Market Minutes for the week of February 27th:
“No persons are more frequently wrong than those who will not admit they are wrong”
– Francois De La Rochefoucauld
Sam Stovall, Chief Investment Strategist of U.S. Equity Strategy, at CFRA: “If you need additional encouragement that a bear market is not just around the corner, history again may offer some more virtual Valium.” In 27 of the past 72 years, since 1945, he notes the S&P has realized gains in January and February, with the stock index finishing up for the year (on a total-return basis) in every one of those years. In those years, the average increase was 24% and the gauge in the remaining 10 months 25 of 27 times was ahead.
Investor’s Intelligence which measures the sentiment of market professionals currently puts the percentage of bulls at 63.1%. This is a level not seen since 1987, the year of the “Black Monday” crash that sent U.S. markets tumbling 23% on October 19.
Does that portend impending doom? Not necessarily, because the economy is solid and getting stronger, meaningful fiscal policy is on the horizon, and banks and U.S. companies are extremely well capitalized. Plus, animal spirits are still alive and well.
Why the huge rally on Wednesday after President Trump’s address to a joint session of congress? Jim Cramer: “But what I didn’t count on, what many didn’t count on, is the President who showed up in front of the joint houses of congress last night and spoke in measured, hopeful tones, ones that made it difficult for his myriad of critics to mount effective attacks against his style or substance – or lack of it. Now I want to be really clear. I am not saying anything political here. I am saying the style of politics matters, and the style we saw last night makes it a lot harder for those who don’t like the substance of Trump’s business plans, to fight them. You may love the firebrand media-trash-talking Trump. But the simple fact of the matter is that the underlying current we had been getting up until last night was that some Republicans would break ranks with Trump, making it impossible to get much done … The impossible twenty-four hours ago now seems the likely today, which is how you put on such a magnificent rally.”
Final revised 4th quarter GDP was 1.9% vs a consensus of 2.1%.
The Chicago February Manufacturing Index increased to 57.4, the best reading since December 2015. New orders were up 10.1% and inventories jumped by 15.3%.
The Richmond February Manufacturing Index also saw a nice jump to 17 from 12 in January. It is now at its best level since March 2016.
The ISM Manufacturing Index rose to 57.7 in February, up from a reading of 56 in January.
The ISM Non-Manufacturing Index rose to 57.6 in February, up from a reading of 56.5 in January. The index indicates that, in February, the service side of the economy which employs the vast majority of Americans expanded at the fastest pace in one and a half years. The production component of the index increased 3.3 points to 63.6, the highest reading since 2011 and the second-highest level since 2004.
The Dallas Fed Manufacturing Survey for February came in at 24.5 vs a forecasted 19.4. January’s reading was 22.1.
The February Consumer Confidence Index rose to 114.8 vs 111.6 in January. Present situation index: 133.4 vs 130.0. Expectations index: 102.4 vs 99.3. The February reading puts the index at the best level since July 2001.
The Commerce Department said that personal incomes rose by 0.4% in January and consumer spending (which accounts for two-thirds of economic activity), rose by 0.2%. The personal savings rate was 5.5%, up slightly from December’s reading of 5.4%.
Orders for January non-defense durable goods fell by 0.4% vs a forecasted increase of 0.5%. Orders for computers/electronics, electrical equipment and primary metals led the decline. Orders for vehicle parts barely got by with a 0.2% gain and are up 5.1% year over year.
Pending home sales fell by 2.8% in January vs a forecasted 1.1% gain.
The Commerce Department said that construction spending in January fell by 1.0%. This is the biggest decline in public expenditures in 15 years and it counterbalanced gains in private projects.
Housing prices hit a 30-month high in December as the S&P/Case-Shiller U.S. National home price index rose 5.8% year over year. As usual Seattle, Portland and Denver lead as the cities with the largest year-over-year gains. Cities reaching all-time record high prices were Seattle, Portland, Denver, Boston, Charlotte, San Francisco and Dallas.
Is the spring housing market heating up? Consider this: At a Sunday open house, recently in Los Angeles, nearly 12 house hunters arrived before the scheduled start time. The move-in ready, 3 bedroom, 2 bath home was also reasonably priced. According to the Redfin agent showing the property, she was expecting 15 to 20 offers before the end of the day. A similar property she had listed recently had 66 offers on it, she said.
According to a report from Vickers Weekly Insider, now that the quarterly earnings reporting season is over, CEO’s and corporate insiders are selling stock in large amounts.
Last week on the NYSE, insider’s sale transactions outpaced their purchases by 11 to 1. Hmmm.
For the first time since October 2015, oilfield services firm Baker Hughes said that its weekly oil rig count surpassed 600 as drillers added 5 more rigs.
The February Economic Confidence Index for Europe came in at 108, which is basically flat when compared with the 107.9 in January. That is still the best level in 6 years but below the 2007 peak.
The yield on Germany’s two-year “schatz” government bond reached another record low on Tuesday as bond investors grabbed German assets amid escalating fears about the EU’s political stability. Dubbed as one of the “most sought after assets in the financial markets,” the yield on the “schatz” has fallen to minus 0.96%. The rally has been fueled by fears that Marine Le Pen is closing in on her rivals in France’s presidential election and could make good on her promise to take the Eurozone’s second largest economy out of single currency.
Reuters says that Australian GDP grew at 2.4 last year vs an expected pace of 1.9%. The rebound in global commodity prices has helped.
Blaine Rollins, CEO and founder of 361 Capital: “There are 11 million undocumented workers in the U.S. They make up 4.5% of Denver, 7.7% of Los Angeles and 8.8% of Houston. If all of them picked up and left one day, how would that impact real estate prices and the local economies?”
According to Travel Weekly, following the January 27th ban on travel to the U.S. by nationals from Iran, Iraq, Libya, Yemen, Somalia, Sudan and Syria, total bookings from those countries were down 80% between Jan. 28th and Feb. 4th when compared to a year ago at the same time.
“Zelle”, a new service that lets users send and receive money, is being created by 19 top banks, including Bank of America, Citigroup, JP Morgan Chase and Wells Fargo. The service works similar to PayPal-owned, Venmo, which was created in 2009. Last year Venmo processed $17.6 billion, a 135% year over year increase. With those kind of numbers, I can see why the banks want in on the action.
U.S retailers are moving towards record distressed levels according to Moody’s Investors Service. Since 2008-2009’s Great Recession, this number has more than tripled and is expected to break new ground in the next five years. The rating agency has 19 companies in its retail and apparel portfolio, 14% of those are now trading at Caa/Ca.
For an estimated 1 million taxpayers who did not file a 2013 return, the IRS is holding $1 billion in unclaimed tax refunds. Students and those whose income is below a set level, may not have filed a return but could be entitled to federal income tax withheld from a paycheck or refundable tax credits.
Consumer Reports says the most reliable cars for 2017 are in order: Audi, Porsche, BMW, Lexus, Subaru, Kia, Mazda, Tesla, Honda and Buick. What cars ranked the worst: Fiat-Chrysler’s Dodge, Jeep and Fiat brands. The Fiat ranked dead last.
General Motors reported a 4.2% rise in sales for February. Ford Motor posted a 4% sales decline from last February and Fiat Chrysler said sales fell by 10% for the month.
Some gems from Warren Buffett’s 2016 annual report on Berkshire Hathaway: “I would rather prep for a colonoscopy than issue Berkshire shares.” “BNSF, like other Class I railroads, uses only a single gallon of diesel fuel to move a ton of freight almost 500 miles. Those economics make railroads four times as fuel-efficient as trucks! Furthermore, railroads alleviate highway congestion – and the tax-payer funded maintenance expenditures that come with heavier traffic – in a major way.”
The Sony PlayStation VR (virtual reality) has turned out to be a big hit, selling almost 1 million devices in the first four months of availability. Sony had a notable advantage in the VR game however, as the PlayStation VR was $100 to $300 less than its competitors and it didn’t require buyers to purchase new hardware to run it.
UBS reports that Apple’s engineering staff for the iPhone working on augmented reality may exceed 1,000. This is a new technology that, when viewed through the iPhone’s camera, adds digital content over real world images. UBS goes on to say that Apple is more interested in augmented reality which connects people rather than virtual reality which possibly isolates.
According to the New York Post, YouTube which is owned by Google, is set to introduce a cable bundle that is streamlined to approximately 40 channels and is considered similar to Dish Sling TV. The price will be $35 per month. YouTube recently said that its service reached 1 billion hours of views per day in late 2016.
Goldman Sachs is getting into the consumer lending business with a product named “Marcus” (after one of the bank’s founders Marcus Goldman). The company will offer unsecured personal loans up to $30,000 for six years with an average interest rate of 12%.
Approximately 1,000 high-volume Wendy’s locations will install self-ordering kiosks to help with labor costs and appeal to a younger generation of customers.
McDonald’s is finally going after the $100 billion delivery market. Delivery services are currently available in the Middle East and Asia, as well as other overseas locations. The company has been working in the U.S. with Postmates Inc., UberEats, Foodpanda and Grubhub to test the delivery mechanism. By the 4th quarter, McDonald’s will offer a mobile pay and order system with curbside pickup. More kiosks will be installed in high traffic locations.
Grocery chain Kroger continues to invest in the technology that will allow it to standardize home delivery. Through “ClickList” and “Express Lane,” online ordering will allow for curb-side pickup or home delivery via an Uber driver.
Snap, parent company of Snapchat, will offer 200 million shares totaling $3.4 billion. This is largest IPO since Alibaba went public in 2014. Shares are priced at $17.
Evan Spiegel (age 26) and Bobby Murphy (age 28), co-founders of Snap will each walk away with $272 million in cash from the sale of some of their shares. Spiegel and Murphy will still have nearly $3.6 billion in stock, owning 210,970,819 shares after the sale.
Who is Evan Spiegel? He is 26, he doesn’t tweet or post on Instagram, he grew up in Los Angeles, he is the son of two successful lawyers, he left Stanford to work on Snapchat when he was about to graduate, lives in Venice Beach, California and is engaged to Australian super model, Miranda Kerr. Oh, he is also now very rich.
Comcast will buy the remaining 49% of Universal Studios Japan in a deal valued at $2.27 billion. The sellers are Goldman Sachs and private equity firm MBK.
Target reports 4th quarter earnings of $1.45 per share on revenue of $20.69 billion, a 4.3 decrease from a year ago.
Domino’s Pizza reports 4th quarter earnings of $1.48 per share on revenue of $819.44 million, an increase of 10.6% year over year.
Nordstrom reports 4th quarter earnings of $1.27 per share on revenue of $4.32 billion, an increase of 3.1% over last year.
Priceline reports 4th quarter earnings of $14.21 per share on revenue of $2.35 billion, an increase of 17.5% year over year.
Salesforce.com reports 4th quarter earnings of $0.28 per share on revenue of $2.29 billion, an increase of 26.5% year over year.
Best Buy reports 4th quarter earnings of $1.95 on revenue of $13.4 billion, a decrease of 1.0% year over year.
Lowes reports 4th quarter earnings of $0.86 per share on revenue of $15.7 billion, an increase of 19.2% year over year.
Shake Shack reports 4th quarter earnings of $0.09 per share on revenue of $73.3 million, an increase of 43.6% year over year.
Costco Wholesale reports 4th quarter earnings of $1.17 per share on revenue of $29.77 billion, an increase of 5.7% year over year.
Next week: Earnings from: Urban Outfitters, Dick’s Sporting Goods, Ulta Beauty, Hain Celestial and Vail Mountain Resorts. Economic reports: Manufacturing New Order, ADP Private Payrolls for February and U.S. Non-Farm Payrolls for February.
WTI crude oil: $53.21 per barrel. 10-year U.S. Treasury note: 2.51%. 30-year mortgage: 4.16%.
Sources: Bloomberg, CNBC, Real Money Pro, 361 Capital, MSN Money, Seeking Alpha, MarketWatch, Estimize.com and the Wall Street Journal.
P.S. Look for the Fed to take interest rate up by 0.25% at their March meeting. The economy is strong enough and the market now expects it. Should be no surprise.
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.