Market Minutes for the week of December 24th:
(Holiday shortened edition)
“What happens if you get scared half to death twice?” – Steven Wright
Here’s what I am hearing and thinking: *1.) Down a record -653 points for the worst Christmas Eve ever. Up record +1,086 points on the day after Christmas! Two days after Christmas – after being down nearly -600 points, an +800-point rally in the last 2 hours of trading! This is not the way our capital markets should be functioning. Kill the quants and the algos before they kill us. *2.) Bryce Doty, SVP at Sit Investment Associates: “Investors are becoming desensitized. It’s like watching ‘Pulp Fiction.’ Halfway through, the violence doesn’t even bother you anymore.” Jeff deGraaf, co-founder of Renaissance Macro Research: “How much do we trust the market’s message, up or down, over this holiday week? About as much as we trust uncle Albert to drive home after Christmas dinner.” Stephen Guilfoyle, economist and former floor trader of 30 years: “In a free market, price discovery is defined as the method by which the fair price of any asset is determined through the interaction of buyers and sellers at the point of sale. Just in case there was anyone left who thought current methods to be anything other than perverse, the Dow Jones Industrials rallied 1,086 points on Wednesday, or just under 5%. This came on the heels of the market’s now-infamous ‘Christmas Eve Massacre,’ and in all honesty, it left the index largely unchanged from last Thursday afternoon’s close. Unchanged over a week. Think about that!” *3.) What is the real reason behind last week’s equity rout? According to the Investment Company Institute and Bloomberg, mutual funds had near record redemptions of $56.2 billion in the week ended December 19th, the biggest outflow since the week ended October 15th, 2008, the peak of the financial crisis. Couple that with total November redemptions of $57.4 billion, mutual funds, in order to satisfy redemptions, had to liquidate the largest amount of stock in nearly a decade. “…With market liquidity already at record lows, the overhang from relentless offers sent clearing prices sharply lower…,” reports Zero Hedge. Add in the piling on from ETFs and algorithms programmed to sell more and more stock as the prices go lower, and you have what we got from December 18th through Christmas Eve. *4.) Other factors in my opinion that have contributed to the 4th quarter decline are: a.) The unintended consequences of the “Volcker Rule” (spun out of Dodd-Frank) which prohibits investment banks from trading for their own accounts. In the past, these trading desks would swoop in on large declines and “make a market” or in other words, aggressively purchase stocks that would support the market and stem the velocity of the decline. Those buyers no longer exist. b.) The Fed’s ongoing and increasing QT (quantitative tightening) combined with seven rate increases is sucking liquidity from the financial system at a greater rate than is appropriate as the economy slows. c.) Wall Street’s eroding confidence in, and support for, President Trump. From the trash talking aimed at former Secretary of State Rex Tillerson, to the surprising firing of Defense Secretary James Mattis, to the withdrawal from Syria – declaring ISIS finished, to the ludicrous idea of firing Fed Chairman Jerome Powell, to trotting Treasury Secretary Steve Mnuchin out on Christmas Eve to say he had spoken with the major banks and there was nothing wrong with the health or liquidity of the banking system (well intentioned maybe, but no different than yelling fire in a crowded theater). Actions and tweets such as these are unnerving the financial markets as they wonder what the impetuous POTUS will do or say next. *5.) From the front lines of the trade war: Bloomberg Economics shows that China’s economy slowed for a seventh-straight month in December. Reuters reports that profits at China’s industrial firms dropped in November (-1.8%) for the first time in nearly three years due to dropping external and internal demand. *6.) Where did all that cash go from the market’s decline? MarketWatch reports, “The U.S. Federal Reserve reports that at the last count, everyone across the financial system, from grandmothers to hedge funds, was holding a total of $2.9 trillion in overnight money market funds, $4.4 trillion in checking accounts and currency, and another $12.1 trillion in saving account and Certificates of Deposit. That comes to $19.4 trillion in gross “cash” and equivalents that is “on the sidelines” of the stock market. Meanwhile, says the Fed, the total market value of all U.S. stocks at the same time came to $41.7 trillion.” Hmmm.
The Fed’s favorite indicator of inflation, the Personal Consumption Expenditures (PCE) index, rose by 0.1% month over month in November and up only 1.8% year over year. The declining cost of energy has played a big part in keeping the PCE contained. Personal incomes rose by 0.2% in the month and up 4.5% year over year while spending was up 0.4%. Positive news for higher GDP.
The Conference Board said that American consumer confidence fell to 128.1 in December from 136.4 in November. The reading is the lowest since July of this year. “The future expectations index – what Americans think the economy will look like 6 months from now – sank to 99.1 from 122.3…the lowest reading since October 2016, according to MarketWatch.
The Chicago Fed’s index of national economic activity registered at a positive 0.22 in November, up 0.06 in October. Forty-eight of the 85 individual economic indicators were positive, while 37 deteriorated and 3 were unchanged.
The Chicago PMI for December decreased slightly to 65.4 from 66.4 in November, which is still a strong reading. “The Chicago survey gives a good idea of what’s happening with manufacturers and other large U.S. companies”, explains MarketWatch.
The Richmond Fed’s Manufacturing Index was a different story, however. The index tumbled to -8 in December from 14 in November. Estimates were for a rebound to 15. There were dramatic declines in new orders and shipments.
The S&P/Case-Shiller 20-city home price index rose by 0.4% in October and the year over year advance in prices slowed to 5.0%, the lowest level of price increase since mid-2016. Phoenix (+0.7%), New York City (+0.4%) and Las Vegas (+0.3%) had the biggest monthly increases in October.
The National Association of Realtors (NAR) said that pending home sales for November fell by 0.7% vs November of last year to a 4-year low.
According to the U.S. Census Bureau, apartment absorption is now at the highest level in three years. This is the rate at which new units are rented out. Weakness in the housing market is boosting apartment demand in spite of high rent rates.
Baker Hughes said that the total active U.S. drilling rig count for last week actually rose by 9 to 1,080 rigs. Oil rigs gained by 10 to 883 and natural gas rigs fell by 1 to 197. These are good numbers in spite of the precipitous decline in oil prices in the 4th quarter.
According to Mastercard SpendingPulse, retail sales from November 1st through Christmas Eve were up 5.1% to more than $850 billion making this retail season the best in 6 years. Online sales were up 19.1% from a year ago during the period. Consumer spending makes up nearly 70% of GDP, so this is good news that consumers continue to spend in the face of a brutal stock market.
According to Comscore, superhero films were the kings of the box office in 2018. Total box office gross for the year was $11.38 billion domestically and superhero films made up 25.5% of the total ticket sales. The top grossing film in 2018 was Disney’s “Black Panther” at $700,059,566.
According to Cowen analysts, U.S. airports are expected to invest $100 billion in airport infrastructure over the next five years which means that the fee paid by U.S. airlines to airports for each passenger ticketed, will increase by 19% over the same time frame.
Blue Apron, the New York-based meal-kit delivery company, has announced a partnership with Weight Watchers International which could help the company become profitable next year.
Cannabis producer Aphria says that it is the subject of a hostile takeover offer from Green Growth.
Chesapeake Energy reports that its CEO Archie Dunham has made a new 2.1 million-share purchase of CHK stock worth more than $4 million. Dunham said: “Since I’m in for [the] long term, when I get the opportunity to buy when the whole market drops like it did over the last 10 days, I decided I would be foolish not to do it.”
Nigeria’s Green Africa Airways has committed to buy 100 Boeing 737 MAX 8 airplanes at a price of $11.7 billion. In the same announcement, Boeing said that it and Sikorsky Aircraft (Lockheed Martin) were awarded a $1.1 billion U.S. defense contract for MH-6 helicopters.
Dell Computer Class C shares are expected to start trading on the NYSE on December 28th.
Under Armour has said that it will return to its roots as a true sportswear company, distancing themselves from the “athleisure” craze where people wear workout gear as a normal form of everyday clothing.
Amazon said that another record holiday season was in the books driven primarily by demand for the Echo Dot, Fire TV Stick 4K with Alexa Voice Remote and Echo. The e-commerce giant also said that its last “Prime Now” delivery was made on Christmas Eve at 11:30 p.m. in Berkley, California, and included Lego Super Heroes Captain America Building Kit, a Hallmark card, Greek yogurt and shampoo.
Amazon said that it will add 10 more aircraft from Air Transport Services Group, expanding the fleet of Boeing 767-300s to a total of 50 planes.
Shares of JC Penney have fallen below $1.00 as holiday sales were less than expected. Fewer sales on top of unsold inventory means further pressure on profits as prices have to be further reduced to move inventory.
Sears, the 125-year old company with more than 68,000 employees, has less than 24 hours to survive according to those close to the situation. The last shot at survival is a $4.6 billion offer by its chairman, Eddie Lampert, to buy the company out of bankruptcy through his hedge fund ESL Investments. The bid is to be funded with outside capital and so far, Lampert hasn’t been able to round up the financing. By late Friday December 28th, if ESL cannot buy Sears, the company along with Kmart, will be put into forced liquidation.
Next week: No earnings to report. Economic reports: Chicago PMI for December, U.S. Auto Sales for December, U.S. Construction Spending for November, ISM Manufacturing Index for December, ADP Private Payrolls for December and U.S. Non-Farm Payrolls for December.
WTI crude oil: $45.47 per barrel. 10-year U.S. Treasury note: 2.72%. Gold: $1,281 per ounce.
Sources: CNBC, Real Money Pro, The Calafia Beach Pundit, Zero Hedge, Seeking Alpha, MarketWatch, Business Insider, Reuters, Bloomberg and The Wall Street Journal.
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 BHGE, MA, DIS, BA, LMT, AMZN.
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.