Market Minutes for the week of January 21st:
“Being Irish, he had an abiding sense of tragedy, which sustained him through temporary periods of joy.” – William Butler Yeats
Here’s what I am thinking and hearing: *1.) David Kostin, Chief Equity Strategist at Goldman Sachs believes that all of the political drama is putting a lid on the stock market. This rally from the December lows he thinks, is “…masking the effect that the shutdown and uncertainty over trade policy is having on stock prices – absent these headwinds, Kostin argued, valuations would be higher today. Kostin points out that the Global Economic Policy Uncertainly Index, which measures policy uncertainty by analyzing the text of newspaper articles, just reached an all-time high of 304, ‘more than 3 times the historical median reading of 101.’”, reports MarketWatch. *2.) According to a Gallup poll conducted from January 2nd through the 10th that questioned a random sample of 1,017 U.S. adults 18 and older, 48% of Americans say economic conditions are worsening, up from 45% in December and 36% in November. However, at the same time, two-thirds said it was a good time to find a quality job. *3.) Brian Wesbury, the frequently accurate chief economist for First Trust: “Maybe this is why the stock market is up despite the lack of data. Investors can see the economy is not falling off a cliff. In fact, it remains very close to the above-trend growth rate of the past year. Right now, we’re estimating real GDP grew at a 2.5% rate in Q4, which would bring the growth rate for 2018 to 3.1%…the fastest pace since 2005.” *4.) Scott Grannis, economist and founder of the Calafia Beach Pundit: “If I were stranded on a desert island and could only access one chart to tell me what was going on in the world,…[the 2-year swap spreads (a financial contract that allows two parties to redistribute risk)], is the one I would pick…Swap spreads are excellent coincident and often leading indicators of financial market and economic health. When spreads are low, liquidity is generally abundant, risk aversion is low, systemic risk is low, and the economic outlook is generally healthy. 2-year swap spreads today are unusually low, less than 20 bps. Among other things, this tells me the banking system is healthy and there is no shortage of liquidity.” *5.) The market’s winning streak may be just beginning according to economist Edward Yardeni, who has spent decades on Wall Street running investment strategy for Prudential and Deutsche Bank. He points to a chart that is flashing negative sentiment and says, “at the end of last year the bull-bear ratio, which is something we watch from Investors Intelligence, fell below one. It’s got an awfully good track record as a contrary indicator…Bearishness was just so widespread that the market had a technical bounce, and now the fundamentals are going the right way…I’m sticking with 3100 [on the S&P 500 for 2019] and feel better about it.” Low interest rates, inflation and valuation multiples could be very positive for the market. *6.) From the frontlines of the trade war: China said that its official economic growth rate came in at 6.6% for 2018 – the slowest pace since 1990. Jim Cramer: “Either way, the weakness in China improves the prospect of a trade deal…The solution is pretty easy: Grant our companies the rights to operate independently of China, be willing to prosecute those who steal, including the execs who run Xiaomi, and then let the telcos offer subsidies for Apple phones on par with domestics, and it’s a done deal.” According to the Financial Times, the U.S has rejected China’s offer for preparatory talks citing lack of progress on “forced” technology transfers and “structural” reforms to China’s economy. *7.) The Investment Company Institute said that bond funds and bond ETFs brought in $9.3 billion in new cash during the last week. It’s the largest inflow into bonds since January of 2018. *8.) I like what Jim Cramer has to say about my continued hot button – high frequency and algorithmic trading and the damage it does to the markets. Cramer: “When the ref bungles a call of the magnitude we saw last weekend against the New Orleans Saints, the world goes up in arms. It’s such a glaring imperfection that people question the very moorings of the game and there’s an immediate outcry for better officiating, for instant replay, for new rules, for anything, anything to make it so a team is no longer denied a chance to go to the Super Bowl. If we only had a similar outcry, a similar revulsion, a similar uproar about the rules of our stock market – because, unlike the NFL, which cares about its popularity and its status, the exchanges and the people who run them clearly don’t or they would do something about the erratic way stocks can trade, and how there are blown calls all over the place and no one does anything about them…I think there should be an investigation about what happened to the American stock dream. How did we let the mechanics drive individual investors away? Why is it that nobody even seemed to care? Could there be more ennui about this bungling of an amazing institution, especially versus a blown call in the NFC Championship game?” *9.) The good news about the government shutdown is that the Fed is not getting enough data for the February meeting to lean one way or the other, hence most economists feel the “dovish” path is the only path under the circumstances. The bad news is that JP Morgan is the first bank to lower its 1st quarter GDP forecast to 1.75% from 2.0% because of the effects of the shutdown. It is becoming critical that government get opened again before major economic damage is done. *10.) It is still relatively early in the 4th quarter earnings reporting season, but some pockets of industrial strength and weakness appear to be emerging. Aerospace is strong. 5G semiconductor manufacturing is strong. Drug and biotech companies that focus on cancer are strong. Digitization and cloud computing are strong. Consumer discretionary and restaurants are strong. Housing and related is weak. Autos are weak. Low end retail (dollar stores and bargain outlets) are strong. High end retailing is weak.
Durable Goods Orders for December and New Home Sales for December are not available because of the ongoing government shutdown.
The IHS Markit U.S. Manufacturing PMI for January rose to 54.9 from 53.8 in December. Production was the highest since May of last year. New orders, employment and stocks of purchase also rose faster in the month.
The IHS Market U.S. Services PMI for January rose to 54.2 from 53.4 in December. New Business growth remained subdued compared to earlier in 2018.
The Conference Board said that the U.S. Index of Leading Economic Indicators fell by 0.1% in December and was down for the two of the past 3 months. The effects of the government shutdown were not present in the December reading.
The Richmond Fed manufacturing index for January came in at -2, up from -8 in December. It is the first time since August/September 2016 that the index has contracted for 2nd month in a row. New orders fell by 2 points, capital spending plans fell by 8 points, while the employment component rose by 5 points.
The National Association of Realtors said that December existing home sales fell by 6.4% to a seasonally adjusted rate of 4.99 million, the lowest level since November 2015. Inventory stands at 3.7 months and properties stayed on the market for 46 days, up from 42 days in November.
The U.S. Energy and Information Administration said that the U.S. will become a net exporter of energy in 2020 for the first time in nearly 70 years as shipments of liquefied natural gas make a bigger contribution. The country has been a net importer of energy since 1953. The EIA estimates that U.S. oil production will continue to set records through 2027 before it levels off.
Goldman Sachs head of commodities research David Currie believes that Brent crude oil will overshoot his price target of $67.50 in 2019. Factors in his prediction include: “China imports [of crude] were still up 30% year over year in December, supply is still coming off the market from OPEC and non-OPEC producers and global demand remains benign if not robust…”, reports Seeking Alpha.
Recession fears continue to be on the front burner, but Goldman Sachs remains unconcerned citing that the six main causes of recession over the last 100 years do not appear to be a threat now. Goldman chief economist Jan Hatzius: “The changes underlying the Great Moderation appear largely intact, and some have even strengthened…While some new risks have emerged, on net we see the U.S. economy as structurally less recession-prone than in the past…More importantly, the private sector remains in very good financial shape and looks much less vulnerable to a decline in asset prices or a tightening in lending standards than in the past couple of cycles”. Hatzius stated the five traditional recession causes are industrial shocks and inventory imbalances, oil shocks, excessive inflation, financial imbalances and fiscal tightening. None of which are currently present.
Japan’s January manufacturing PMI fell to 50.0 in December versus 52.6 in November to the lowest reading since August of 2016. The Eurozone manufacturing and services PMIs both fell to 50.7 in January from 51.1 the slowest pace of growth in 5 1/2 years. The German IFO business confidence index, their version of our ISM (Institute for Supply Management), dropped to 99.1 in January from 101 in December. That’s the weakest print since February of 2016.
Speaking at the Davos World Economic Summit on slowing economic growth, Chevron CEO Michael Wirth: “We’re not seeing signs that we’re hitting any kind of a wall.” He added that the company sells products such as lubricants and lubricant additives for construction, mining and transportation, industries that have been dependable indicators of economic activity and sales of these products do not indicate that growth will come to a halt.
Speaking of growth, here is the latest big sky crane update for U.S cities. Seattle is still in the lead with 59 cranes, that’s down from 65 six months ago but still far ahead of Los Angeles with 44 big units.
America’s favorite Valentine’s Day candy is not available this year. Necco, the original producer of “Sweethearts” went out of business last year and the new owner, Spangler Candy Company (Dum Dum lollipops) hasn’t had enough time to revive the heart-shaped candy, but promises Sweethearts will be back on the shelf for next year’s Valentine’s Day.
The Westminster Kennel Club Dog show will introduce two new breeds when 190 dog breeds walk down the purple carpet at Madison Square Garden next month. The Grand Basset Griffon Vendeen is a French rabbit-hunting hound with a “big goofy attitude” who loves to “sniff around.” The Nederlandse Kooikerhondje is the “Pied Piper of the dog world” according to its owner Rod Beckstead. It is a merry and clever breed that was initially trained to help Dutch duck hunters by attracting the bird’s interest and then luring them into net-covered canals.
For 2018, Boeing said that it received 1,090 gross orders and 893 net orders for a total list price of $140 billion. Orders for single aisle aircrafts (includes 737NG and 737 MAX) totaled 675 aircraft. Wide-bodied sales (includes 747,767, 777 and 787) totaled 218 planes.
Wells Fargo increased its quarterly dividend by $0.02 per share to $0.45 per share, an increase of 4.7%.
Streaming service Hulu is dropping the price of its most popular monthly plan to $5.99 from $7.99 as it seeks to counter and capture market share after the Netflix price increase.
Amazon has launched its delivery robot Scout. The device is the size of a “small cooler” and can roll along sidewalks delivering packages to a customer’s doorstep. Scout is currently operating in Snohomish County, Washington. Although the device is autonomous, an Amazon employee will initially accompany Scout on its deliveries.
Amazon has said that it has 10,000 employees dedicated to Alexa and more than 100 million of the devices have been sold since its inception.
Apple announces that Apple Pay is coming to Target, Taco Bell, Jack in the Box, Speedway convenience stores and Hy-Vee grocery stores. By adding these national retailers, 74 of the top 100 merchants in the U.S. and 65% of all retail locations across the country will accept Apple Pay.
“Viacom Inc. said it bought the ad-supported video streaming service Pluto TV for $340 million in cash, a move that gives the pay-television giant another entrée to the realm of online video,” according to MarketWatch.
iHeartMedia, the country’s biggest radio station operator, has gotten the approval from the bankruptcy court to emerge from bankruptcy with a restructuring plan that allows the company to slash its debt load and hand over control to a group of bondholders led by Franklin Advisers Inc.
Walmart has announced that it is hiring “hundreds” of new truck drivers for 2019, while raising driver pay. Drivers will now earn on average $87,500 a year with an all-in rate of $0.89 per mile. Last year Walmart hired 1,400 new truckers.
Southwest Airlines has said that the government shutdown could cost the company as much as $10 to $15 million this month. The shutdown has also delayed the opening of its California to Hawaii route.
The Cal Fire investigation team has concluded that the 2017 Tubbs fire was not caused by PG&E but rather by a private electrical system. The 2018 fires are still under investigation.
IBM reports 4th quarter earnings of $4.87 per share on revenue of $21.76 billion, a decrease of 3.5% year over year.
PetMed Express reports fiscal 3rd quarter earnings of $0.38 per share on revenue of $60.07 million, a decrease of 0.1% year over year.
Johnson & Johnson reports 4th quarter earnings of $1.97 per share on revenue of $20.39 billion, an increase of 0.9% year over year.
TE Connectivity reports fiscal 1st quarter earnings of $1.29 per share on revenue of $3.35 billion, an increase of 0.3% year over year.
Comcast reports 4th quarter earnings of $0.64 per share on revenue of $27.85 billion, an increase of 26.1% year over year.
Procter & Gamble reports fiscal 2nd quarter earnings of $1.25 per share on revenue of $17.44 billion, an increase of 0.2% year over year.
United Technologies reports 4th quarter earnings of $1.95 per share on revenue of $18.04 billion, an increase of 15.1% year over year.
Las Vegas Sands reports 4th quarter earnings of $0.77 per share on revenue of $3.48 billion, an increase of 2.7% year over year.
United Rentals reports 4th quarter earnings of $4.85 per share on revenue of $2.31 billion, an increase of 20.3% year over year.
Ford Motor reports 4th quarter earnings of $0.30 per share on revenue of $41.8 billion, an increase of 1.2% year over year.
Intel reports 4th quarter earnings of $1.28 per share on revenue of $18.66 billion, an increase of 9.4% year over year.
Union Pacific reports 4th quarter earnings of $2.12 per share on revenue of $5.76 billion, an increase of 5.7% year over year.
Starbucks reports fiscal 1st quarter earnings of $0.75 per share on revenue of $6.63 billion, an increase of 9.2% year over year.
AbbVie reports 4th quarter earnings of $1.90 per share on revenue of $8.31 billion, an increase of 7.4% year over year.
Next week: Earnings from: Caterpillar, Boeing, Facebook, Apple, Microsoft, Amazon, Edwards Lifesciences, AT&T, Visa, Honeywell, Align Technologies, PayPal, Altria, Royal Dutch Shell, Chevron, Exxon Mobil and Idexx Pharmacuticals. Economic reports: S&P Case-Shiller Home Price Index/Composite 20 for November, Consumer Confidence for January, Pending Home Sales for January, Chicago PMI for January, ISM Manufacturing Index for January, Construction Spending for January, University of Michigan Consumer Sentiment for January, ADP Private Payrolls for January and U.S. Non-Farm Payrolls for January.
WTI crude oil: $53.50 per barrel. 10-year U.S. Treasury note: 2. 71% Gold: $1,280 per ounce.
Sources: The Business Insider, Real Money Pro, CNBC, The Wall Street Journal, Bloomberg, Seeking Alpha, MarketWatch, 361 Capital, First Trust Economics, The Calafia Beach Pundit, Yardeni Research and The Street Insider.
At the time of publication Cascade Investment Group and /or its clients owned shares of BA, WFC, AMZN, AAPL, TGT, YUM, WMT, LUV, IBM, PETS, JNJ, TEL, CMCSA, PG, UTX, LVS, URI, F, UNP, SBUX and ABBV.
We also own shares in the following sectors: Industrials/Capital Goods, Information Technology, Health Care, Biotechnology, Telecom Services, Consumer Discretionary and Consumer Staples. A complete list is available upon request.
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.
U.S. IHS Markit Manufacturing PMI