Market Minutes for the week of July 30th:
“Anyone who doesn’t make mistakes is either a liar or doesn’t make decisions.” – Leon Cooperman
Here’s what I am thinking and hearing: 1.) Happy 149th birthday to Campbell Soup company. Founded shortly after the Civil War, the company has been family-owned for the majority of its lifespan. 2.) Warren Buffett’s Charlie Munger’s core ideology that has served him throughout life: “The safest way to try and get what you want is to try and deserve what you want.” 3.) According to a survey from Country Financial, one out of six American adults receive financial support from their parents or other family members, who shell out for everything from rent to groceries. It’s not just millennials asking for assistance, the study found that 15% of the adults that receive financial help from family members are 35 to 49 years old. 4.) The American Association of Individual Investors (AAII) says that the number of Bulls fell last week from 44.0% to 29.1%. Apparently, the recent collapse in the NASDAQ (triggered by Facebook and Twitter) has sent them running. 5.) Charlie McElligott, head of cross-asset strategy at Nomura Securities, said that last week’s tech rout which triggered a 3-day move from growth to value was the biggest seismic shift since the days of the Lehman Brothers collapse in 2008 – a 4.3 standard deviation event relative to the past decade’s returns. 6.) The 2nd quarter of 2018 is shaping up as a blockbuster quarter. In terms of earnings, 83% of S&P 500 companies have reported earnings that are 2.5% above estimates, and if that trend carries through to the end of the earnings season, it would be the highest percentage of beats since this metric first began being tracked in the third quarter of 2008. On the revenue side, 73% of companies are reporting actual sales 0.9% above estimates. 7.) What does J.P. Morgan CEO Jamie Dimon consider the biggest risks to the U.S. economy? Two things. First, the U.S trade dispute with China. If it escalates into a full-blown trade war, it would erase much of the economic progress that has already been made. Second, an unwinding of the unprecedented QE efforts by central banks around the world ten years after the financial crisis in 2008. His concern is that the markets have never gone through this bond-buying activity known as quantitative easing (QE), and have never experienced a period of time when it is being reversed. The markets enjoyed the easing process and may not like the tightening very much. 8.) More from the front lines of the trade war: Trump raises the stakes on China by proposing a 25% tariff on $200 billion of goods instead of the 10% he originally proposed. How crazy is this next one?…Trade wars have sent U.S. soybean prices to record lows and Brazilian soybean prices to near record highs. So now, Brazilian producers are arbitraging the spread in prices. They are buying soybeans from American farmers at low prices, then turning around and selling them for a premium on the global market, thus pocketing the spread. The bigger concern to soybean farmers is that it all comes down to market share and the fact that for commodity producers, it can be extremely difficult to recover that market share once lost (a 1973 Nixon soybean embargo against Japan ultimately gave birth to Brazil and Argentina soybean markets which today, control more than half of the global exports of soybeans). Comments from a soybean and hog farmer in Illinois to Marketplace host Kai Ryssdal: “It could dramatically change the look of rural America…I mean, we’ve seen the six big commodities drop in value on an annualized basis $20 billion since the trade war began. That’s $20 billion with a B in a year that we were forecasting agriculture to have a net income of $60 billion. So you see what that means, and so if this continues on, this is not just potentially damaging to my own personal economy but to the economy of rural America.” From Patrick McGee of the Financial Times, “BMW is the U.S.’s largest vehicle exporter to China by value, thanks to its popular sport utility vehicles made in Spartanburg, South Carolina — its biggest factory in the world [and shipped from the Port of Charleston, South Carolina]. The plant exported more than 70% of the 371,316 vehicles it produced last year.” Last week, BMW said it was raising prices of its X5 and X6 SUV models by 4% and 7%, respectively. If the Chinese decide to reduce purchases of BMW’s and substitute with less expensive brands, jobs are lost in South Carolina. 9.) An interesting observation by Bank of America/U.S. Trust’s head of market strategy Joseph Quinlan: “The global economic order is being upended. We are shifting from an era of geopolitics based on conventional military might to geo-economics — whereby foreign security goals and national interests are fought with markets, currencies and commerce, rather than with missiles, submarines and drones…Rarely has Washington so openly and blatantly used its economic might and resources in pursuit of national and global interests.” 10.) Economist Scott Grannis, creator of the Calafia Beach Pundit: “Free and fair trade requires the absence of government-imposed restrictions and subsidies. Trump gets this; he’s not a madman intent on starting another global trade war. He knows tariffs are bad and even stupid. But the route he chose to get to the goal of zero [tariffs] was circuitous and risky, and he has been justly criticized on both sides of the political aisle for unilaterally imposing tariffs on our major trading partners. He had to credibly threaten to raise tariffs in order to lower them. This could be the beginning of a new era in global trade and prosperity.”
Payroll processor ADP said that the U.S. economy generated 219,000 new jobs in the private sector in July, the best showing since February when 241,000 jobs were created. Medium-sized businesses which employ 50 to 499 people, added the most payrolls, creating 119,000 jobs in July.
The Labor Department announced that the U.S. economy generated 157,000 new non-farm jobs in July. Wages grew 0.3% month over month and the 2.7% year over year gain remained unchanged. Manufacturing jobs jumped by 37,000 and are up by 327,000 over the last 12 months, the largest increase since the 12 months ending April 1995. The category for toy and hobby stores fell by 32,000 workers, and economists say that the closing of the Toys R Us chain could be behind the miss.
It’s early in the third quarter but the Atlanta FED’s GDPNow is predicting a 5% jump in GDP for the July-September period.
The Federal Reserve Open Market Committee unanimously voted to keep its benchmark rate at 1.75% to 2.00%, within its target range. The committee said that household spending has “grown strongly” and “economic activity has been rising at a strong rate,” a more bullish view than the statement of “solid” growth in June. The change in semantics virtually guarantees a September rate hike of 0.25%.
The Institute for Supply Management (ISM) reported that its manufacturing index declined in July to 58.1% from 60.2%, the lowest level in four months. It is still a robust number because any reading over 55% indicates that companies are strongly expanding. The index is compiled from a survey of executives that order supplies for their companies and serves as a reliable window into the economy.
The Commerce Department said that U.S. factory orders rose by 0.7% in June for a second straight monthly increase. Orders were boosted by strong demand for transportation equipment, electrical equipment, appliances, computers and electrical products.
The Commerce Department also said that U.S. construction spending fell by 1.1% in June, the biggest decline since April 2017. Data for April and May were revised sharply higher however. Spending on private residential projects fell 0.5% in June and spending on public construction projects fell by 3.5%.
The University of Michigan Consumer Sentiment Index fell to 97.9 in July from 98.2 in June as the assessment of current economic conditions and expectations declined.
The Conference Board announced that consumer confidence rose to 127.4 in July from 127.1 in June and although just below the recent peak of 130, it’s still among highest readings in 18 years. The “Present Situation Index,” which measures the current state of the economy, rose to 165.9 from 161.7 in June.
The Bureau of Labor Statistics reported that the employment cost index (ECI) rose by 0.6% in the 2nd quarter, the biggest increase since the third quarter of 2008. Overall, the ECI was up 2.8% year over year. Wages and salaries climbed 0.5% for the quarter and 2.8% for the 12-month period, while benefits costs rose by 0.9% and 2.9% respectively for the biggest jump in 4 years. Private industry compensation rose 2.9% and government compensation rose by 2.4% for the period.
The Commerce Department stated that consumer spending increased by a solid 0.4% in June, after a 0.4% increase in May as households spent more on restaurants and accommodations. Consumer spending is important to watch as it accounts for more than two-thirds of U.S. economic activity and factors greatly in the GDP calculation.
The S&P Case-Shiller 20-city home price index rose 6.5% in May. That’s slightly lower than April but still more than double the increases felt in paychecks. Home prices in the hottest markets continue to climb higher with Seattle up 13.6% y/o/y, Las Vegas 12.6% y/o/y and San Francisco 10.9% y/o/y.
The Census Department said that the national homeownership rate rose to 64.3% in the second quarter up from 64.2% in the first quarter for the sixth-straight quarter of increases. This increase, however, is still a full percentage point below the 50-year average and well below the past housing boom peak in 2005.
According the National Association of Realtors (NAR), the dollar volume of U.S. home sales to international buyers between April 2017 and March 2018 plunged 21% compared the previous 12-month period. Buyers from China, Canada, India, Mexico and the United Kingdom made up almost half of the dollar volume of sales to foreign buyers. According to Lawrence Yun, chief economist for the NAR: “The decline is partly coming off high levels of the prior year, but also surely from the strong rhetoric coming out of Washington against foreigners…There has been a large drop-off in foreign students attending U.S. universities already. Chinese [buyers], in particular, purchase homes for their kids while attending college.”
After the Great Recession of 2008-2009, economists Paul Krugman, Lawrence Summers and Bob Gordon, as well as many others claimed that “secular stagnation” had saddled the U.S. economy with a “new normal” long-term real growth rate of 2%. First Trust chief economist Brian Wesbury didn’t believe it then and doesn’t believe it now. He says, “We never believed slow growth was permanent…High tax rates were holding the economy back…The real problem was the size of government – too much spending, too much regulation and excessive tax rates…We believed the idea of ‘secular stagnation’ was another Keynesian red herring, designed to hide the damage the government was doing and fool people into accepting slow growth as something that couldn’t be fixed. But after cutting tax rates and regulation, Friday’s GDP report demolished that theory. Real GDP grew at 4.1% annual rate in the second quarter…So now of the same people who said the economy couldn’t grow any faster are saying that the acceleration in growth is just temporary, due to tax cuts. While we certainly agree that tax cuts boost growth, we think the change is more than temporary, particularly due to the cut in the corporate tax rate and the move to full expensing of plant and equipment. Not only has real GDP growth picked up, ‘potential’ GDP growth has accelerated as well.”
Here’s what Wesbury was referring to: Jared Bernstein, chief economist for former VP Joe Biden: “Pretty Goldilocks GDP report: up 4.1%, juiced by strong con[sumer] spending, net exports (exporters getting ahead of tariffs, ie, one-time). More reliable yr/yr real growth up 2.8%, still above trend.” Ian Shepherdson, chief economist for Pantheon Macroeconomics: “In one line: Looks great, won’t last… Looking ahead, the big stories for Q3 will be the slowdown in consumption – Q3 probably was boosted by tax cuts, but the incremental cash flow effect is now zero – and the reversal of the Q2 inventory and trade swings. With investment and government spending growing steadily, that means our initial working assumption for Q3 grow this about 3%.”
Baker Hughes said that the total active drilling rig count in the U.S rose by 2 rigs after falling by 8 the week before. Oil rigs gained by 3 to 861 and gas rigs fell by 1 to 186. One rig remained as unclassified.
New figures show that the French economy at a 1.7% rate in the 2nd quarter, down from the 1st quarter growth rate of 2.2%.
The Wall Street Journal reports that healthcare spending in the U.S. will soon reach 20% of GDP, a substantially higher proportion than any other major economy. The problem has been increased costs, not increased demand. Since 1960, the CPI has risen roughly 700% while medical costs have risen 2,000%. Since the year 2000, prescription drug costs have risen 69%, hospital care 60%, and physician and clinical services 23%.
According to Treasury Secretary Steven Mnuchin, the Trump administration is exploring a plan to cut capital gains taxes by $100 billion over the next decade by using inflation factoring. In other words, one could possibly add the compounded inflation rate to the cost of the asset from the time of purchase to the point of sale which increases the basis, and in the end, decreases the realized capital gain.
United Natural Foods said that it will acquire SuperValu Inc. for $2.9 billion in cash. The deal is worth $32.50 per share and will close in the fourth quarter if this year. UNFI distributes more than 110,000 products to more than 43,000 customer locations, from natural product stores and conventional supermarkets.
DocuSign has acquired SpringCM for $220 million in cash. SpringCM is a cloud-based contract lifecycle management and document generation software company.
Energy Transfer Equity has agreed to acquire Energy Transfer Partners for $27 billion in a deal that will give ETP shareholders 1.28 shares of ETE for each share of ETP owned.
Cisco Systems plans to acquire cybersecurity firm Duo Security for $2.35 billion. Duo Security provides cloud-based tool to prevent security breaches on devices.
Smart speaker company Sonos has gone public at $16.00 per share giving it an opening market value of $1.5 billion. Sonos markets high-end, web-connected speakers to audiophiles and music fans.
Brookstone, the specialty travel and entertainment products company, has filed for bankruptcy and has also announced that it will close its remaining 101 mall stores.
More from Apple’s 3rd quarter earnings call: Devices shipped: iPhones – 41.3 million. iPads – 11.5 million, MACs – 3.7 million. Service revenue grew 31.0% on the year to an all-time high of $9.55 billion. Apple now has $243.7 billion of cash on hand. That’s down from $267.2 billion in the first quarter, when the company announced a $100 billion buyback program and a dividend increase of 16%.
The day after Apple announced it 2nd quarter earnings, the stock gained $5.94 (3%) to make it the first ever publicly traded company to exceed $1 trillion in market value.
Comcast will bring Amazon Prime Video to a pay services platform as part of a new deal between the two companies. This makes the Xfinity X1 service the only pay TV operation integrating Prime Video, Netflix, and YouTube in one set-top box.
Facebook and Instagram are planning to launch new features that show people how much time they have spent on the apps. The company says that the rollout is part of an ongoing effort to be more responsible with its community. An activity dashboard will display how long you’ve been using the apps. A daily reminder will let you know when you are hitting your time allotment for the day and there will be a way to turn off notifications.
The major automakers reported that sales in June were a “clunker.” Steep declines in sales were nearly across the board with the exception of Fiat Chrysler. Ford sales dropped by 3.1% and retail sales fell by 10.4% due in large part to a 28% drop in passenger car sales. Ford truck sales however continued higher, up 10.2%. Nissan Motor said total sales sank 15.2% in July with passenger cars down 21.1% and pickup truck/SUV sales down 10.6%. Honda Motor sales were down 8.2% with passenger cars off 19.3%, while sales of SUV’s were up 3.2%. Fiat Chrysler Automotive said that total sales were higher by 6.0% due mostly to a 15% jump in sales of its popular high-margin Jeep brand.
Fallout from the 2008 financial crisis still haunts Wells Fargo as the bank agreed to pay a $2 billion civil penalty for misrepresentation of its mortgage loan quality (faulty income information) which preceded and precipitated the crisis.
Caterpillar says that its worldwide machine retail sales rose by 25% year over year for the rolling 3-month period ending in June.
Caterpillar reports 2nd quarter earnings of $2.97 per share on revenue of $14.01 billion, an increase of 23.7% year over year.
Edwards Lifesciences reports 2nd quarter earnings of $1.24 per share on revenue of $943.7 million, an increase of 12.1% year over year.
Chipotle Mexican Grill reports 2nd quarter earnings of $0.06 per share on revenue of $1.27 billion, an increase of 8.5% year over year.
Expedia reports 2nd quarter earnings of $1.38 per share on revenue of $2.88 billion, an increase of 11.2% year over year.
Starbucks reports 2nd quarter earnings of $0.62 per share on revenue of $6.31 billion, an increase of 11.5% year over year.
Apple reports fiscal 2nd quarter earnings of $2.34 per share on revenue of $53.3 billion, an increase of 17.4% year over year.
Dine Brands reports 2nd quarter earnings of $1.03 on revenue of $184.47 million, a decrease of 2.2% year over year.
Square reports 2nd quarter earnings of $0.13 per share on revenue of $385 million, an increase of 60.1% year over year.
Fortinent reports 2nd quarter earnings of $0.41 per share on revenue of $441.3 million, an increase of 21.4% year over year.
Tesla reports 2nd quarter earnings of -$3.06 per share on revenue of $4 billion, an increase of 43.4% year over year.
Next week: Earnings from: Zillow, Disney and Priceline. Economic reports: Producer Price Index (PPI) for July. Consumer Price Index (CPI) for July.
WTI crude oil: $69.13 per barrel. 10-year U.S. Treasury note: 2.98%. Gold: $1,221 per ounce.
4% GDP growth is good for sure, but hardly “historic.”
Sources: Real Money Pro, CNBC, First Trust Economics, 361 Capital, Seeking Alpha, MarketWatch, The Wall Street Journal, Bloomberg, Estimize.com, Yardeni Research, The Calafia Beach Pundit and MSN Money.
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.