Market Minutes for the week of January 28th:
“To be absolutely certain about something, one must know everything or nothing about it.” – Henry Kissinger
Here is what I am thinking and hearing: *1.) I understand that the NFL is considering renaming the Super Bowl. Going forward, they plan to call it “The New England Patriot Invitational.” *2.) Since I began writing my weekly Market Minutes, the positive feedback has continued to grow. If there are other friends, acquaintances, family members, that you think would enjoy this weekly commentary, please feel free to share it by forwarding it on to them. If they like it, past editions can be found on our website. *3.) The economic and business elite at the World Economic Forum in Davos, Switzerland are sounding a somber tone compared to comments from January 2018’s event. Morgan Stanley CEO James Gorman: “Everybody’s skittish, you talk to enough people and you express your skittishness, and it echoes and it just keeps compounding…By the third day everybody’s a little depressed, and I spoke at a dinner we hosted last night with a bunch of CEOs and clients and I said I don’t get it, I mean I don’t get it, we’re not living in a depressing economic world at the moment.” Guggenheim CIO Scott Minerd: “Coming [to Davos] last year, there was such euphoria after the tax cut, the stock market was making new highs. This year, everybody’s concerned about economic slowdown, recession, the trade war. So, I’m thinking to myself, time to go the other direction. I got suspicious that this place is the land of contraindication.” *4.) According to the Wall Street Journal, Fed officials have been discussing when to curtain the reduction of bonds it holds on its balance sheet. On January 15th Kansas City Fed President Esther George told the Journal, “A lot of the heavy lifting has been done. We’re waiting for the committee to be satisfied that they have reached sufficient understanding of what all the moving pieces are.” With about $500 billion to go (which equals 50 more bps of rate increases), let’s hope Esther is persuasive amongst her colleagues. *5.) During this week, 113 of the S&P 500 companies will have reported 4th quarter earnings, while 13 of the Dow 30 will have done the same. Tony Dwyer of Canaccord Genuity says that so far this earnings season, “a large percentage of companies are beating lowered consensus expectations with 58.0% and 72.3% are beating on the top and bottom lines, respectively.” Fourth quarter revenue growth is estimated at 5.6% and after-tax profit margins remain at record highs. If these trends continue through the rest of the reporting season, stocks can certainly be expected to hold the January rally. *5.) So far so good Tony. We have seen some impressive beats by Goldman Sachs, Boeing, Facebook, IBM, 3M, ServiceNow, United Technologies, Qualcomm, Procter & Gamble, Align Technologies and Amazon. *6.) December was the worst December for the stock market (S&P 500) since the Great Depression (-9.6%), so I guess it’s not much of a surprise that January was the best January for the S&P 500 since 1987 (+7.9%)? Off of the December 24th low, the S&P 500 is higher by 15%. Given this kind of 2-month volatility, it is imperative to be able to distinguish between manufactured, algorithmic-machine driven panic and real corporate/economic fundamentals that are in place. Think about that for a moment, that’s a 15% swing between “fake news” and reality in just a month and a week. Just crazy! *7.) From the front lines of the trade war: Dennis Muilenburg CEO of Bowing: “I can tell you, having been intimately involved in the discussion and engagement with the governments of both in the U.S. and China that we see progress on that front.” Jim Cramer: “I come back and say, if there were ever a time to get the Chinese to play fair, it’s now — when we have a shrinking pool of workers and far more jobs wanted than we can fill and they have too many mouths to feed.” The just concluded two-day trade talks with China at the White House focused on technology transfer, intellectual property right protection and enforcement and cybertheft of U.S. commercial property. President Trump also indicated that he may be willing to extend the tariff deadline as long as talks are progressing. *8.) According to NerdWallet here are the average and median 401(k) balances by age on the Fidelity platform as of December 31st, 2018: Ages 20-29: Average – $11,600, Median – $4,000. Ages 30-39: Average – $43,600, Median – $16,500. Ages 40-49: Average – $106,200, Median – $36,900. Ages 50-59: Average – $179,100, Median – $62,700. Ages 60-69: Average – $198,600, Median – $63,000. *9.) Excuse me but what recession are the “experts” referring to? The January ISM index is up 2.6 points from December to 56.6. January consumer confidence jumps to 91.2 from 90.7 in December. January nonfarm payrolls are a blockbuster at 304,000 new jobs. *10.) I continue to shake my head in disbelief as to how wrong conventional wisdom was in December.
In a stunning shift, the Federal Reserve implied that it might be done raising interest rates. Fed Chairman Jerome Powell said that their new-found caution can be attributed to more than a half-dozen “crosscurrents.” Powell pointed out that “growth has slowed in some major foreign economies, particularly China and Europe.” He mentioned the festering trade dispute between the U.S. and China and a messy attempt by the U.K. to exit the European Union is hampering growth. “Financial conditions tightened considerably late in 2018,” said the Chairman alluding to a surge in interest rates and a collapsing stock market. Fed surveys of consumers and businesses also showed less optimism than they did just several months ago according to Mr. Powell.
As the Fed adjourned its two-day meeting in Washington, they voted 10-0 to keep rates at current levels. The Fed said, “In light of global economic and financial developments and muted inflation pressures, the FOMC will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.” The Fed went on to say, it continues to think “the most likely outcome” for the U.S. economy is sustained growth with strong labor market conditions and inflation near 2%.
Here is what Tom Graff, head of fixed income for Brown Advisory Group thinks: “Does the Fed know something we don’t? This is a very tempting conclusion. I’m usually not one to jump to these kinds of conclusions, but I think it is fair to assume the Fed fears things are worse than they look now. Otherwise this about-face on rate hikes seems premature. What are those fears based on? Probably conversations with business contacts and their non-U.S. counterparts. The Fed relies quite a bit on a semi-formal network of business contacts that both the Board and the regional presidents have, and if they have turned more negative the Fed is going to listen.”
The Labor Department said that 304,000 new non-farm payrolls were created in January. That’s a huge number but it should be tempered by the fact that December’s total was revised down by 90,000 jobs. The government shutdown does not have a direct effect on the nonfarm payroll numbers. The figure is derived each month by the Labor Department calling up businesses and asking how many new workers they employed that week. The shutdown may have had an effect on the unemployment rate, which is determined by the Labor Department calling up individual households and asking whether you personally, have a job or not.
ADP/Moody’s Analytics said that private payrolls for January grew by 213,000 vs estimates of 178,000. Medium-sized businesses (that employ 50-499 people) added the most with 84,000 new jobs. Large businesses (+500 people) grew by 66,000 and small businesses added 63,000 new workers. The service sector contributed 145,000 of the jobs led by professional and business services, education and health services.
The Dallas Fed Manufacturing Survey for January rose to a +1 from a -5.1 in December. Production rose to +14.5 from +7.3, Capacity Utilization rose to +14.8 and New Orders fell slightly to +11.6 from +14.4. Upward pressure on input prices and wages eased further in January.
The Chicago PMI for January fell to 56.7 from 63.8 in December, the weakest print since January 2017. The 3-month average is 61.3 and the 6-month average is 61.5.
The Institute for Supply Management said that the January ISM manufacturing index hit 56.6, up from 54.3 in December. New orders, production and employment all increased.
The Conference Board said that U.S. consumer confidence fell in January to 120.2 from 126.6 in December. While confidence in the broader index remained strong, the Expectations index fell hard from 97.7 in December to 87.3 in January. The very volatile financial markets and the government closure were mainly responsible for the drop.
The University of Michigan Consumer Sentiment Index for January rose to 91.2 from 90.7 in December. Consumer expectations rose by 1.6 points to 79.9 and that helped fuel the increase.
The National Association of Business Economists (NABE) released its January Business Conditions Survey and here are some of the summary responses from companies surveyed: “…most respondents do not expect a recession within the next 12 months, but fewer respondents than previously expect robust economic growth in the year ahead.”…“Fifty-three percent of survey respondents report shortages of skilled labor at their firms and the current tight labor market conditions continue to push firms to raise wages, increase training, and consider additional automation.”…“Additionally, fewer survey respondents report rising sales at their firms in the fourth quarter of 2018 compared to the third quarter. Profit margin increases became significantly less widespread in the fourth quarter of 2018.”
The S&P CoreLogic Case-Shiller National Home Price Index/Composite 20 rose by 0.3% in November and was 4.7% higher than a year ago for the slowest pace of appreciation since January 2015. The cities with the biggest year over year gains continued to be Las Vegas (+12.0%), Phoenix (+8.1%) and Seattle (+6.3%). On a month over month basis, the cities with the biggest price declines were San Francisco, Seattle, Chicago and Cleveland – all down 0.7%.
The National Association of Realtors (NAR) said that pending home sales for December fell by 2.2% month over month and is down 9.8% year over year, even as the 30-year mortgage rate fell from 5.1% in November to 4.61% in December.
The worst sales pain is being felt in Southern California as sky high prices have weighed heavily on potential buyers. Year over year in December, sales transactions have dropped by 20.3%.
The Commerce Department said that November new home sales soared 17% to an annualized rate of 657,000, an 8-month high. The median sales price was $302,400. The report was due 2 weeks ago and delayed due to the government shutdown.
The Congressional Budget Office has estimated that the partial government shutdown cost the economy $11 billion and $3 billion of the loss is permanent.
The Baker Hughes oil rig count rose by 9 to a total of 1,059 active drilling rigs in the last weekly report which follows a decline of 25 rigs in the week prior. Oil rigs rose by 10 to 862 and natural gas rigs fell by 1 to 197.
According to Refinitiv, natural gas demand in the lower 48 states hit a record high 145.1 billion cf/day on Wednesday as the Polar Vortex settled in. Several utilities in affected states are urging customers to curtain power and gas usage as supplies of natural gas dwindle.
According to Reuters, Europe is now the top purchaser of U.S. liquified natural gas after nearly a 5X spike in U.S. LNG sales to the continent this winter. Second only to Qatar, the US total shipments from October to January were 3.23 million metric tons or 48 cargoes.
The Eurozone said as expected, its economy grew by 0.2% quarter over quarter and +1.2% year over year. This marks the 5th quarter in a row that has seen a moderating pace of growth. While maintaining the lowest rate of unemployment for the region since October of 2008, with a steady at 7.9%.
Germany saw retail sales fall by 4.3% month over month in December, the biggest one month decline in 11 years. The German unemployment rate held steady at 5.0%, the lowest level since Checkpoint Charlie fell.
The RV Industry Association’s December survey of manufacturers found that total shipments of RVs’ finished the month with, “28,363 wholesale shipments, a decrease of 21.7% from the 36,227 units shipped last December”.
According to CNBC, toy industry sales for 2018 broke a “4-year growth streak by falling 2% ($21.6 billion vs $22 billion in 2017)”. The closure of Toys R Us which contributed 10% to 15% of all toy sales before its closure in June, was responsible for the overall downturn. The best-selling toys? Action figures and accessories followed by dolls and youth electronics.
Wells Fargo is using two approaches – one in marketing and the other in hiring – to clean up its image after a series of consumer-abuse scandals in 2016. “This is Wells Fargo” focuses on the changes the bank has made to improve the customer experience. The other is the hiring of 10 high-profile (outside) financial professionals (from Citibank and Goldman Sachs) to top positions within the bank.
“Boeing is awarded a $2.46 billion contract for production and delivery of 19 P-8A surveillance aircraft – 10 for the U.S. Navy, five for the government of Norway and four for the U.K. – and other equipment”, reports Seeking Alpha.
Trader Joe’s said that it is discontinuing its 10-year-old New York City grocery delivery on March 1st, in part because it was too costly to maintain. The company said that it has no plans to introduce it to other markets.
According to CNBC sources, Amazon plans to launch a new marketplace targeting Middle Eastern countries. The initial main target focus will be United Arab Emirates and Saudi Arabia. In 2017 Amazon purchased Dubai-based retailer Souq.com for $508 million.
“Fox News has topped total-day cable ratings for January – marking 17 straight years atop the cable news food chain”. It’s the 31st straight month as the most watched basic cable network in total-day viewership at 1.3 million viewers. Fox News was No. 2 in prime time with 2.2M viewers in January behind only ESPN, according to Seeking Alpha.
Also from Seeking Alpha, “Exxon Mobil confirms it reached a final investment decision to begin construction on a new unit at its Beaumont, Texas refinery that will increase capacity by more than 65% or 250,000 barrels per day. The expansion will create the largest refinery in the U.S. at about 616,000 barrels of oil per day”.
Apple and Aetna are teaming up on an app called Attain that offers customizable challenges, goals, and rewards that include an Apple Watch. “Participating members who don’t already have an Apple Watch can get a Series 3 for free then “work off” the payment by using the app and meeting fitness goals”, according to Seeking Alpha.
Apple reports fiscal 1st quarter earnings of $4.18 per share on revenue of $84.3 billion, a decrease of 4.5% year over year.
Other Apple quarterly statistics: iPhone revenue – “$51.98 billion. Service revenue – $10.9 billion. Cash on hand – $245 billion up 3% from the prior quarter. Revenue from China- $13 billion, down 27% from a year ago. Gross profit margin from Services (iTunes, iCloud, App Store) was 62.8% up from 58.3% a year ago”. seekingalpha.com
Caterpillar reports 4th quarter earnings of $2.55 per share on revenue of $14.3 billion, an increase of 10.9% year over year.
Align Technologies reports 4th quarter earnings of $1.20 per share on revenue of $534 .02 million, an increase of 26.7% year over year.
ServiceNow reports 4th quarter earnings of $0.77 per share on revenue of $723.7 million.
Pfizer reports 4th quarter earnings of $0.64 per share on revenue of $13.98 billion, an increase of 2.0% year over year.
Boeing reports 4th quarter earnings of $5.48 per share on revenue of $28.3 billion, an increase of 14.3% year over year.
AT&T reports 4th quarter earnings of $0.86 per share on revenue of $47.99 billion, an increase of 15.2% year over year.
Tesla reports 4th quarter earnings of $1.93 per share on revenue of $7.23 billion, an increase of 119.8% year over year. The company also reports that is CFO Deepak Ahuja will retire in 2019. It’s the second CFO to come and go from Tesla in just 2 years.
Microsoft reports fiscal 2nd quarter earnings of $1.10 per share on revenue of $32.5 billion, an increase of 12.4% year over year.
Facebook reports 4th quarter earnings of $2.38 per share on revenue of $16.91 billion, an increase of 30.4% year over year. The company said that daily active users were 1.52 billion and grew in every one of Facebook’s geographical areas. Monthly active users were 2.32 billion. Average revenue per user was $7.37, a 21% increase from last quarter and 19% higher from last year.
Amazon reports 4th quarter earnings of $6.04 per share on revenue of $72.4 billion, an increase of 19.8% year over year. The company said that Amazon Web Services (AWS) generated $7.43 billion of revenue in the quarter a 45% jump from a year ago. Revenue by product: Online stores – $39.8 billion. Physical stores – $4.4 billion. Third-party sellers – $13.4 billion. Subscription services – $4.0 billion. Other – $3.4 billion.
Visa reports fiscal 1st quarter earnings of $1.30 per share on revenue of $5.5 billion, an increase of 13.2% year over year.
PayPal reports 4th quarter earnings of $0.69 per share on revenue of $4.23 billion, an increase of 13.1% year over year.
Altria reports 4th quarter earnings of $0.95 per share on revenue of $4.79 billion, an increase of 1.7% year over year.
Next week: Earnings from: Google, Disney, Tableau Data, Chipotle, GM, Spotify, Take Two Interactive, Cognizant Technologies, Fortinet, Nvidia, GrubHub and Buckeye Partners. Economic reports: 4th Quarter GDP, U.S. Factory Orders for December, U.S. ISM Non-Manufacturing Index for December, Wholesale Inventories for January, U.S. Durable Goods Orders for December, U.S. Housing Starts for December, Retail Sales for December and U.S. New Manufacturing Orders for December.
WTI crude oil: $54.63 per barrel. 10-year U.S. Treasury note: 2.69% Gold: $1,322 per ounce.
Sources: CNBC, Real Money Pro, Estimize.com, Morningstar, Seeking Alpha, MarketWatch, First Trust Economics, Zero Hedge, 361 Capital, Bloomberg, The Wall street Journal, Reuters and The Business Insider.
At the time of publication Cascade Investment Group and /or its clients owned shares of GS, BA, FB, IBM, MMM, NOW, UTX, QCOM, ALGN, AMZN, WFC, XOM, AAPL, CAT, PFE, T, TLSA, MSFT, V, PYPL, MO.
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.