Market Minutes for the week of December 3rd:
“I do not like broccoli. And I haven’t liked it since I was a little kid and my mother made me eat it. And I’m the president of the United States and I’m not going to eat any more broccoli.” President George H.W. Bush after he banned the vegetable from Air Force One.
George H.W. Bush on his 90th birthday.
Here’s what I am thinking and hearing: *1.) From the front lines of the trade war: The Fed’s November Beige Book notes that nearly all 12 Districts reported concerns about the effects of the ongoing trade war with China. The truth is that nobody really knows the truth of what actually transpired at the trade negotiations dinner in Buenos Aires last weekend. Lots of conflicting statements. What we do know is there was no white flag from China, but a cease-fire from both sides is a good start. The U.S. will hold off on raising tariffs on China to 25% after the first of the year and in return, the Chinese will agree to purchase from the U.S. a not yet agreed upon, but a “very” substantial amount of agricultural (soybeans up 1.1% on the news), energy, industrial and other products to reduce the trade imbalance between the two countries, according to a White House statement. The White House had initially said that the Chinese have agreed to reduce and remove 40% tariffs on U.S. automobiles, but it turns out that statement wasn’t accurate. National Economic Council Director Larry Kudlow said after the 90-day cease-fire agreement, that progress on technology transfers and intellectual property rights will happen “very quickly.” Let’s hope so Larry but you many want to reign in your boss’s tweets. Although President Trump thinks a trade deal with China will “probably” happen, his ill-timed tweet on Tuesday calling himself a “Tariff Man” disturbed the markets and called into question his commitment to a deal with China. The arrest of Huawei (Chinese telecom giant) CFO Meng Wanzhou in Canada on charges of sanction violations and bank fraud is certainly not a “good faith” gesture in the ongoing trade negotiations. According to Inside Higher Ed, “The University of Illinois at Urbana-Champaign has paid $424,000 to insure itself against a significant drop in tuition revenue from Chinese students.” The university signed a three-year contract with an insurance broker to pay the annual six-figure sum to cover up to $60 million in tuition losses from Chinese students. *2.) What caused this week’s unexpected drop in stock prices? Two things, I think. First of all, see the point above that refers to the arrest of the Huawei CFO. This has the potential to really derail the China – U.S. trade negotiations and is a bad event for the global stock markets if Beijing chooses to retaliate. Secondly, in the past I have said that it’s not actual change, but rather the velocity of change that unnerves markets. In just 2 trading days the 10-year Treasury note has gone from a 3.06% yield to 2.88% which in turn triggered the first inversion of the yield curve (where short-term bonds yield more than long-term bonds) since 2007. And over the years, an inverted yield curve has been historically accurate at forecasting recession six months to two years in the future. As soon as the curve approached inversion, trading algorithms were triggered to sell stocks and buy bonds (to “realign” risk). And as these weapons of wealth destruction often do, they sold baskets of stocks indiscriminately which once again, resulted in ridiculously distorted stock prices. For example: The NASDAQ lost 4%, shaving $140 billion of value from the FAANG stocks. The Dow Jones Transportation Average fell by 4.3%, its largest-ever (471 point) drop. And, because an inverted yield curve is not bank-friendly, the SPDR S&P Regional Banking ETF fell by 5.3%. *3.) As I have said before, I despise these machines because they are programmed to act on immediate data points and news releases, without taking the time to digest the information the way humans normally would. They are agnostic to economic and company specific fundamentals and it is wrong. I can yell and roar and roar some more, but the regulators don’t hear me and continue to turn a blind eye to the problem. Given that, all any of us at Cascade Investment Group can do is to try to find value in the rubble and act upon it for future portfolio benefit. *4.) If the upper-end new home market is turning down (Toll Brothers which builds new homes at $500,000 and up saw orders decline by 13% in November and Dallas builders are cutting prices by $150,000 in high-end subdivisions), do we need to be concerned about non-bank lenders like Quicken Loans, PennyMac and LoanDepot? The Fed thinks so. Chairman Powell in a speech several weeks ago expressed concern about them, calling them imprudent lenders which could create a problem for the credit system in the next housing crisis. As Jim Cramer says, these non-bank lenders need to play by the same set of rules that govern bank lenders and if the Fed is concerned, they have the power to make them do so or shut them down. Better get on it now. *5.) Dr. Edward Yardeni of Yardeni Research says that the stable rate of inflation gives the Fed reason to pause after a most likely December rate hike. He cites: a.) The PCE (Personal Consumption Expenditures) deflator rising only 1.8% year over year in October, the slowest pace since February. b.) The PCE deflator for core goods fell by 0.6% year over year in October. c.) The PCE deflator for services (ex. energy) rose by 2.6% in October, the slowest rate in eight months. d.) Rents have peaked and in some cases are rolling over. e.) The PCE deflator for medical care is up just 1.3% year over year through October with hospital and physician services up only 1.5% and 0.7% respectively and prescription drugs up just 0.8%. f.) The 31% plunge in oil prices has taken the edge off inflationary expectations. g.) Worker productivity is increasing better than the data suggests.
Before the rest of the world learned of the passing of America’s 41st president, the news was reportedly shared among the Bush family and close associates via a “code word” that went back to George H.W. Bush’s time as a Naval aviator in WWII: CAVU (ceiling and visibility unlimited).
Payroll processor ADP said that the U.S. economy generated 179,000 new jobs in November down from October’s gain of a revised 225,000 jobs. The service sector generated the most jobs with 59,000 in professional and business services. Education and health created 49,000 new positions and leisure and hospitality added 26,000 new jobs. Small companies added 46,000 jobs, medium-sized businesses added 119,000 and large companies added 13,000 new workers.
The Labor Department reported that the U.S. economy created 155,000 new non-farm payrolls in the month of November which fell short of the forecasted 198,000. Average hourly earnings gained by 0.2% but just short of the estimate of 0.3%. Healthcare and business services added the most jobs. Overall, the report is good news for a one and done for the Fed.
The University of Michigan consumer-sentiment index for December held steady at 97.5, keeping most of the positive gains that consumers have registered over the past two years. In the survey, consumers were more optimistic about current conditions but more pessimistic about future job prospects.
The Fed’s November Beige Book announced that all 12 Districts saw “modest to moderate growth from mid-October through late November, but Dallas and Philadelphia noted slower growth, while St. Louis and Kansas City noted just slight growth.” On the plus side, consumer spending remained steady. On the minus side, new home construction and existing home sales declined. Labor markets remained tight.
The Commerce Department stated that U.S. new home sales fell by 8.9% in October to a 2 ½ year low of 544,000 seasonally adjusted units. The median price of a new home fell to $309,700 in October.
The National Association of Realtors (NAR) said that pending home sales, a measure of signed contracts to buy existing homes, fell by 2.6% in October. Sales were down a steeper 6.7% when compared with October 2017 and marks the 10th straight month of declines.
The Bureau of Economic Analysis announced that the headline Personal Consumption Expenditure (PCE) inflation deflator, rose 0.2% month over month in October and 1.8% year over year. The PCE is the Fed’s favorite inflation indicator and appears to continue to be under control. Personal spending in October rose by 0.6%. Spending on both durable and non-durable goods was stronger, especially in services where spending grew by 0.7%.
The Institute for Supply Management (ISM) reported that its Purchasing Manager’s Index (PMI), a measure of U.S. factory activity, rose more than expected in November. The PMI hit 59.3, far better than the forecast of 57.8 and even better than October’s reading of 57.7.
The Institute for Supply Management (ISM) also reported that its non-manufacturing (services) index posted it second-strongest showing in 13 years with all 16 industries but agriculture showing improvements. The November index rose to 60.7 up from 60.3 in October.
The Commerce Department said that October factory orders fell by 2.1%, the largest decrease since July of 2017. The biggest culprit in the decline were orders for transportation equipment and defense aircraft parts.
The Commerce Department also said that the trade deficit for October rose to $55.5 billion, the highest reading since 2008. Imports rose 0.2% to $266.5 billion, a new record while exports fell by 0.1% to $211 billion as exports of soybeans and airplanes fell. The trade deficit with China rose again to a fresh all-time high of $43.1 billion.
The Commerce Department went on to say that U.S. construction spending fell for a third straight month in October by 0.1% to $1.31 trillion. On a year over year basis, construction spending has increased by 4.9%.
The American Petroleum Institute shows a build of 5.36 million barrels of oil for the week ending November 30 following a 3.45 million-barrel increase in the prior week, resulting in the 11th consecutive weekly build in crude oil inventories.
The U.S. Geological Service says that the Permian’s Delaware Basin, the less-drilled part of the giant oil field, holds more than twice the amount of crude oil as its sister field, the Midland Basin. The Delaware’s Wolfcamp Shale and Bone Spring rock formations hold an estimated 46.3 billion barrels of oil and 281 trillion cubic feet of natural gas. Dr. Jim Reilly, director of the USGS said the Midland and Delaware estimates are the USGS’s “largest contiguous oil and gas assessments ever released.”
Qatar’s Energy Minister Saad al-Kaabi told a news conference on Monday that the country was withdrawing from OPEC on January 1, 2019, saying that the move represents a “technical and strategic change” and was not politically motivated.
OPEC, at its meeting in Vienna, Austria on Friday said that the cartel and its allies have agreed to cut oil output by 1.2 million barrels per day. Iran is exempt from the cut???
Peter Boockvar, chief investment officer at Bleakly Advisory Group on Fed Chairman Powell’s comments last week: “For a market that is so beholden to monetary policy and desperately wanting to know ‘are we there yet?’ in terms of ending the tightening, I only thought of this yesterday after Powell basically said: we are, see here [2.75%]. But as long as QT is still in place, we really aren’t there just yet. Their balance sheet is still expected to shrink by $600 billion next year …and is their other form of tightening.”
Economist Scott Grannis of the Calafia Beach Pundit says that the Fed funds futures market is now pricing in a 2.70% Fed funds rate by the end of 2019 based on Chairman Powell’s comments in a speech from two weeks ago. That is the equivalent of 2 more 0.25% bps increases from 2.25% to 2.75%. Beyond 2019, the market sees no more increases in the Fed funds rate.
More Scott Grannis: “…the ongoing economic expansion has been the weakest in history. For many decades the economy averaged 3.1% annual rates of growth. But since the Great Recession ended in mid-2009, the economy has averaged only 2.3% annualized growth. Things have picked up a bit of late: in the year ending last September, growth was 3.0%. A decade of sub-par growth has created a potential GDP ‘gap” of at least $3.2 trillion. In the past year alone, the U.S. economy has missed out on over $3 trillion of income – which averages out to over $20,000 per worker – that could have been earned if the economy kept up with its previous trend.”
Worldwide PMI’s for November: China – 50.2 (unchanged), South Korea – 48.6 (down from 51), Eurozone – 51.8 (down from 52) and U.K. – 53.1 (up from 51.7).
According to the Department of Agriculture, the price of iceberg lettuce soared as much as 168% after the E. coli outbreak took romaine lettuce off the shelves. The USDA said that supplies of iceberg lettuce were already light when the outbreak hit. For the 52 weeks ended November 10, U.S. lettuce production was valued at $1.6 billion with romaine accounting for 38% of the total production.
According to the Centers for Medicare and Medicaid Services, Americans shelled out $10,739 per person ($3.5 trillion) on health care in 2017. Spending grew by 3.9% last year, the slowest rate since 2013. Private health insurance saw the highest total spending, increasing by 4.2% to $1.2 trillion. The lowest spending was on retail prescription drugs, which totaled $333.4 billion, an increase of just 0.4%.
Toyota new car sales fell by 0.6% in November to 190,423 units due to decreased demand for Prius and Camry sedans.
Honda new car sales fell by 9.5% in November to 120,534 vehicles, hurt by lower volumes on the Civic.
Ford new car sales fell by 6.9% in November to 196,303 units. Retail sales -6.8%, Fleet sales -7.1%, SUV sales -4.9% and Truck sales -2.3%. Year to date total new car and truck sales -2.9% to 2,276,544 units.
Ride sharing company Lyft has filed to go public in an IPO which could be the first of 2019. The offering is likely to exceed the $15.1 billion valuation that Lyft posted back in June.
Shirt-maker “Untuckit” has hired investment bank Morgan Stanley to raise money to fuel the growth of the company. The untucked style shirt-maker could fetch a valuation of more than $600 million as the company is profitable with $150 million in sales.
Amazon Prime is out with its “Best of Prime 2018” and it says that Prime members worldwide ordered more than 2 billion products for one-day or faster delivery. For its 2-day option, Prime members ordered over 5 billion products.
United Airlines has launched a new “premium economy” class between coach and business for some of its longer flights. Premium economy tickets will cost about double that of a standard coach ticket and will come with more leg room, bigger seats with deeper reclines, amenity kits, free alcoholic beverages, noise-reducing headphones and other perks.
According to Australian newspaper The Daily Telegraph, Qantas Airlines is cracking down on carry-on luggage. The airline is requiring carry-ons that weigh more than 7 kilograms (15.4 pounds) to be gate- checked. Qantas is defending the move by trying to make the boarding process “fair” for all travelers, because many passengers try to game the system by overloading their carry-on luggage to avoid having to check baggage.
AT&T said that it is adding a second 5G smartphone from Samsung in 2019. That brings AT&T’s announcements to three commercial 5G devices, along with the Netgear Nighthawk 5g Mobile Hotspot.
Nexstar Media Group has reached an agreement in principle to acquire Tribune Media for $4.1 billion, a tie-up that will create the largest local TV company in the U.S.
GlaxoSmithKline has agreed to purchase cancer treatment company Tesaro for $75 per share in a deal worth $5.1 billion.
According to sources from CNBC, Marlboro cigarette maker Altria has announced a $1.8 billion investment in Canadian cannabis producer Cronos Group as it seeks to diversify its business beyond traditional smokers.
Walmart has said that it has acquired home décor retailer Art.com for an undisclosed amount as the company shoots for a goal of owning upwards of 40 digitally native brands.
Canadian Imperial Bank reports fiscal 4th quarter earnings of C$3.00 per share on revenue of C$4.45 billion, an increase of 4.2% year over year.
Workday reports 3rd quarter earnings of $0.31 per share on revenue of $743.2 million, an increase of 33.8% year over year.
Salesforce.com reports 3rd quarter earnings of $0.61 per share on revenue of $3.39 billion, an increase of 25.6% year over year.
Box reports 3rd quarter earnings of -$0.06 per share on revenue on $155.94 million, an increase of 20.6% year over year.
Toll Brothers reports fiscal 4th quarter earnings of $2.08 per share on revenue of $2.46 billion, an increase of 21.2% year over year.
Ollie’s Bargain Outlet reports 3rd quarter earnings of $0.32 per share on revenue of $283.61 million, an increase of 19.1% year over year.
DocuSign reports 3rd quarter earnings of $0.00 per share on revenue of $178.4 million, an increase of 36.6% year over year.
Broadcom reports fiscal 4th quarter earnings of $5.85 per share on revenue of $5.44 billion, an increase of 12.4% year over year.
Lululemon Athletica reports 3rd quarter earnings of $0.75 per share on revenue of $747.66 million, an increase of 20.8% year over year.
Ulta Beauty reports 3rd quarter earnings of $2.18 per share on revenue of $1.56 billion, an increase of 16.4% year over year.
Next week: Earnings from Stitch Fix, Adobe Systems and Costco. Economic reports: JOLTS for October, Producer Price Index for November, Consumer Price Index for November, U.S. Retail Sales for November, U.S. Industrial Production for November, Capacity Utilization for November and Business Inventories for November.
WTI crude oil: $53.50 per barrel. 10-year U.S. Treasury note: 2.87%. Gold: $1,243 per ounce.
Rest in Peace – George H.W. Bush – a true gentleman and a patriot!
Sources: Karen Reid, CNBC, Morningstar, Real Money Pro, 361 Capital, First Trust Economics, The Wall Street Journal, Seeking Alpha, MarketWatch, The Calafia Beach Pundit, Bloomberg and Yardeni Economics,
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 WDAY, CRM, ADBE, CM, DOCU, ULTA, OLLI, F, AMZN, T, GSK, MO, WMT, CM, BOX, TOL and AVGO.
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.