Market Minutes for the week of February 4th:
“I have known no wise people who didn’t read all the time – none, zero. You’d be amazed at how much Warren reads – and how much I read. My children laugh at me. They think I’m a book with legs sticking out.” – Charlie Munger of Berkshire Hathaway
Here’s what I’m thinking and hearing: *1.) It’s not a Bull market or a Bear Market but rather a “Pig” market. According to the Chinese calendar, 2019 is the “Year of the Pig” and according to Chinese astrological predictions, a great year to make money, and a good year to invest. *2.) Since the December 24th lows, the DJIA is up 16.5%, the S&P 500 is up 16.3% and the NASDAQ is up 19.3%. Goldman Sachs said that if you missed this move, then you likely missed a bulk of 2019’s gains. Strategists Sharon Bell and Peter Oppenheimer: “The rally we expected has happened swiftly, and given this we see relatively modest returns on equities from here.” Goldman said that the news flow on four variables will determine the direction for U.S. equities: (1.) Fed policy. (2.) China’s economic growth. (3.) Trade policy, and (4.) Earnings growth. *3.) Remarkably, according to Deutsche Bank, money has continued to flow out of U.S. equities even though the markets have staged a strong rebound. What is going on here? The Financial Times says, “…many investors admit a gnawing and growing unease. Where once there was certainty – whether bearish or bullish – there is now mostly doubt and indecision. As one top hedge fund manager says: ‘No one has a view, and everyone is positioned accordingly.’ Some think the new year rally will fizzle out, but are too cautious to bet on it given how painful being in cash or “short” can be if markets keep climbing. Others think another extended bull run is on the horizon, but are still nursing the wounds inflicted by 2018 and fear being pummelled should turbulence return.” There is an old Wall Streetism that says something like: “Once you get out, it’s hard to find a comfortable spot to get back in.” *4.) Blaine Rollins founder and CIO of 361 Capital: “There may not be a worst idea for a capitalistic country. These two Senators [Sanders and Schumer] want to ban investors from getting a return for their ownership in a company until a government agency picks its winners and losers. It is called a free market for a reason. Those companies that are focused on the long game and equally reward shareholders, employees and customers, get rewarded a premium multiple…If you want to stop companies from paying dividends and repurchasing stock, give them a reason to invest in their U.S. companies…If Washington D.C. could act and behave with more stability and direction, then business would feel better about spending money on capex and hiring decisions.” *5.) Fed Chairman Jerome Powell had dinner at the White House with President Trump and Treasury Secretary Steve Mnuchin on Monday night. Apparently, the conversation was light with the president wanting to get the Chairman’s read on the economy before the SOTU address on Tuesday. It is not uncommon for presidents to meet with the current Fed Chairman once or twice a year. *6.) Former Fed Chairwoman Janet Yellen said it is possible that the next Fed move could be a cut in rates if the global economy continues to slow. She also said that the U.S. economy looks solid amid a thriving labor market, a strong consumer and contained inflation. *7.) Investors Intelligence said that the number of Bulls has grown from 45.8% last week to 48.6 this week. The number of Bears were unchanged but when the Bulls get to 50%, history shows that it becomes a more challenging time for the stock market. The CNN Fear/Greed index closed the week at 64 (strongly in the greed category) vs one month ago at 16 (at the fear level). The late December reading for the index was 2 (end-of-the-world kind of thinking). *8.) From the front lines of the trade war: Presidential economic advisor Larry Kudlow said on Thursday that “We’ve got a pretty sizable distance to go here,” referring to the ongoing trade negotiations with China. The Chinese state agricultural conglomerate COFCO Group said that it has recently purchased “millions of tonnes” of U.S. soybeans. In the latest round of talks, the Chinese apparently offered to buy another 5 million tonnes of soybeans. *9.) I am guessing that we will see the pace of stock buybacks pick up if it looks like the Sanders/Schumer proposal on restricting buybacks, gains any traction. I can’t imagine that it will. *10.) With an increase in the number of regulation-happy hawks populating both the House and Senate Banking Committees, I wouldn’t be surprised to see the number of bank mergers pick up before that coalition can get too well organized. Just saying…it might be prudent to get ahead of that potential wave.
According to last week’s nonfarm payrolls report, the 4th quarter ECI (employment cost index) for private sector wages and salaries rose 3.1% for a 2nd straight month and that matches the best pace since 2008.
In last week’s ISM manufacturing report of the 18 industries surveyed, 14 saw growth, up from 11 in December. The ISM said: “Comments from the panel reflect continued expanding business strength, supported by strong demand and output.”
The Commerce Department said that U.S. factory orders for November unexpectedly fell by 0.6% which follows a 2.1% decline in October. The decline was fueled by a sharp drop-off for machinery and electrical equipment.
The Institute for Supply Management said that the January ISM services index fell to 56.7% versus 58% in December. Companies reported slower growth in new orders, production and employment.
The Commerce Department said that the U.S. trade deficit narrowed in November to $49.3 billion from $55.7 billion in October, the first decline in 5 months. Imports fell by 2.9% to $259.2 billion while exports fell by 0.6% to $209.9 billion. The trade gap with China fell by $2.8 billion to $35.4 billion.
The narrowing of the trade deficit has caused economists to increase their 4th quarter final GDP forecast to 2.7%.
Baker Hughes said that the total active U.S. drilling rig count fell by 14 rigs in the last week to 1,045. Oil rigs fell by 15 to 847 and natural gas rigs added 1 rig to 198.
The National Retail Federation is forecasting U.S. retail sales to climb between 3.8% and 4.4% in 2019. We don’t have 2018 retail sales figures yet because of the government shutdown but the Commerce Department and the NRF is expecting last year’s retail sales to have grown at a 4.6% rate.
The Wall Street Journal survey of the small business (not the same as the NFIB) index fell to the lowest level since the 2016 presidential election. “Just 14% of firms expect the economy to improve this year, while 36% expect it to get worse.” One CEO announced: “I’d rather play it safe at this point. I’m divided right down the middle. Half of me is very positive. Half of me is very nervous.”
Here are January PMIs (Purchasing Managers Index where a reading above 50 indicates expansion and a reading below 50 equals contraction) from around the world: Japan (50.3), the Philippines (52.3), Taiwan (47.5), South Korea (48.3), Thailand (50.2), Indonesia (49.9), Vietnam (51.9), China (48.3) and the Eurozone (50.5).
German factory orders ended the 4th quarter down 1.6% month over month. Nine of the twelve months in 2018, saw factory orders fall for Europe’s largest economy.
Kelly Blue Book estimates that the average price of an automobile transaction in the U.S. climbed to 4.2% in January to $37,149 as the shift away from passenger cars drove prices higher. ATP by manufacturer: Honda +2.4% to $29,341; Fiat Chrysler + 5.0% to $39,484; Ford + 3.4% to $41,446; GM +2.4% to $40,664; Hyundai-Kia -1.0% to $25,116; Nissan +2.3% to $29,819; Subaru + 5.4% to $29,727; Toyota +3.0% to $33,258 and Volkswagen +4.2% to $37,149.
U.S. News & World Report is out with its 2019 list of best hotels around the world. Here is list of the top three in the U.S., Europe, Mexico and the Caribbean: The U.S. – Four Seasons Hualalai, Big Island Hawaii; The Peninsula Chicago and Four Seasons at The Surf Club, Surfside, Florida. Europe – La Reserve Paris; Hotel Sanders, Copenhagen and Hotel Eden, Rome. Mexico – Esperanza, Cabo San Lucas; One & Only Palmilla, Los Cabos and Las Ventanas al Paraiso, Los Cabos. The Caribbean – Jade Mountain, St. Lucia; Zemi Beach House Hotel & Spa, Anguilla and Ladera Resort, St. Lucia.
The National Oceanic and Atmospheric Administration estimates that in 2018, 14 natural disasters (hurricanes, wildfires and floods) cost $91 billion. 80% or $73 billion was attributable to just three events: Hurricane Michael, Hurricane Florence and the California wildfires. Last year’s wildfires set a record with $24 billion in losses.
Former “Bond King” Bill Gross plans to retire from Janus Henderson on March 1st. Gross helped found Pacific Investment Management Company (otherwise known as Pimco), the largest bond fund in the world. Four years ago, Gross moved on to Janus Henderson after a dispute with Pimco.
Goldman Sachs has announced after a months-long review they will exit the commodities business. The company said that the business uses too much capital for too little profit.
Microsoft has purchased BrightBytes data integration platform DataSense. Terms of the acquisition were not disclosed but DataSense will be integrated into the family of Microsoft Education products.
Tesla has said that it has acquired Maxwell Technologies for $4.75 per share. “Maxwell is focused on developing and manufacturing energy storage and power delivery solution-related products”, according to Seeking Alpha.
Spotify has acquired podcast companies Gimlet and Anchor as it tries to compete with Apple’s iTunes podcasting platform. Terms of the deal were not disclosed but the company said it plans to spend $400 to $500 million on acquisitions in 2019.
Seeking Alpha reports, “IBM and McCormick [have announced] an ongoing research collaboration using AI for flavor and food product development.”
BB&T will purchase SunTrust Banks for $28.24 billion in an all-stock deal. The merged value of the banks will be $66 billion and will make the combined bank the sixth-largest in the U.S. based on assets.
According to new Consumer Intelligence Research Partners data, the new installed base of home smart speakers is at 66 million units as of December 2018 versus 36 million at the end of 2017. Amazon’s Echo has 70% of the market. Google Home has 24% and Apple HomePod has a 6% share.
Southwest Airlines made its maiden voyage to Hawaii on Tuesday. The first “proving flight” for the Boeing 787-800 took off from Oakland, California bound for Honolulu with just the pilots and FAA officials on board. “The airline must get a government approval for long over-the-water flights, known as “extended-range twin-engine operational performance standards” or ETOPS”, reports CNBC.
Delta Air Lines debuted its first commercial flight of the Air Bus A220 on Tuesday morning with flights from La Guardia to Boston and Dallas/Fort Worth. The A220 features passenger perks like spacious overhead bins, big windows (even in the bathroom) and wider seats.
McDonald’s which has 37,000 locations around the world and thus a good proxy for growth said last week during its earnings call: “Consumer uncertainty is growing from France to China to the UK and elsewhere around the globe, in response to tightening economies and shifting political environments.”
Ford said that it is investing about $1 billion in its plants in Chicago to support the production of SUVs (Lincoln Aviators, Explorers and Police Interceptors). The investment will create 500 new jobs the company said.
IBM said that it is investing $2 billion in a new AI research hub located at the SUNY Polytechnic Institute campus in Albany, New York. “The AI Hardware Center will focus on chip research, prototyping, development, testing and simulation”, according to Seeking Alpha.
Brookfield Property announces that it will raise its quarterly dividend by 4.8% to $0.33 per share. The company also announced a share buyback of $500 million.
CNBC reports, “Last summer IHOP teased that it would change its name to “IHOb” as part of a marketing campaign for its line of burgers.” Well, it worked because last week IHOP Chief Marketing Officer Brad Haley said at Brandweek, a marketing conference, that the chain sold 4 times more burgers after the campaign.
Bank of America said that it will boost its stock buyback plan by 2.5 billion to $22.5 billion. The move comes after the Federal Reserve Board loosened its capital requirement on the bank after successful stress tests.
Google reports 4th quarter earnings of $12.77 per share on revenue of $39.28 billion, an increase of 21.5% year over year. The company said that CapEx increased by 80% year over year from $3.88 billion in 2017 to $6.85 billion in 2018.
LyondellBasell reports 4th quarter earnings of $1.79 per share on revenue of $8.88 billion, a decrease of 2.7% year over year.
IDEXX Laboratories reports 4th quarter earnings of $0.98 per share on revenue of $549.39 million, an increase of 8.5% year over year.
Disney reports fiscal 1st quarter earnings of $1.84 per share on revenue of $15.3 billion, a decrease of 0.3% year over year.
Tableau Data reports 4th quarter earnings of -$0.03 per share on revenue of $275.7 million, an increase of 10.6% year over year.
Cognizant Technologies reports 4th quarter earnings of $1.13 per share on revenue of $4.13 billion, an increase of 7.8% year over year.
Fortinet reports 4th quarter earnings of $0.59 per share on revenue of $507 million, an increase of 21.7% year over year.
General Motors reports 4th quarter earnings of $1.43 per share on revenue of $38.4 billion, an increase of 1.9% year over year.
Chipotle reports 4th quarter earnings of $1.72 per share on revenue of $1.23 billion, an increase of 10.8% year over year. The company also said that digital sales jumped by 66% and accounted for 12.9% of all sales.
GlaxoSmithKline reports 4th quarter earnings of £0.312 per share on revenue of £8.2 billion, an increase of 7.3% year over year.
Expedia reports 4th quarter earnings of $1.24 per share on revenue of $2.56 billion, an increase of 10.3% year over year.
Next week: Earnings from: Activision Blizzard, Under Armour, Nvidia, Cisco Systems, CenturyLink, Enbridge Energy Partners, PepsiCo, Coca Cola and Deere. Economic reports: Final 4th Quarter GDP, U.S CPI for January, U.S. PPI for January, U.S. Single Family Home Sales for December, U.S. retail Sales for January and Industrial Production for January.
WTI Crude oil: $52.55 per barrel. 10-year U.S Treasury note: 2.65%. Gold: $1,314 per ounce.
Sources: CNBC, Real Money Pro, 361 Capital, First Trust Economics, Seeking Alpha, MarketWatch, Estimize.com, Morningstar, Bloomberg, The Wall Street Journal, Yardeni Research, The Calafia Beach Pundit.
At the time of publication Cascade Investment Group and /or its clients owned shares BHGE, HMC, F, GS, MSFT, TSLA, SPOT, AAPL, IBM, MKC, BBT, AMZN, GOOGL, LUV, BA, DAL, MCD, DIN, LYB, IDXX, DIS, DATA, CTSH, FTNT, CMG, GSK, EXPE, BAC, BPY, ATVI, UA, NVDA, CSCO, CTL, ENB, PEP, KO and DE.
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.