Market Minutes for the week of July 2nd:
“Two things that are not long for this world: dogs that chase cars and professional golfers who putt for pars.” – Lee Trevino (Here’s to the Broadmoor East Course, where 97.2% of the pros didn’t break par at the U.S. Senior Open).
Here’s what I am thinking and hearing: 1.) Morningstar 2018 year-to-date markets performance as of 6-30-2018: DJIA: -1.81%. S&P 500: +1.67%. NASDAQ: +8.79%. MSCI EAFE (USD): -2.75%. U.S. Corp. Bond: -3.17%. Target Date Moderate Risk (70-30) 2025 TR: -0.29%. 2.) Six months into 2018, the S&P 500 is up +1.67% and all of that gain has come from just 2 sectors: technology (102%) and consumer discretionary (Amazon: +44.8% and Netflix +107.5%). 3.) FactSet: S&P 500 Growth Index YTD: + 8.0%. S&P 500 Value Index: -1.5%. 4.) S&P Dow Jones says that on a total return (including dividends) basis the S&P 500 is +2.2% YTD and non-U.S. markets are down -6.7% YTD. 5.) Best market in the world YTD: Ukraine +17.78% (in local currency). Worst performing market in the world YTD: Philippines -9.80% (in local currency). 6.) The IPO (Initial Public Offering) market had its busiest quarter since 2015 as 60 companies went public, raising a total of $13.1 billion. Of that total, many of the companies were in the small-cap healthcare arena. 7.) According to Scott Grannis of the Calafia Beach Pundit, in last week’s final revised GDP number for Q1, after-tax corporate profits reached a record $1.92 trillion, up nearly 17% from last year. “That’s equal to 9.6% of GDP, a level that has been exceeded in only 4 quarters in our nation’s recorded history.” 8.) Tom Graff, senior market strategist at Brown Advisory Group: “We should bear in mind that trade is far more important for the stock market than it is the actual economy. According to the World Bank, trade is only 27% of U.S. GDP, far lower than other large, wealthy and open economies (e.g., the percentage is 84% in Germany, 59% in the U.K. and 64% in Canada). This is due to two factors. One is that we have a very large service sector that isn’t readily traded. Second is that our country is so large that we trade more with ourselves than the outside world…Trade restrictions are unambiguously bad for stocks generally. If we get inflation, the Fed hikes and chokes off the economy. If we don’t get inflation, companies can’t pass higher input costs on to consumers. It’s bad either way.” 9.) What would a full-blown trade war cost the economy? J.P. Morgan’s John Normand says that a worst-case scenario (where the rest of the world raises retaliatory tariffs by 10%) could reduce global growth by a “material” amount of not less than 1.4% over two years. 10.) Based in Broseley, Missouri, Mid-Continent Nail, the largest U.S. manufacturer of nails recently laid-off 60 of its more than 500 workers after U.S. tariffs on steel imports raised the cost of its product (nails) by about a third, which in turn, resulted in a 70% drop in orders for July. Company spokesman James Glassman said instead of buying nails from Mid-Continent, customers are going to Chinese manufacturers who can export nails duty-free to the U.S. because they don’t pay tariffs on domestically sourced steel.
Payroll servicer ADP said that the U.S. economy created 177,000 private payroll jobs in June. Analysts had expected an increase of 190,000 new jobs. Medium-sized businesses that employ 50 to 499 people, added 80,000 payrolls while large businesses added 69,000 and small businesses which employ one to 49 people created 29,000 new jobs. Companies continued to say that they are having a hard time finding qualified workers.
The Labor Department announced that the U.S. economy created 213,000 new non-farm jobs in the month of June. The unemployment rate rose to 4% as more people returned to the job market. Wage growth was somewhat restrained as the average hourly wage rose by 2.7%. Professional and business services created the most new jobs, adding 50,000, manufacturing created 36,000 jobs, healthcare was higher by 25,000 and construction added 13,000 new payrolls. Retail lost 22,000 jobs.
The Commerce Department said that factory orders increased by 0.4% in May among strong demand for machinery. Manufacturing accounts for about 12% of the U.S. economy.
The Commerce Department also said that U.S. construction spending was 0.4% higher in May and 4.5% higher on an annualized basis for 2018 vs 2017. Spending on public projects was up 0.7% for the month while spending for private projects was up 0.3% and residential construction spending was higher by 0.8%.
The Institute for Supply Management (ISM) reported its manufacturing index rose to 60.2% in June vs 58.7% in May, which matches the second-highest level of the current economic expansion which began in mid-2009. Manufacturers however, are reporting that tariffs and shipping bottlenecks are contributing to rising costs.
The Institute for Supply Management (ISM) also reported that its services (non-manufacturing) index rose in June to 59.1 from 58.6 in May. Service companies employ an overwhelming majority of American workers.
U.S. West Texas Intermediate crude oil has touched $75 per barrel this week for the first time since November of 2014 amid supply disruptions in Libya and Canada.
Baker Hughes announced that the total drilling rig count fell by 5 last week to 1047 from 1052. Oil rigs fell by 4 and gas rigs fell by 1.
Bloomberg reports that sales of investment-grade bonds used for M&A rose by 50% to $154 billion in the first half of 2018 compared with the same period last year. The increase in supply has pushed spreads in the secondary market to the highest levels in 18 months and should represent a good buying opportunity in the 3 to 5-year maturities. With more than $1 trillion of M&A pending in the 2nd half of the year, the trend is likely to continue.
Federal Reserve minutes for June indicated the Fed had observed that negative risks from the U.S. trade policy “had intensified” and could have negative effects on business sentiment and investment spending.
CoreLogic reports that U.S. home prices rose by a whopping 7.1% in May for the biggest monthly jump in 4 years. The median price of an existing home sold in May was $264,800 according to the National Association of Realtors (NAR). The supply of existing homes continues to contract and has fallen every month for the past 36 months.
Real estate research firm Reis says that the vacancy rate at regional and super regional malls in the United States reached 8.6% in the second quarter of this year based on a survey of 77 metropolitan areas across the country. The malls haven’t been this empty since 2012 and with the bankruptcy of Bob-Ton and Toys R Us, and the slow shuttering of Sears, the vacancy rate is sure to keep climbing.
According to real estate appraisers and consultants Douglas Elliman and Miller Samuel, Manhattan real estate had its second worst quarter since the financial crisis of 2008-2009. Total sales fell by 17% and the average price fell by 5% to $2.1 million.
Of the world’s equity markets, Shanghai is the worst performing since peaking in January. The Shanghai index is down -23% from January 24th of this year and the Shenzen is down -22% during that time. By comparison, the S&P 500 is down by -5% since its peak on January 26th. Seems to me to reflect who has more to lose in a trade war.
China’s PMI fell to 51.5 from 51.9. Japan’s PMI fell to 21 from 24. UK’s PMI rose by 0.1 to 54.4 and Europe’s PMI fell slightly to 54.9 from 55, but that level matches the slowest pace of growth since November 2016.
Vanguard reports that the average 401(k) balance in 2017 was $103,900 while the median balance was $26,300. “The big difference between the median and the average is due to a small number of accounts that have really big balances. Average balances are more typical of long-tenured and more affluent participants, while the median balance represents the typical participant”, explains Alicia H. Munnell of MarketWatch. What is disturbing with the recent findings is that, using 2017 dollars (adjusting for inflation), the median balance in 2017 is actually lower than in 2007 and the average balance is only $11,000 higher from 2007 to 2017. Simply put, the finding shows that retirement savers are not contributing enough annually to even keep up with inflation.
According to TransUnion, personal loans are surging, with outstanding balances climbing 18% in Q1 to $120 billion. The gains are mostly due to the rising popularity of online lenders. Fintech companies originated 36% of the total personal loans last year vs a fraction of 1% eight years ago.
The Wall Street Journal says that David Einhorn’s hedge fund Greenlight Capital has dwindled to around $5.5 billion in assets under management from $12 billion in 2014, as investors flee bad investments and bad returns. Einhorn’s main fund has decline 11% from 2014 to 2017 while the S&P 500 gained 38% during the same period. This year Einhorn said he had been shorting Amazon and Netflix which are up 44.8% and 107.5% respectively in 2018. His second-largest long holding as of March 31st was Brighthouse Financial which is down -31% this year. Ouch and double ouch!
According to Box Office Mojo, box-office revenue for this summer is on pace for the best year since 2013. Hollywood closed out a record 2nd quarter with more than $6 billion in ticket sales. Domestic summer revenue has totaled $2 billion as of June 26th. $1.2 billion or 60% of the market share is from Disney Studios.
Wells Fargo, Citigroup and J.P. Morgan Chase and 31 other banks received the OK from the Fed to boost share buybacks and increase dividends after they passed the Fed’s annual stress test. “Conditional” approval was granted to Goldman Sachs and Morgan Stanley. Deutsche Bank was denied approval.
Facebook is acquiring Bloomsbury AI, a U.K.-based business that specializes in natural language processing according to TechCrunch. The price tag is reportedly between $23 million and $30 million and Facebook plans to use the acquisition to help fight fake news
United Rentals has announced that it will acquire BakerCorp for $715 million in cash. BakerCorp is a leading multinational provider of tank, pump, filtration and trench shoring rental solutions.
According to MarketWatch, Nestlé SA is in talks to acquire a majority stake in Canada’s Champion Petfoods for more than $2 billion. The consumer foods giant is investing in higher growth businesses to help counterbalance its struggling package-foods operations.
Boeing and Brazilian aircraft maker Embraer are close to a final agreement with the Brazilian government to set up a new company focused on commercial aviation, according to Valor Economico. The deal values Embraer’s commercial aircraft operations at $4.75 billion. Boeing’s 80% ownership stake in the joint venture will be valued at $3.8 billion.
Data center REIT Digital Realty Trust is apparently in talks to acquire Brazilian operator Ascenty.
Bar code maker Zebra Technologies has agreed to acquire Xplore Technologies for $6.00 per share in cash, a 46% premium to the current stock price.
Amazon is acquiring companies at an expanded rate and has spent nearly $2 billion on acquisitions so far this year. For the first time in its 24-year history, Amazon has spent $1 billion or more on deals in consecutive years.
Amazon says that its annual Prime Day will run for a full 36 hours, kicking off on July 16th at 3:00 EDT. Amazon Prime Day is the company’s annual sales holiday which started in 2015 and features deep discounts on its own devices and brands. This year, Whole Foods will participate offering select deals at all stores.
Guinness plans on opening a brewery in the U.S. for the first time in more than 60 years. The brand’s owner, Diageo, will make an $80 million investment near Baltimore, Maryland which will include a visitor center, a 270-seat restaurant, a tap room, and will create 200 new jobs.
Ford’s June car sales were up 1.2% to 230,636 units. Total year to date sales are down by 1.8% to 1,277,691 vehicles. For the month: SUV sales: +8.9%. Truck sales: +3.2%. F-Series truck sales: +1.7%.
General Motors 2nd quarter car sales were higher by 4.6% to 758,376 units. Sales by brand: Chevrolet: +6.2%. GMC: +6.6%. Buick: -12.0%. Cadillac: +3.0%. Silverado-CK pickup truck: +15.7%.
Nike reports fiscal 4th quarter earnings of $0.69 per share on revenue of $9.8 billion, an increase of 12.9% year over year.
Next week: Earnings from: PepsiCo, JP Morgan, Wells Fargo, Citigroup and Bank of America. Economic reports: Producer Price Index (PPI) for June and Consumer Price Index (CPI) for June.
WTI Crude oil: $73.40 per barrel. 10-year U.S. Treasury note: 2.82%. Gold: $1,256 per ounce.
Sources: Real Money Pro, CNBC, MarketWatch, Seeking Alpha, 361 Capital, Estimize.com, Bloomberg, The Wall Street Journal, MSN Money, First Trust Economics, Yardeni Research, The Calafia Beach Pundit Forexlive.com and Morningstar.
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.