Market Minutes for the week of February 11th:
“A coach is someone who can give correction without causing resentment.” – John Wooden
Here’s what I am thinking and hearing: *1.) At the end of this Market Minutes, I encourage you to read a piece authored by my partner and co-founder Craig Ralston back in May of 2002 titled: “Pride of Ownership.” In this day and age when shares of companies are looked upon as nothing more than casino chips, it’s refreshing to look back on, and long for, what it meant to be a shareholder of a company. Maybe again someday. *2.) I echo Jim Cramer’s thought. I too never envisioned the top business story of the day to be that Jeff Bezos, CEO of Amazon, would be accusing the National Enquirer of blackmail as the “checkout line” tabloid threatened to release embarrassing pictures of him in various points of undress as he hung out with a woman identified as his girlfriend. *3.) This whole thing reminds me of Elon Musk when he lit up a big fat joint on the Joe Rogan podcast last fall. Could Bezos’s big lapse in judgement be a sign that one of the most respected people in business may not be as bankable as we thought? It does beg the question. *4.) Former U.S. Representative John Dingell, the longest-serving member of Congress in American history, passed away last week. The Michigan Democrat was 92. What’s most amazing is that he served in the House of Representatives for 59 straight years. He started in Congress in 1955. His record over the years was impressive but still…59 years in a row? Call it what you will. *5.) Economist Dr. Ed Yardeni: “I also argued that based on my 40 years’ experience in our business, I’ve never found that supply-vs-demand analysis helped much in forecasting bond yields. It’s always been about actual inflation, expected inflation and how the Fed was likely to respond to both.” *6.) The drumbeat of 2019 recession talk continues on. Why? According to Jim Cramer, the pessimists are focused on four things: A nearly flat yield curve as short rates almost equal the 10-year Treasury yield and an inverted curve has been a reasonably good forecaster of recession. An ongoing global economic slowdown led by Europe. The trade war with China which is terrible for business and, the decline in commodity prices which is pushing the Baltic Dry Freight index lower. Jim’s feeling is that the only things that can cause the next recession are a renewed aggressive approach to monetary policy by the Fed and the lack of a trade deal with China which would increase tariffs. Brian Wesbury, chief economist for First Trust says that those predicting the next recession are going to be waiting a while until they get it right. Why? Because employment remains strong. ISM manufacturing and service indexes remain solidly above 50 (anything above 50 signals expansion). A smaller trade deficit. Continued positive retail sales. Strong corporate profits. And, continued tailwinds from the corporate tax cut. *7.) Astonishingly, the most recent Bank of America/Merrill Lynch Fund Manager Survey shows that the level of allocation to cash during this powerful recovery from the Christmas Eve lows, has jumped to 44%, the highest level since January of 2009 during the Financial Crisis. The number of professional money managers who believe that the S&P 500 has peaked, rose to 34% from just 11% five months ago. Allocations to global equities fell to a 6% overweight, the lowest level since September of 2016 during Brexit. That’s a lot of “dry powder” if they are caught leaning the wrong way! *8.) Contrast that with the results of a recent Gallup poll where 69% of Americans said they expect to be “financially better off at this time next year” than they are now. That’s a 16-year high, and only two percentage points below the all-time high of 71% back in March of 1998. What’s more, Gallup goes on to say that half of Americans say they are better off now than just a year ago. That’s “a post-recession milestone – the first time since 2007 that at least half of the public has said they are financially better off than they were a year ago,” according to the poll. *9.) From the front lines of the trade war: The White House said that it might be flexible on the March deadline for increased China tariffs as long as talks continue to move forward. President Trump has also proposed Mar-a-Lago as a site for a trade summit with China’s President Xi Jinping in mid-March. Tom Adams owns Maine Lobster Company and he used to sell most of his inventory to China. But now, his former customers in China buy their lobsters from Canada, where dealers can make a sale without the 25% import tariff. Maine lobster dealers are having a tough time trying to manage the fallout from the U.S.-China trade war. China was the second biggest importer of U.S. lobster before the tariff, buying $128.5 million worth of it in 2017. Now with tariffs on lobsters that hit last July, U.S. lobster exports have all but dried up and Mr. Adams has lost 90% of his China business which used to represent 22% of his total sales. Encouraging news is that Chinese President Xi Jinping is scheduled to meet with U.S. trade representative Robert Lighthizer and Treasury Secretary Steven Mnuchin soon in Beijing. In the ongoing trade negotiations, China has promised to purchase over $200 billion of U.S. semiconductors over the next six years. *10.) Wow! I hope the December retail sales data had a large margin of error built into it.
The Labor Department reported that U.S. employers posted the most open jobs in December in the roughly twenty years that records have been kept. Openings in December jumped 2.4% to 7.3 million.
The Bureau of Labor Statistics said that the core Consumer Price Index (CPI) rose by 2.2% in January. The Fed’s favorite inflation indicator, the Personal Consumption Expenditure Index (PCE), rose by only 1.9% in the month. Most economists say the well-behaved PCE continues to support a sidelined Fed.
The BLS also said that U.S. producer prices (PPI) fell by 0.1% in January. For the 12 months through January, the PPI rose by 2.0%, the smallest increase in 1 ½ years.
The Labor Department announced that average hourly earnings for January climbed by 1.7% on a year over year basis, the best since mid-2016. That’s good news as worker pay is keeping up with inflation.
The Treasury Department said that the U.S. budget deficit for December came in at $14 billion as revenues were lighter following last year’s tax cuts.
The National Federation of Independent Business (NFIB) stated that its small business optimism index continued to retreat as the index fell to 101.2 from 104.4 in December. That is the lowest print since November of 2016. Plans to Hire fell by 5 points. Those That Expect a Better Economy is down by 6% from 16%. Six months ago it was 34%. In its release, the NFIB said that government shutdown was mostly to blame.
The Commerce Department said that December retail sales fell 1.2%, the largest drop since September of 2009. The consensus was for an increase of 0.2%. Since retail sales make up two-thirds of GDP, estimates for 4th quarter GDP growth have come down to 2.4% growth vs an original 3.1% growth rate.
According to JP Morgan economists: “The most plausible economic explanation is that the long-dormant wealth effects came back with a vengeance, and consumers slashed their holiday purchases when they saw their 401(k)’s going down the drain.”
Baker Hughes said that the U.S. rig count rose by 4 to 1,049 last week. The number of active oil drilling rigs rose by 7 to 854 while the number of natural gas rigs fell by 3 to 195.
Once again, Saudi Arabia is pledging to cut another 500,000 barrels per day of production in an effort to keep crude oil prices higher. The Kingdom said that the cartel’s January production was 800,000 bbl/day lower to 30.8 million bbl/day.
Goldman Sachs sees Brent crude oil peaking at $67.50 per barrel in the second quarter of this year. The bank thinks that world demand will grow by 1.4 million barrels per day in 2019 and that OPEC is taking a “shock and awe” approach to cutting output.
Things in Europe are looking weaker as Eurozone industrial production fell by 0.9% in December and by 4.2% year over year. The slowdown was broad over all of Europe and wasn’t just concentrated in heavily exported sectors.
The Labor Department has said that school teacher strikes have contributed to the highest number of work stoppages in the past 11 years. In 2018, the Labor Department said that there were 20 stoppages of at least 1,000 workers. Arizona, Oklahoma, West Virginia, Kentucky, Colorado and North Carolina all had walkouts in 2018. Something to ponder.
According to Freddie Mac, more and more seniors are choosing to “age in place” and not sell the family home, which has created an estimated 1.6 million fewer properties that are available in a market already experiencing a critical shortage.
“U.S non-grocery retailers lost $300 billion in revenue in 2018 due to markdowns, according to a new report from Celect. That’s the equivalent to about 12% of gross sales. The cloud-based inventory management platform polled 200 senior retail executives with help from Coresight Research. More than half of the respondents (53%) attributed the missed sales to ‘inventory misjudgments’”, reports MarketWatch.
According to the USDA, more than half of the U.S. farm households in recent years lost money farming. In 2018, the median farm income for U.S. farm households was a negative $1,548.00. Despite record productivity, the oversupply has driven commodity prices lower.
The Wall Street Journal reports that, “bankruptcies in three regions covering major farm states last year rose to the highest level in at least 10 years. The Seventh Circuit Court of Appeals, which includes Illinois, Indiana and Wisconsin, had double the bankruptcies in 2018 compared with 2008. In the Eighth Circuit, which includes states from North Dakota to Arkansas, bankruptcies swelled by 96%. The 10th Circuit, which covers Kansas and other states, last year had 59% more bankruptcies than a decade earlier. States in those circuits accounted for nearly one half of all sales of U.S. farm products in 2017, according to U.S. Department of Agriculture data”.
Warren Buffett’s Berkshire Hathaway revealed in a recent 13F filing that it has acquired 4.175 million shares of software maker Red Hat for $733 million. The investment company also purchased new stakes in Suncor Energy and StoneCo. Ltd. Sales included its entire Oracle position of 41 million shares and 1.0% (2.89 million shares) of its Apple holdings. Warren and Charlie (Munger) still hold $39.4 billion Apple which equals 21.5% of Berkshire’s total holdings.
According to the Washington Post, Amazon is reconsidering New York City as its second headquarters because of local opposition. Apparently local politicians and advocacy groups including Rep. Alexandria Ocasio-Cortez and City Council Speaker Corey Johnson have expressed opposition to the Long Island, Queens project.
Amazon has now announced that it will cancel its plans to build a second headquarters in New York, at a cost of 25,000 jobs. Unbelievable. How many cities would have killed for that opportunity?
Amazon has announced that it has acquired eero, a maker of mesh Wi-Fi systems for the home. Financial terms of the deal were not disclosed.
“Amazon will set up its Amazon Lockers on site at Coachella for the first time. Customers can ship what they need to the Lockers for no additional cost during both weekends of the festival. The 2019 Coachella Valley Music and Arts Festival will be held during the weekends of April 12-14 and April 19-21”, according to Seeking Alpha.
“Apple announces working with the U.S. Department of Defense to make the Health Records in iPhones available to veterans”, Seeking Alpha reports.
The SEC has filed a lawsuit against former high-ranking Apple lawyer Gene Levoff for insider trading. The SEC alleges that Levoff used his position as corporate secretary to either profit or avoid losses of $382,000.
According to a report from TechCrunch, U.S. Apple iPhone users on average spent $79 on apps in 2018, up 36% year over year. Gaming apps made up 56% of total spending. Entertainment apps grew by 82% per device year over year while Lifestyle apps rose 86%.
From Seeking Alpha, “Google plans to invest $13 billion throughout 2019 in data centers across the U.S. and in the process hire tens of thousands of people. The tech giant says the plans will add more than 10,000 new construction jobs in Nebraska, Nevada, Ohio, Texas, Oklahoma, South Carolina and Virginia.”
More from Seeking Alpha, “Facebook has acquired visual-shopping specialist GrokStyle, an artificial-intelligence start-up that the social media giant will integrate into its own AI lab work.”
Ingersoll-Rand will acquire Precision Flow Systems for $1.45 billion. PFS would join Ingersoll-Rand’s Fluid Management business. The deal is expected to close by mis-2019.
Taco Bell, part of Yum Brands, has begun a nation-wide delivery program via GrubHub. The restaurant chain says that for a limited time, all Taco Bell orders over $12.00 will qualify.
Chipotle said during last week’s earnings conference call that labor costs for the quarter were 27.1%, down 40 basis points from last year. While labor inflation was in the 4% to 5% range, the increase was partially offset by a menu price increase.
From Seeking Alpha, “IBM announces that Watson AI services will now work on any cloud platform, including those of rivals Amazon and Microsoft. Watson AI tools include Watson Assistant, which helps create conversational services like customer service bots…”
IBM has also announced a 5-year global technology agreement with Banco Santander to accelerate Santander’s digital transformation. The agreement is valued at $700 million.
Ohio-based cannabis company Green Growth Brands has reached a deal with the largest mall developer in the country, Simon Property Group, to open more than 100 shops selling products infused with CBD (cannabidiol). Also, on Monday luxury department store chain Barney’s said that it will be opening a “cannabis lifestyle shop” in its Beverly Hills store next month.
Cisco Systems reports fiscal 2nd quarter earnings of $0.73 per share on revenue of $12.45 billion, an increase of 4.7% year over year. The company also said that it is raising its quarterly dividend by 6.1% from $0.33 per share to $0.35 per share.
GrubHub reports 4th quarter earnings of $0.19 per share on revenue of $287.72 million, an increase of 40.3% year over year.
Restaurant Brands reports 4th quarter earnings of $0.68 per share on revenue of 1.39 billion, an increase of 13.0% year over year.
Under Armour reports 4th quarter earnings $0.09 per share on revenue of$1.39 billion, an increase of 1.5% year over year.
Activision Blizzard reports 4th quarter earnings of $1.29 per share on revenue of $2.84 billion, an increase of 7.6% year over year.
CenturyLink reports 4th quarter earnings of $0.37 per share on revenue of $5.78 billion, a decrease of 3.7% year over year. The company also said that it would reduce its annual dividend from $2.16 per share to $1.00 per share.
Next week: Earnings from: Aqua America, Gannett, Walmart, Roku and Domino’s Pizza. Economic reports: U.S. Housing Starts for January, Existing U.S. Home Sales for January, U.S. Durable Goods Orders for December and the Philly Fed Manufacturing Index for February.
WTI crude oil: $54.25 per barrel. 10-year U.S. Treasury note: 2.66%. Gold: $1,317 per ounce.
Sources: CNBC, Real Money Pro, Estimize.com, Morningstar, Seeking Alpha, MarketWatch, 361 Capital, First Trust Economics, Zero Hedge, Bloomberg, Reuters, The Wall Street Journal, The Calafia Beach Pundit, Yardeni Research and The Street Insider.
At the time of publication Cascade Investment Group and /or its clients owned shares JMP, BHGE, GS, ORCL, AAPL, AMZN, GOOGL, FB, IR, YUM, GRUB, CMG, MSFT, IBM, CSCO, QSR, UAA, ATVI, CTL, WTR, GCI, WMT, ROKU, DPZ.
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.
Household debt as a percentage of GDP:
May 1, 2002
PRIDE OF OWNERSHIP?
It occurred to us while sorting through various pieces of r’esearch recently, that there is something missing. In all the messages about the stock market that we are bombarded with every day, the endless articles on asset allocation, sector analysis, hedge funds, etc., something is missing. Could it be that we are overlooking a concept of investing that previously seemed so very important? This may sound corny, but we know the concept was important to our Grandparents. We think the missing concept in current investing is, “Pride of ownership”.
There was a time, prior to the Internet bust, prior to the S & L bust, prior even to the Gold bust, when people actually enjoyed being a part of the companies they held in their portfolios. Not because they would talk about “the killing” they made in the market, but because they actually believed that when they bought a Ford, they were part of the Ford family. When plunking down their nickel for a pack of Double-Mint Gum, they felt a kinship with Phil Wrigley, and knew he would get a small portion of that nickel back into their pocket. When they bought Smuckers Jelly at the A & P they could see and smell the vat full of apples cooking in the orchard. The stores people went to, the products they bought, even the cards they sent a grandchild for a birthday, did more than just fill a need, it turned the investor into an owner!
Have we lost sight of the importance pride of ownership can bring to successful investing. It seems that currently companies are being run for short-term quarter-to-quarter results, rather than making a philosophical commitment to the long term. Have you thought about the huge options granted to management of some companies, and what their motivation becomes? They become companies being run by people who want to cash out! Pride of ownership seems to refer to pride in a profit, not pride in a company. We don’t believe those two have to be mutually exclusive.
Years ago, people ran companies with an eye toward having their Sons and Daughters someday take over. Companies grew and prospered because they offered a good product, and they thought of their customers and shareholders as family (which many times they were). Maybe they didn’t have to sit down across the table from them at Thanksgiving, but they always had an eye toward keeping peace in “the family”, and would make decisions based on that premise. Why would they ever do something to jeopardize family pride and Junior’s future livelihood? As the family grew, so did the profitability and the market. Who better to promote a product than a proud owner.
We would like to think it makes sense to go back to those times, and look for companies that are being run like they want to be thriving 100 years from now. When we drive down the street, we would like to take pride in the companies we own. We want to see a Caterpillar, building the roads, for us to drive our Ford home on, so we can enjoy a cool Budweiser at the end of the day. We like knowing that we can go to Safeway to buy some Bayer aspirin, and Johnson & Johnson Band-aids, to help heal the skinned knee one of us got getting off their John Deere lawn mower. You can obviously see the theory!
Wouldn’t it be nice to have management feel like they let us down if they didn’t have a plan for at least the next 100 years? We don’t think this type of analysis will be added to Wall Streets arsenal of analytical weapons any time soon however, as it is about 99 ½ years too long a perspective for them. We, on the other hand, think we will begin analyzing companies with an eye toward a place for our grandchildren to work.
Cascade Investment Group