Market Minutes for the week of January 7th:
“Men go to far greater lengths to avoid what they fear than to obtain what they desire.” – Dan Brown, The Da Vinci Code
Here’s what I am thinking and hearing: *1.) What a difference a few words and sentences can make. Last Friday Fed Chairman Jerome Powell said: “As always, there is no preset path for policy. And particularly with muted inflation readings that we’ve seen coming in, we will be patient as we watch to see how the economy evolves…No one knows whether this year will be like 2016 [when the Fed indicated four rate hikes but increased only once as conditions tightened]. But what I do know is that we will be prepared to adjust policy quickly and flexibly and to use all of our tools to support the economy should that be appropriate to keep the expansion on track, to keep the labor market strong and to keep inflation near 2 percent.” *2.) As if that wasn’t enough, Powell went on to say while speaking at the American Economic Association and Allied Social Science Association annual meeting in Atlanta: “…I’ll say again, if we reach a different conclusion, we wouldn’t hesitate to make a change. If we came to the view that the balance sheet normalization [QT] plan – or any other aspect of normalization – was part of the problem, we wouldn’t hesitate to make a change.” Holy cow, what a change in the Fed’s policy stance since October 4th. I don’t think for a minute that Powell fears Trump, but it does look like the Fed is watching and listening. *3.) I think there is a chance that those comments from the Chairman may have put a floor under the market, especially if the economy hangs in there and 4th quarter earnings are decent. *4.) According to TrimTabs Investment Research, mutual funds invested in stocks and bonds lost a record $152 billion in December while ETFs had their first back-to-back weekly outflows since July, losing $7.1 billion of value in just two weeks. And for only the second time in the past decade, the S&P 500 did not move in the direction that corporate actions (buybacks) were expecting. Blame the algos, the quants, and ultimately the SEC’s lack of concern for the integrity of price discovery. *5.) Jonathan Golub, chief U.S. equities strategist for Credit Suisse: “Based on fundamentals, I don’t think the pullback we had in this market was ever justified. Markets will do what they’ll do. I think you have significant upside here. Therefore, we would think that the bottom has been put in this market.” Jamie Dimon, CEO of JP Morgan: “Markets are overreacting to short-term sentiment around a whole bunch of complex issues…My view is that the consumer is in good shape and is continuing to grow, and they have backwinds with jobs and wages going up…I think you’re going to have decent growth in 2019 in America.” *6.) Citigroup’s chief U.S. equity strategist Tobias Levkovich said that the bank’s panic/euphoria model hit extreme levels of panic in late December. “The model – which takes into account factors such as newsletter sentiment, margin debt and options activity – has had a good track record of predicting pullbacks and surges”, reports CNBC. Levkovich says that now the model is indicating “high probabilities of making money (with average 18% upward moves [in the S&P 500] looking out 12 months)…with our key sentiment indicator implying a more than 97% chance of the S&P 500 being higher in 12 months.” *7.) Jeremy Siegel, professor of finance at the Wharton School of Business at the University of Pennsylvania who called this Bull market from its beginnings, said that even if there is no earnings growth in 2019, this is a “cheap market”…“I’m not concerned about the Fed. With the 10-year at its level that we see now we won’t see any increases.” Stocks could rally between 5% and 15% in 2019. *8) Wall Street veteran and legend, Blackstone’s Byron Wien (in his 34th annual Top 10 Surprises list), sees the S&P 500 rallying as much as 15% to new highs in 2019. He doesn’t think the Fed will raise rates at all this year and doesn’t think there will be a “whiff” of a recession until 2021. FYI, looking back on his Top 10 Surprises for 2018, Wien got it mostly right on the markets, the Fed and the economy. *9.) From the front lines of the trade war: Apple CEO Tim Cook on the inside information he has from those involved in the trade negotiations, “It is a very complex trade agreement and it needs to be updated, but as I’ve said before, I’m very optimistic that this will happen. That clearly will be good not only for us, frankly, but I think more about the world in general. The world needs a strong U.S. and China economy for the world economy to be strong.” The Chinese Caixin/Markit Manufacturing Purchasing Managers’ index survey (PMI) which measures small and mid-size companies, fell to 49.7 in December from 50.2 in November. The Chinese National Bureau of Statistics said the country’s official PMI which measures activity at large companies, fell to 49.4 in December, the weakest reading since February 2016. *10.) “I coulda been a contender.” – Marlon Brando. Remember Bitcoin? In December of 2017 it was the rage, trading around $20,000. Today, it trades at $3,660. Ouch! Get me out!
Minutes from the December Federal Reserve meeting revealed that rate increases could be on hold until May at the earliest. Fed officials were of the belief that some further rate increases would be necessary but stressed that a “relatively limited amount of additional tightening likely would be appropriate.”
Fed Chairman Powell said in an address to Economic Club of Washington D.C. that the longer the government shutdown drags on, the more likely it is that they will be hampered by a lack of data that is used in formulating its economic outlook and, consequently, monetary policy. The Department of Commerce will be particularly hamstrung when it comes to obtaining data on GDP and retail sales.
St. Louis Fed President James Bullard (one of the more dovish Fed governors) said that the December rate increase was an “overreach” and he argued against the move. As for now he says the Fed should not be forecasting any more rate increases.
The Dallas Fed Manufacturing Survey fell to a -5.1 in December vs a +17.6 reading in November.
The ISM services index for December fell by 3.1 points in December to 57.6, the lowest reading since July. Of the 18 industries surveyed, growth was reported in only 16 vs 17 as in the previous 3 months. The inventory component fell 6 points to the lowest reading since January. The employment component fell by 2.1 points, backlogs fell 5 points and new orders rose slightly by 0.2 points.
The ISM manufacturing index for December fell to 54.1 from 59.3 in November and was the lowest reading since November 2016. New orders fell sharply by 11 points. Backlogs fell by 6.4 points while inventories were mixed. Of the 18 industries surveyed, only 11 saw growth, down from 13 in November. Six industries actually saw a contraction in activity in the month.
The National Federation of Independent Business (NFIB) said that the small business optimism index for December fell by 0.4 points to 104.4 for the 4th straight month of declines which puts the index at the lowest level since October 2017. Capital spending plans declined and “Those That Expect a Better Economy” dropped by 6 points to the lowest level since November 2016. “Positions Not Able to Fill” rose by 5 points, the most on record.
Payroll services provider ADP said that 271,000 private jobs were added in December, the biggest monthly gain since February 2017. Professional and business services led the way with 66,000 new jobs. Education and health services contributed 61,000 and leisure and hospitality 39,000 new jobs.
December nonfarm payrolls grew 312,000 and way above the estimate of 184,000 new jobs. Construction was higher by 38,000 and the health and education sector contributed 82,000 new positions. Manufacturing added 32,000 new workers. There was a 0.4% increase in hourly earnings for an annual wage growth of 3.2%.
After the recent drop in the 10-year yield, the Mortgage Bankers Association (MBA) said that purchase applications increased by 16.5% last week while refi applications jumped by 35.3%. During that period the 30-year mortgage rate dropped by 10 bps to 4.74%, the lowest level since April.
The Labor Department said that U.S. consumer prices (CPI) fell by 0.1%, the first decline in 9 months. The core rate for 2018 averaged 2.2%. The Fed’s favorite indicator, personal consumption expenditures (PCE) increased 1.9% for the year and is in line with the Fed’s 2.0% target.
The high yield or “junk bond” market has effectively been frozen for 40 days as turmoil engulfed the markets. Not a single deal came to market in December, for the first time since 2008. In fact, the 40-day drought is the longest stretch since 1995. It looks like a thaw may be coming however. Targa Resource Partners, a junk bond-rated midstream energy company (BB-) has filed to sell $750 million of bonds due in 2027.
U.S. auto makers reported that Americans bought cars and light trucks at an annual rate of 17.55 million units in December, the fastest rate since November of 2017.
In other parts of the world, Hong Kong’s December PMI came in at 48 vs 47.1, Singapore – 52.7 vs 53.8, the UK – 51.2 vs 50.4 and the Eurozone – 51.2 vs 52.7 in November.
Saudi Arabia said that it plans to cut crude oil exports to 7.1 million barrels per day in January. The 800,000 bbl/day reduction come on the heels of another reduction in November.
Seeking Alpha reports, “Saudi Arabia is nearing a deal to invest in U.S. liquified natural gas and has narrowed its focus to a shortlist of at least four U.S. LNG projects.”
According to an audit by Dallas-based petroleum consulting firm DeGolyer and MacNaughton, Saudi Arabia’s crude oil reserves total above 268.5 billion barrels, 2.2 billion barrels more than Saudi Aramco reported in its last annual review. Total natural gas reserves stand at 319.5 trillion cubic feet up from 302.3 trillion cubic feet at the last audit.
Goldman Sachs has cut its oil price forecast for 2019. The bank expects WTI crude to an average $55.50 per barrel and Brent crude at $62.50 per barrel this year. Increased shale production, high current levels of inventory and weaker demand growth factored into Goldman’s forecast reduction.
WTI crude oil has rallied for 9 consecutive days taking the price from $46 per barrel to $52.70, the longest winning streak in nearly 10 years according to MarketWatch.
According to the state of Oregon, cannabis growers have been overly enthusiastic with the production of marijuana since it was legalized just over a year ago. With a 1.4 million-pound surplus, the state is considering legislation to export weed to other states.
Cowen & Co. analyst Vivien Azer is bullish on the cannabis industry and has forecasted an $80 billion market in 11 years.
According to CBRE Group Inc., New York’s iconic Chrysler building is being sold. The 77-story skyscraper built between 1928 and 1930 is owned by the Abu Dhabi Investment Council and Tishman Speyer. We don’t know the asking price but the Abu Dhabi Investment Council paid $800 million for 90% in 2008, shortly before the financial crisis hit hard.
MacKenzie Bezos, if she didn’t sign a prenup, could become the richest woman in history when her divorce from Amazon CEO Jeff Bezos is finalized. Financial records show that she will receive roughly $69.5 billion or $7.4 million for each day she was married to the Amazon founder. Or in other terms, she would be 26 times richer than Oprah Winfrey and 100 times richer than the Queen of England. Before she married Bezos, she was a Wall Street research assistant.
The film “Aquaman” ruled the New Year’s Day box office with a $16.8 million. That puts the film over $200 million in domestic gross and near $800 million globally. Disney’s “Mary Poppins Returns” is at $115 million and Viacom’s “Bumblebee” is at $78.5 million domestically.
“Pharmaceutical companies are ringing in the new year by raising the price of hundreds of drugs, with Allergan PLC setting the pace with increases of nearly 10% on more than two dozen products”, according to MarketWatch. Alzheimer drug Namenda and dry-eye treatment Restasis were two in particular referenced by the company.
BP has announced that they have discovered 1 billion barrels of oil at its Thunder Horse field in the Gulf of Mexico. CNBC reports, “BP credits its investment in advanced seismic technology for speeding up its ability to confirm the discoveries.”
Google has announced that it plans to build a new 584,000 square-foot campus in Los Angeles. The company has leased the space at the site of a current shopping mall and expects to have construction completed by 2022.
This from Seeking Alpha, “General Motors plans to introduce more than 20 new and refreshed models in China in 2019 as it looks to tap emerging opportunities in new energy vehicles…GM delivered more than 3.64 million vehicles in China in 2018, a drop of about 10% from 2017’s level.”
More from Seeking Alpha, “Windstream announces that it has sold the legacy EarthLink consumer internet business to Trive Capital for $330 million.”
Eli Lilly has agreed to buy Loxo Oncology for $8 billion. Last year, regulators approved Vitrakvi, a drug that has shown to be effective against a wide variety of cancers driven by a rare genetic mutation.
Bristol-Myers Squibb has said that it will buy Celgene for $74 billion in cash. Celgene is the maker of Revlimid and Otezla.
Chinese restaurant chain P.F. Chang’s has been sold to TriArtisan Capital LLC and Paulson & Co. Inc for $700 million. The debt burdened ($675 million) chain was previously owned by CenterBridge Partners LP which still owns Pei Wei Asian Diner.
Netflix hauled in 5 Golden Globes last Sunday night, receiving critical acclaim for its original content. Streaming competitor Amazon Prime Video received 2 Golden Globes.
CNBC reports that, “Mastercard is removing the word Mastercard from the pair of interlocking red and yellow circles where it has resided for more than 50 years…The company said Monday that 80% of people recognize the Mastercard logo even when the name isn’t present.” The move comes as the company is attempting to rebrand itself as a “technology company in the global payments industry.”
Reuters says PG&E is considering filing for bankruptcy protection for some or all of its businesses as the potential liability losses continue to mount from the 2017-2018 California wildfires. Moody’s recently downgraded the company’s debt to Ba3 and B2 and S&P cut it’s rating from BBB- to B.
According to Yahoo Finance, Amazon’s Whole Foods Market is eyeing vacant stores created by the shut down of 123 Sears and 205 Kmart stores. WFM currently has 436 stores, far fewer than competitors like Walmart and Kroger.
Costco reports that 4th quarter comparable store sales rose by 6.1% vs an estimate of 5.7%. Ex-gasoline, comps were up by 7.1%. For December, total sales rose by 7.8% to $15.42 billion and e-commerce sales rose 13.6% when compared to a year ago.
Macy’s said that holiday sales increased only 0.7%, much lower than forecast. Kohl’s said that its same store holiday sales increased 1.2% and Target said same store sales for its holiday season increased 5.7% compared to 3.4% a year earlier.
KB Home reports 4th quarter earnings of $0.96 per share on revenue of $1.35 billion, a decrease of 3.6% year over year.
Lennar Homes reports 4th quarter earnings of $1.96 per share, on revenue of $6.46 billion, an increase of 70.4% over a year ago
Bed Bath & Beyond reports fiscal 3rd quarter earnings of $0.18 per share on revenue of $3.03 billion, an increase of 2.7% year over year.
Next week: Earnings reports from: Citigroup, Wells Fargo, JP Morgan Chase, Bank of America, Goldman Sachs, United Health, CSX and Netflix. Economic reports: NAHB Homebuilder’s Sentiment Survey for January, Fed’s Empire State Manufacturing Survey for January, Philly Fed Manufacturing Survey for January, U.S Housing Starts for January, Fed’s Beige Book for January, U.S Retail Sales for December, U.S Factory Capacity Utilization for December, U.S. Industrial Production for December and The University of Michigan Consumer Sentiment Survey for January.
WTI crude oil: $51.41 per barrel. 10-year U.S. Treasury note: 2.69%. Gold: $1,290 per ounce.
Sources: Real Money Pro, CNBC, Reuters, The Calafia Beach Pundit, 361 Capital, First Trust Economics, Morningstar, The Wall Street Journal, Seeking Alpha, MarketWatch, Zero Hedge, The Business Insider and Bloomberg.
PS: The stock market has gotten off to its best yearly start in 13 years. Wait a minute, wasn’t December close to becoming the worst December since the Great Depression? What insanity!
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.
At the time of publication Cascade Investment Group and /or its clients owned shares of AMZN, DIS, AGN, BP, GOOGL, LLY, BMY, CELG, NFLX, MA, COST, M and TGT.
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.