter note, all of us at Cascade Investment Group would like to wish you a most warm and merry holiday season. As another year draws to a close, we thank you, our clients, for your ongoing trust, confidence and loyalty. Who knows what 2019 has in store for all of us, but we wish for you, our clients, VACU (visibility and ceiling unlimited) in the year to come.
There will be no Market Minutes for the week of December 24th and December 31st but will resume on January 7th.
The National Association of Homebuilders/Wells Fargo Housing Market Index declined 4 points in December to 56, the lowest reading since May 2015.
The Commerce Department said that November housing starts totaled 1.256 million annualized, 28,000 more than forecast. Multi-family starts rose by 79,000 while single-family housing starts fell by 40,000, down more than 13% from a year ago at this time.
The National Association of Realtors (NAR) announced that sales of U.S. existing homes rose unexpectedly in November by .10% to an annual rate of 5.32 million units. The sales increase followed another uptick in October but still sales of existing homes are down by 7.0% from November a year ago.
From Zero Hedge: “10,000 single-family homes were on the market and by the end of November, 7,000 of those homes had zero offers, up 54% compared to 2017 and the highest number of homes in the Las Vegas Valley to not get a bid in more than two years.” According to the latest CoreLogic Case-Shiller index, prices in Vegas were up greater than twice the national rate increase in September at 13.5% year over year.
The Commerce Department said that durable goods orders rose by 0.8% in November, driven almost entirely by spending on military aircraft. The core rate (excluding transportation), actually fell by 0.6% but nonetheless, a much better reading than October when durable goods fell by 4.3%.
The University of Michigan Consumer Sentiment Index for December registered a final reading of 98.3 vs a forecasted 97.2 but worries over employment were of more concern than the falling stock market.
The Bureau of Economic Analysis reported that consumer spending increased by 0.3% in November and personal incomes increased by 0.2% in the month.
Share repurchases during the 3rd quarter jumped by 58% from a year ago to a quarterly record of $203.8 billion, marking the third consecutive quarterly record. The top share repurchases were from Qualcomm at $21.1 billion and Apple at $19.4 billion.
According to Ned Davis Research Group, for the first time since 2011, more than half (56) banks across the world are tightening their interest rate policy by either raising short-term interest rates or conducting some kind of QT (quantitative tightening) of their own.
Jim Cramer: “I talk to an endless number of business people who have businesses both here and abroad and I always bring up tariffs with them. The tariffs do matter. But they are much more concerned with rate hikes, particularly the threat of rate hikes galore next year, that is absurd if you are in my position to say that tariffs are at the heart of the less than robust growth we are now having.”
John Williams, president of the Federal Reserve Bank of New York, said in a CNBC interview that the central bank is listening “very carefully” to the capital market’s concerns. While he believes the economy is in good shape, the Fed should lean toward being more data dependent.
The Baker Hughes latest weekly count of active U.S. drilling rigs fell by 4 to 1,071. Oil rigs fell by 4 to 873 and natural gas rigs remained steady at 198.
Mexico has said that it will lift oil and gas production by almost 50% in the next six years. Mexican crude output will likely climb to 2.624 million barrels per day 2024, while gas production is expected to rise by about 50% during the same time period.
Pipeline Authority reports that North Dakota’s oil production hit a record of 1.39 million barrels per day in October. The state’s oil output has notched a new high in four consecutive months and has climbed nearly 215,000 barrels per day since January. North Dakota’s gas production also hit a record in October at 2.56 billion cubic feet per day.
WTI crude oil continues its plunge to $46.24 per barrel as supply continues to overwhelm demand. Crude output from U.S. shale basins is on course to exceed 8 million barrels per day while Russia is reportedly pumping oil at a record 11.42 million barrels per day in December. The American Petroleum Institute (API) said that U.S. stockpiles of WTI crude rose by 3.5 million barrels last week as global demand continues to fall.
Goldman Sachs says that the risks in the leveraged loan and collateralized loan obligations markets remain “moderate” on lower credits and “low” on CLO AAA tranches.
Clarity Media, owned by Denver billionaire Philip Anschutz, has said that it will shut down the Weekly Standard, a 23-year old conservative magazine. December 17th will be the last edition. Double-digit declines in its subscriber base since 2013 forced the decision.
According to Adobe Analytics, a record $110.6 billion has been spent online since November 1st. When all is said and done, shoppers are expected to spend at least $126 billion online this holiday season.
Former NASA engineer Mark Rober has apparently developed a “glitter bomb trap” devised to bust “porch pirates” that steal Amazon packages from the porches of homes and apartments. Apparently, when the box is lifted, it sets off a GPS device that tracks the thief and explodes glitter spray when opened.
As reported in Business Insider, “Amazon said earlier this week that it is planning to build a regional air hub at the Fort Worth Alliance Airport, which would support a handful of daily flights and infrastructure for sorting packages.”
Google has announced that it will lease a large office building in Manhattan’s West Village neighborhood and will make it the centerpiece of a new 1.7-million-square-foot Hudson Square Campus. When done, the company will have invested $1 billion into capital improvements to the campus and plans to double its workforce to over 14,000 employees over the next decade.
Eli Lilly has increased its profit guidance for 2019 and has increased the quarterly dividend by 15% from $0.56 to $0.64.
“Pfizer and GlaxoSmithKline PLC plan to combine their consumer-health units, and eventually spin the joint venture off…”, according to a report in MarketWatch. The combined entity had $12.7 billion in global sales in 2017.
Altria is near to completing a deal to purchase a 35% stake in Juul that would value the privately held e-cig maker at about $38 billion.
GE has filed paperwork to spin out its health-care unit in an IPO. The filing will be likely in mid-2019. Last year, GE’s health-care unit accounted for 15.8% of the conglomerate’s total sales and 43.2% of its operating profit.
TE Connectivity has announced that it has added $1.5 billion to its existing share repurchase program.
Abbott Laboratories has increased its quarterly dividend to $0.32 per share, a 14.3% increase over its prior quarterly payout.
Boeing has said that it will raise its quarterly dividend by 20% to $2.05 per share in 2019. The company will also boost its share buyback to $20 billion. Boeing will deliver a record 568 planes through the end of the 3rd quarter and has pushed its cash flow ahead of expectations.
AT&T has announced a quarterly dividend increase of 2.0% from $0.50 per share to $0.51 per share. The company also announced that its new 5G network will be live in 12 cities in the U.S. starting December 21st and will expand to seven more cities in the 1st half of 2019.
After Johnson & Johnson’s shares took a beating on the asbestos in baby powder allegations, the company has authorized a share buyback of $5 billion.
Reuters has reported that drug and consumer-products company Johnson & Johnson had known for decades that its baby powder was contaminated with asbestos. The headline shaved $39.8 billion off the value of the company in one six-hour trading session. J&J has called the report “one-sided, false and inflammatory.”
Facebook is in hot water again following a New York Times article charging that FB gave big tech companies “more intrusive access to users’ personal data than it has disclosed.” The report said that FB allowed Netflix and Spotify to read users’ private messages. Everyone involved has denied the accuracy of the NYT report.
Starbucks is planning a virtual store launch in China in a partnership with Alibaba Group using the Starbucks app and customer-facing Alibaba apps like Tmall and Alipay. The company has also said that it has expanded its partnership with Nestle and Nespresso and will return $25 billion to shareholders in fiscal years 2018 and 2019.
Jack in the Box said that it is reviewing strategic and financing options to maximize shareholder value, including the potential sale of the company.
Canadian cannabis company Tilray has announced a distribution agreement with Swiss drug maker Novartis. Tilray will work with Novartis’s generic drug business Sandoz to supply non-smokable and non-combustible medical cannabis products where legally allowed.
Tilray announces a partnership with AB InBev (Budweiser) to research the development of non-alcoholic beverages containing THC. At this time, the potential commercialization of the drinks will be confined to Canada.
It could be a big IPO year in 2019 for the Silicon Valley. Planned IPOs include Uber, Lyft, Airbnb, Slack, Pinterest and Palantir.
FedEx reports fiscal 2nd quarter earnings of $4.03 per share on revenue of $17.8 billion, an increase of 9.2% year over year. The company also trimmed future expectations because of European weakness. CEO Fred Smith on the lower guidance: “I’ll just conclude by saying most of the issues that we’re dealing with today are induced by bad political choices…all things that have created macroeconomic slowdowns.”
Oracle reports fiscal 2nd quarter earnings of $0.80 per share on revenue of $9.56 billion, a decrease of 0.3% year over year.
General Mills reports fiscal 2nd quarter earnings of $0.85 per share on revenue of $4.41 billion, an increase of 5.0% year over year.
Nike reports fiscal 2nd quarter earnings of $0.52 per share on revenue of $9.37 billion, an increase of 9.6% year over year.
Next week: Earnings from: No earnings for the holiday week. Economic reports: S&P Case-Shiller Home Price Index for October, U.S. New Home Sales for November and Consumer Confidence for December.
WTI crude oil: $45.93 per barrel. 10-year U.S. Treasury note: 2.78%. Gold: $1,242 per ounce.
Sources: CNBC, 361 Capital, Real Money Pro, Seeking Alpha, MarketWatch, The Wall Street Journal, First Trust Economics, Zero Hedge, The Calafia Beach Pundit, Bloomberg and Yardeni Research.
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 QCOM, AAPL, BHGE, ADBE, AMZN, GOOGL, LLY, PFE, GSK, MO, GE, TEL, ABT, BA, T, JNJ, FB, NFLX, SPOT, SBUX, TLRY, NVS, BUD, FDX, ORCL, GIS, NKE.
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.