“If you run through a dynamite factory with an open torch and happen to get to the other side without blowing yourself sky high, that doesn’t mean it was a good idea.” – Charlie Munger
Here’s what I’m thinking and hearing: *1.) Scott Grannis of the Calafia Beach Pundit: “At best, I can say that the outlook for economic growth is Ok – not great, but not terrible either. Maybe more of the same: 2.0% to 3.0% real growth. Lower tax rates have not yet created boom-time conditions. Business investment has been disappointing. Overlooked, however, is the significant reduction in regulatory burdens that the Trump administration has been able to achieve. It’s hard to quantify this, but we haven’t seen anything so positive in this area since just about forever. If Trump’s tariff wars can be resolved (by drastically reducing or eliminating tariffs), the economy has lots of upside potential.” *2.) Goldman Sachs has raised its year-end S&P 500 forecast by 3% to 3,100 and its 2020 year-end price target to 3,400 which would represent a 10% increase from this year. The bullish forecast next year is based on a rebound in GDP to +2.5% or higher. *3.) According to the Wall Street Journal, “Some of the country’s largest natural gas producers are tearing up their drilling plans, relenting to prices for the fuel that have fallen to their lowest summer level in two decades. Natural gas prices typically move higher in the heat of summer, as demand from electricity plants surges to power air conditioners. This month’s heat wave in the Eastern U.S. has generated record consumption at power plants, yet natural gas prices have continued to slide due to bountiful supplies.” *4.) According to the Financial Times, “…money is pouring into the U.S. bond market from overseas…as the volume of negative-yielding debt grows across Europe and Japan…” According to research from Bloomberg and Deutsche Bank, nearly 25% of all global sovereign debt carries a negative yield. In fact, JP Morgan suggests that, “while there has already been a dramatic decline in U.S. yields, an accelerated move lower is potentially in the offering. If, as expected, the Fed begins a rate-cutting cycle at the end of this month, money will be shaken out of the money-market funds into bond funds in an effort to lock up higher yield. A secondary vast pool would come from a return to balance sheet run-off in September just as the third pool of money could come from de-risking. An escalation in the trade war has surely raised the probability of recession.” In summary, the bank says that if all three scenarios were to come to fruition, U.S. 10-year bond yield could approach zero. *5.) It looks like the ECB (European Central Bank) is poised to go lower (on rates) when you are hearing these comments out of Germany, Europe’s growth engine….from Clemens Fuest, president of the highly regarded German research group IFO Institute: “In manufacturing, the business climate indicator is in freefall…No improvement is expected in the short term, as businesses are looking ahead to the next six months with more pessimism.” Jörg Krämer, chief economist at Germany’s Commerzbank: “There is far and wide nothing to be seen of the second half recovery hoped…Germany is in a grey area between a marked growth slowdown and a recession.” *6.) From the front lines of the trade/cold war: In the latest round of trade talks this week in Shanghai, CNBC reports, “…the two sides discussed China increasing its purchase of American farm goods and the U.S. creating ‘favorable conditions’ for it.” Other topics discussed were forced technology transfer, intellectual property rights, services, nontariff barriers and agriculture. Both sides agreed to “high level” talks in the U.S. in September. China’s factory output contracted in July for the third straight month as the official purchasing manager’s index contracted to 49.7, hmm. Something was said Thursday morning when President Trump met with Treasury Secretary Mnuchin and chief trade negotiator Robert Lighthizer. Not long after the meeting adjourned, Trump announces new 10% tariffs on $300 billion of Chinese goods, starting September 1st. The Thursday tweet triggered nearly a 580-point reversal (from +280 points to -280 points) in a matter of minutes in the DJIA. Uggh! More headwinds to neutralize the Fed cut! *7.) I guess the market wanted a 50-bps cut. It really didn’t like Powell’s comment that the 25-bps cut was nothing more than a “mid-course” adjustment. Did the market think this was a new beginning to move rates back toward zero? Computerized algorithmic selling tantrum…nothing else. The bond market thinks the Fed didn’t cut far enough as the 10-year U.S Treasury note fell to a 3-year low of 1.89% on Thursday. The decline in yield signifies from the bond market that further weakening in the U.S. economy lies ahead. *8.) Chairman Powell is not cutting rates because he is worried about the consumer, he is worried about a tariff-induced slowdown in the manufacturing sector of the U.S. economy (see the recent readings from the ISM and IHS manufacturing surveys).
The Federal Reserve has lowered its target fed funds rate for the first time since 2008 by 25 basis points to 2.0% to 2.25%. The vote was 8-2 in favor and the Fed cited: “Implications of global developments for the economic outlook as well as muted inflation pressures” as the driving forces behind the move. The Fed also said that it will end its quantitative tightening 2 months early.
The Bureau of Economic Analysis said that the U.S. economy grew by 2.1% in the 2nd quarter, down from 3.1% in the 1st quarter but better than economists’ estimates of 2.0%. Consumer expenditures rose by 4.3%, while business investment fell by 5.5%.
The Federal Reserve Board said that private sector wages grew by 0.5% in June, while personal spending rose by 0.3% and the personal savings rate rose to 8.1% in June.
The Case-Shiller Home Price Index for May rose by 3.4%. The 10-city price composite rose by 2.2% and the 20-city composite showed a 2.4% gain. The median existing home price in June was $285,700 an all-time high and up 4.3% from June of 2018. Prices in Las Vegas were up 6.4%, followed by Phoenix +5.7% and Tampa +5.1%. Seattle’s home price index fell by -1.2% vs a year ago.
The Fed’s Chicago purchasing manager’s index for July fell further to 44.4 vs 49.7 in June. That is the lowest reading since December of 2015. Four of the five components were in contraction territory with only the supplier delivery index above 50.
The IHS Markit Manufacturing Purchasing Managers’ Index fell to 50.4 in July, down from 50.6 in June, the lowest reading since September 2009. The gauge of employment fell to the lowest level since mid-2013. IHS Markit economist Chris Williamson: “U.S. manufacturing has entered into its sharpest downturn since 2009, suggesting the goods-producing sector is on course to act as a significant drag on the economy in the third quarter.”
The ISM (Institute for Supply Management) manufacturing index fell to 51.2 in July as the pace of growth decelerated to its weakest level in 3 years. U.S. construction spending also fell 1.3% in June to its lowest level in 7 months. The ISM statement: “Comments from the panel reflect continued expanding business strength, but at soft levels. July was the fourth straight month of slowing PMI expansion…Respondents expressed less concern about US/China trade turbulence, but trade remains a significant issue. More respondents noted supply chain adjustments as a result of moving manufacturing from China. Overall, sentiment this month is evenly mixed.”
The ADP/Moody’s Analytics private payrolls survey found that the U.S. economy generated 156,000 new private sector jobs in July, better than the estimates of 150,000. The service sector accounted for 146,000 of the total.
The Bureau of Labor Statistics said that the U.S. economy generated 164,000 new nonfarm payrolls in July. Average hourly earnings rose by $0.08 to $27.98 per hour. In the past 12 months, average hourly pay rose by 3.2% which still exceeds the stated rate of inflation.
Disney’s photorealistic remake of “Lion King” has brought in a domestic total of $350 million, making it the fourth-highest grossing film for this year after just 10 days of release. Quentin Tarantino’s “Once Upon a Time In Hollywood” was a distant second with a box office take of $40 million in its opening weekend. After 19 days of release, “Lion King” will have gross box office sales of over $1 billion, the fourth Disney movie to go over $1 billion this year so far.
According to a new poll from Harris Insights & Analytics, America’s favorite pizza chain for 2019 is Marco’s Pizza. The poll surveys 77,000 people on more than 3,000 randomly selected brands. Marco’s was founded in 1978 by native Italian, Pasquale Giammarco. The sauce is a recipe by the founder that’s made fresh every day at every store. The chain will open their 1,000th store this year.
According to Goldman Sachs, share buybacks are expected to approach $1 trillion this year and for the first time since the Great Recession of 2009, buybacks have exceeded free cash flow. Over the past 12 months, the level of buybacks to free cash flow hit 104% as non-financial companies have drained $272 billion in cash as a part of the push to return money to shareholders. The 15% decline is the steepest drop since 1980.
According to AutoNation, dealers are turning down new deliveries of cars because they are still full of unsold inventory. In the U.S., “…after many years of strong sales, many consumers are driving vehicles that don’t need to be replaced. Newer cars and trucks tend to be more durable and hold up longer than cars made even a decade earlier. At the same time, the average sticker price of a new vehicle has risen to around $35,000, while interest rates on auto loans have edged higher”, according to Zero Hedge.
In New York, Governor Andrew Cuomo has signed a bill that decriminalizes marijuana use, just a month after the state legislature failed to reach an agreement on a bill that would have legalized cannabis sales. Still, without a move towards legalization, New York State remains one of the few states in the Northeast with draconian marijuana laws.
Over-valued? Beyond Meat closed last Friday at $236.50 per share. At that price, Beyond Meat’s market capitalization ($13.85 billion) is bigger than 25% of the S&P 500. The company is also trading at 100X sales and 300X cash. So, it comes as no shocker that the company has announced a secondary offering of shares to the public at nine times the price it came public in May. Beyond Meat will sell 3.25 million more shares with 3 million coming from selling stockholders and 250,000 shares from the company itself.
Warren Buffet’s Berkshire Hathaway has increased its stake in Bank of America to $29 billion and the company now owns more than 10% of the bank’s outstanding shares.
Cancer diagnostics company, Exact Sciences, will acquire health-care company Genomic Health for around $2.8 billion to help bolster its cancer testing business. Under the terms of the deal, Genomic Heath shareholders will receive $27.50 in cash and $44.50 in Exact Sciences shares.
The Capital One hack involved 100 million customer records, 140,000 social security numbers and 80,000 linked bank details of Capital One customers. What makes this hack different from the Equifax and Marriott breaches is that this was perpetrated by an insider within Capital One. Software engineer Paige Thompson exploited a misconfigured firewall in a cloud server used by Capital One by employing a Tor browser and a VPN known as IPredator to obscure her activities.
According to the Gartner Group, Amazon now owns nearly half the public-cloud market. Annual revenue from Amazon Web Services (AWS) grew 27% last year to $15.5 billion, representing nearly half of the $32.4 billion in total revenue generated by providers in the cloud infrastructure market.
According to the Securities and Exchange Commission, Amazon CEO Jeff Bezos has sold 968,148 shares of Amazon over the past 3 days for about $1.84 billion. According to Forbes, this may be his largest stock sale ever. Maybe he had to pay the legal bill from his divorce from MacKenzie Bezos.
Verizon has said that it has turned on its 5G Ultra Wideband service in four more cities. Customers can now access the network in parts of Detroit, Atlanta, Indianapolis and Washington D.C. They now join Chicago, Denver, Minneapolis, Providence and St. Paul with the 5G service. Verizon is planning to make the service available in more than 30 cities this year.
The Wall Street Journal reports that the Nordstrom family is exploring a new plan to boost its stake in the company and strengthen its grip on a potential transaction that would move the family closer a controlling position.
Altria reports 2nd quarter earnings of $1.10 per share on revenue of $5.19 billion, an increase of 6.4% year over year.
HCA reports 2nd quarter earnings of $2.21 per share on revenue of $12.6 billion, an increase of 9.3% year over year.
Apple reports fiscal 3rd quarter earnings of $2.18 per share on revenue of $53.8 billion, an increase of 1.0% year over year. The company said that iPhone sales totaled $25.99 billion in the quarter vs $29.9 billion in the 3rd quarter of 2018. The company now has $102 billion in cash on hand. Wearables revenue was up 50% year over year and services revenue was up 18% year over year.
Spotify reports 2nd quarter earnings of -€0.42 on revenue of €1.6 billion, an increase of 31.5% year over year.
Dine Brands Global reports 2nd quarter earnings of $1.71 on revenue of $228.08 million, an increase of 23.6% year over year.
Square reports 2nd quarter earnings of $0.00 on revenue of $563 million, an increase of 46.2% year over year.
Fortinent reports 2nd quarter earnings of $0.58 per share on revenue of $521 million, an increase of 18.2% year over year.
Cognizant Technology Solutions reports 2nd quarter earnings of $0.94 per share on revenue of $4.14 billion, an increase of 3.5% year over year.
Next week: Earnings from: Take Two Interactive, Disney, Roku, CVS, Lyft, Uber, Century Link and Activision Blizzard. Economic reports: U.S. ISM Non-Manufacturing Index for July and Producer Price Index for July.
WTI crude oil: $54.65 per barrel. 10-year U.S. Treasury note: 1.89%. Gold: $1,456 per ounce.
Sources: Real Money Pro, CNBC, 361 Capital, First Trust Economics, Seeking Alpha, MarketWatch, The Wall Street Journal, Bloomberg, Zero Hedge, Estimize.com, The Calafia Beach Pundit and MSN Money,
At the time of publication Cascade Investment Group and or its clients were long shares of: GS, DIS, TTWO, ROKU, CVS, LYFT, UBER, CTL, ATVI, MO, HCA, AAPL, SPOT, AMNZ, DIN, VZ, JWN, SQ, FTNT and CTSH.
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.