Market Minutes for the week of January 14th:
“A man who views the world the same at 50 as he did at 20 has wasted 30 years of his life.” – Muhammad Ali
Here’s what I am thinking and hearing: *1.) Citigroup’s “Bear Market Checklist” is an early warning system set up for detecting an oncoming Bear market. It tracks 18 factors of which only 3.5 are currently flashing an amber warning light. Robert Buckland, chief global equity strategist at Citi, “For now, we are reassured. The checklist is telling us to buy this dip.” *2.) Tom Lee, co-founder and head of research at Fundstrat Global Advisors: “The buy the dip, which people thought died last year, is back. The probability of a double-digit year we think is the highest since 2009.” Lee forecasts the S&P 500 climbing to 2,835 by the end of the year, a 17% increase from current levels. *3.) From the front lines of the trade war: Reuters says that China’s 2018 trade surplus with the U.S. increased 17% from a year ago to $323.32 billion, the highest on record dating back to 2006. Exports to the U.S. climbed 11.3% year over year, while imports from the U.S. to China rose by 0.7% over the same period. Overall exports to the world by China fell by 4.4% year over year, well below a forecasted increase of 2.0%. Imports by China from the rest of the world fell by 7.6% year over year. Jim Cramer: “Yes, last week, decamped in a part of the nation [Silicon Valley] notoriously known as anti-Trump, I was repeatedly shocked at how many execs, off camera, said the same thing: if the Fed doesn’t try to stop our economy, we could be strong enough to take on the Chinese and end these dubious joint ventures that represent ridiculous technology transfer and outright theft.” According to the Wall Street Journal, Treasury Secretary Steve Mnuchin has recommended a plan to pull back tariffs on China while the negotiations continue. U.S Trade Rep Robert Lighthizer is resisting the plan. *4.) Tom Graff, Head of Fixed Income Strategy at Brown Advisory Group has a great take on the 4th quarter of 2018: “I’m bringing this up to tell you to not fight the last war. The thing I learned from the September-to-December selloff was that whenever we get a proper economic slowdown, the markets are going to way overshoot, probably because people are assuming a crisis mentality.” *5.) Ken Fisher, the head of Fisher Investments: “You know what IPO stands for, right? It’s probably overpriced. I put that at some length with a chapter in my 1987 Wall Street Waltz book. IPOs overwhelmingly can be bought cheaper a year or so later.” *6.) U.S. Trust Economics says that, “Some economists estimate that for every two weeks government services are stalled, the economy could be depressed by about 0.1%. That could likely mean that by the end of January, after almost a month of reduced services, GDP estimates could be trimmed by 0.2 to 0.3%. And with no resolution by the end of March, first-quarter growth estimates could fall to zero percent.” *7.) According to data from Morningstar, investors pulled a record $143 billion from actively managed funds in December. The record exodus brought the total to $301 billion for the year, just shy of 2016’s $320 billion drawdown. Hmmm, I wonder how much of that money has gone back in? Probably not nearly as much as came out. *8.) So far, January for the markets has been an upside-down image of December. Fear has melted into complacency as the Fed has walked back its hawkish stance from early October. Economic data shows that the economy is still on sound footing and we may be seeing a glimmer of light from the U.S.- China trade negotiations. We were pretty sure the wicked action in December’s markets did not reflect reality and that is now proving to be true. *9.) Once again, fear and panic prove to be flawed investment strategies. *10.) According to Dow Jones Market Data, for the first 12 trading sessions of 2019, the Russell 2000 (small cap) is up 8.8%, the best start in 32 years. The S&P 500 (large cap) is up 5.2%, the best start in 32 years. The DJIA is up 4.5% and the NASDAQ up 6.8%.
The Fed’s Empire State manufacturing index fell 7.6 points in January to a reading of 3.9, the lowest level in a year. New orders and shipments fell along with the six-month outlook.
The Fed’s Philly manufacturing index for January rose to a seasonally adjusted reading of 17, rebounding from a two-year low of 9.1 in December. The new orders component rose by 8 points to its highest reading in six months.
US Manufacturing output for December surged to 1.1% for the biggest gain in 10 months. The production of motor vehicles, construction supplies and a solid gain in business equipment contributed to the boost.
The University of Michigan’s consumer sentiment index for January dropped to 90.7, down from December’s final reading of 98.3. The weaker than expected data pared the rise of US Treasury Yields at 2.755%.
The Labor Department said that wholesale inflation, the producer price index (PPI), dropped by 0.2% in December to an annualized rate of 2.5%. Last July, the 12-month annualized rate of wholesale inflation hit a seven-year peak at 3.4%.
The Investment Company Institute said that money market mutual fund assets reached $3.066 trillion in the week ended January 11th, the highest level since March of 2010.
Former Fed Chair Janet Yellen thinks that the Fed has implemented its last rate hike of this current cycle. She said, in an address to the National Retail Federation’s annual event in New York City: “If there is a downturn in the global economy that spills into the U.S. … It’s very possible we may have seen the last interest rate hike of this cycle…I am very surprised on the focus [on the balance sheet selling off]…This is meant to be done in [a] way that’s not disruptive…It was important Powell indicated it’s open for a re-think if it looks like it is a problem…I don’t see that evidence now.”
Kansas City Federal Reserve President Esther George, one of the more hawkish members of the Fed and a current voting member said in a recent speech that now “might be a good time to pause” the rate hike cycle. “It seems to me that we should proceed with caution and be patient as we approach our destination,” George said.
Comments from the Fed’s December Beige Book: contacts in “many districts have become less optimistic.” Eight of the 12 Federal Reserve districts reported modest to moderate growth in December and early January. Kansas City reported flat to slight growth while St. Louis and Dallas reported a slower pace of growth.
According to data from John Burns Real Estate, sales of newly built homes fell by 18% in December. Due to the ongoing government shutdown, the official figures for November and December sales have not been released. Sales posted a sharp decline of 19% annually in November as well, according to JBRC analysts. The firm counts market ratings by 373 builders overseeing more than 3,500 new home communities. Hardest hit was Northern California where sales dropped by 40% and Southern California down 49%. The best region was the Midwest where sales fell by only 5%.
According to the National Association of Homebuilders (NAHB), builder sentiment rose 2 points in January to 58 on the monthly index. This followed the two previous months of sharp drops to the lowest level in more than 2 years.
CoreLogic says that single-family rent prices increased by 2.9% annually in November of 2018. Single-family home prices gained 5.1% annual in the month, the smallest gain since August of 2015. Vacancies in single-family rentals are already low and declined in November to 4.6% from October. The hottest rental markets continue to be Phoenix, Las Vegas and Orlando.
According to the National Golf Foundation, more than 200 golf courses closed in 2017 across the country, while only about 15 new ones opened amid a decline in golf participation. Given the lack of progress with my game, and the high level of frustration it produces, I have considered allocating the 5 hours spent on the course, to something different. Fly tying, bocce ball maybe?
U.K. Prime Minister Theresa May lost a crucial vote on her Brexit plans in the House of Commons by a vote of 432 to 202 to reject the deal. “Her deal with Europe is seen by some as a sell-out to the ideals of Brexit, reducing Britain’s influence while staying within many of the EU’s rules”, reports CNBC.
Core Japanese machinery orders registered no growth for November. A Cabinet Office official said that orders “aren’t on the upward trend that they once were” and is evidence of the slowing state of many of the world’s economies, this time from the 3rd largest.
College football’s national champion Clemson University came to the White House for dinner on Monday night. The menu that President Trump served up included Wendy’s, McDonald’s, Burger King and Domino’s Pizza. With much of the White House residence staff on furlough because of the government shutdown, the President chose his favorite fast-food suppliers over a private caterer.
New York Governor Andrew Cuomo is soon expected to announce in his State of the State address a proposal to legalize cannabis in the state. It is forecast that legal weed sales would generate $300 million in annual tax revenue.
Canopy Growth announced that it has been granted a license by New York state to process and produce hemp aided by the efforts by Gov. Andrew Cuomo and Sen. Chuck Schumer. Canopy Growth, a Canadian company, plans to invest between $100 million and $150 million in its New York operations.
California utility PG&E has said it will file for bankruptcy as the company faces almost $30 billion in liability costs stemming from the devastating wildfires of 2017 and 2018.
Sears has been saved from liquidation at the 11th hour by its chairman Eddie Lampert with a $5 billion deal with Gotshal & Manges. If all goes well, Sears will be able to save 400 stores and 50,000 jobs.
Delta Air Lines says that the partial government shutdown has cost the airline $25 million in revenue as fewer government employees and contractors are traveling. The shutdown is also preventing airlines from introducing new routes and aircraft because they need federal officials to sign off on those plans.
According to the Associated Press, Netflix will hike prices by 13% to 18% and is the largest increase by the company in 12 years. This will raise the price of the most popular plan from $11 to $13 per month.
“Verizon is expanding a partnership with Apple Music, offering the streaming service as a built-in inclusion in its Beyond Unlimited plans”, reports Seeking Alpha.
More from Seeking Alpha: “IBM and Juniper Networks announce a $325 million agreement that will have IBM managing the cloud transition of Juniper’s infrastructure. IBM will use the IBM Services platform with Watson to help manage JNPR’s support systems including data centers, help desks and data and voice networks.”
Cannabis lovers take note, Costco sells a 24-pound “storage bucket” of ready-made macaroni and cheese. Listed under “Emergency Kits & Supplies,” the bucket costs $89.99, contains 180 servings with a 20-year shelf life. Here’s the bonus according to People magazine: You can fit “100 baseballs, half a bale of hay or your average 3-year-child” in the container once it’s empty.
Ollie’s Bargain Outlet said that total sales increased 16.6% during the November-December holiday period with comparable store sales up 7.1%
General Motors said that it expects earnings growth in 2019 and forecasts EPS of $6.50 to $7.00 per share for the year vs analysts’ consensus of $5.95 per share. Adjusted automotive free cash flow is anticipated to be between $4.5 and $6.0 billion.
Ford has announced plans to develop a hybrid and all-electric F-150 pickup truck with technology and design cues from the Mustang hybrid.
Fossil has announced a plan to sell $40 million of smartwatch intellectual property to Google. Fossil said that its R&D team will join Google.
“Google is planning to build a $600 million data center in Minnesota that would be powered by two Xcel Energy wind farms according to the Minnesota Public Utilities Commission”, reports Seeking Alpha.
According to Consumer Intelligence Research Partners, Amazon had 101 million U.S. Prime members at the end of last year. “The research group says 62% of Amazon’s U.S. customers are Prime members and have an average annual spend of $1,400 compared to $600 for non-Prime customers. Of the members, 36% pay the monthly fee, 58% pay annually, and 7% are on a trial basis”, as stated on Seeking Alpha.
Taco Bell said that it will start testing a vegetarian menu later this year. Offering a vegetarian menu will help the Mexican fast food chain cement itself as the go-to option for non-meat eaters.
Walmart has announced that it will add four more delivery companies to expand its delivery services. The retailer will add Point Pickup, Skipcart, AxleHire and Roadie.
Fiserv and First Data have agreed to merge in an equity deal that will value the combined entity at $22.74 billion.
Newmont Mining has acquired Goldcorp in a stock for stock transaction valued at $10 billion.
Goldman Sachs reports 4th quarter earnings of $6.04 per share on revenue of $8.08 billion, a decrease of 0.5% year over year.
Wells Fargo reports 4th quarter earnings of $1.21 per share on revenue of $20.98 billion, a decrease of 4.9% year over year.
Citigroup reports 4th quarter earnings of $1.61 per share on revenue of $17.12 billion, a decrease of 2.2% year over year.
JP Morgan reports 4th quarter earnings of $1.98 per share on revenue of $26.8 billion, an increase of 4.1% year over year.
Bank of America reports 4th quarter earnings of $0.70 per share on revenue of $22.7 billion, an increase of 11.3% year over year.
United Continental reports 4th quarter earnings of $2.41 per share on revenue of $10.49 billion, an increase of 11.0% year over year.
CSX reports 4th quarter earnings of $1.01 per share on revenue of $3.14 billion, an increase of 10.2% year over year. The company also added a new $5 billion share buyback program.
Netflix reports 4th quarter earnings of $0.30 per share on revenue of $4.19 billion, an increase of 27.4% year over year. The company also estimated that it would add 9.4 million global memberships in the 4th quarter.
Next week: Earnings from: IBM, Ford, United Technologies, J&J, Proctor & Gamble, Colgate Palmolive, United Rentals, TE Connectivity, Intel, Starbucks, Bristol-Myers Squibb, Union Pacific, Southwest Airlines and AbbVie. Economic reports: Existing Home Sales for December, New Home Sales for December, U.S. Leading Economic Indicators for December and U.S Durable Goods Orders for December.
WTI crude oil: $52.84 per barrel. 10-year U.S. Treasury note: 2.75%. Gold: $1,290 per ounce.
Sources: The Calafia Beach Pundit, Real Money Pro, CNBC, Seeking Alpha, MarketWatch, 361 Capital, First Trust Economics, Zero Hedge, Bloomberg, The Business Insider, The Wall Street Journal, Reuters, Estimize.com, U.S. Trust Economics, and Econoday.
At the time of publication Cascade Investment Group and /or its clients owned shares of MCD, QSR, DPZ, CGC, DAL, NFLX, VZ, AAPL, IBM, JNPR, COST, OLLI, F, GOOGL, XCEL, AMZN, YUM, WMT, FISV, GS, WFC, C, JPM, BAC, UAL.
Rest in Peace Jack Bogle (Founder of the Vanguard Group and creator of the first indexed mutual fund).
Jack Bogle on diversification: “Don’t look for the needle in the haystack. Just buy the haystack.”
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.