“The whole problem with the world is that fools and fanatics are always so certain of themselves, and wiser people so full of doubts.” – Bertrand Russell
Here’s what I am thinking and hearing: *1.) According to Bloomberg, hedge funds have taken to tracking private jets in order to find the next megadeal. In April, a Gulfstream V owned by Occidental Petroleum was spotted at an Omaha, Nebraska airfield. The speculation was that Occidental was in town talking with Warren Buffett’s Berkshire Hathaway, seeking financing from the Oracle of Omaha for Occidental’s acquisition of Anadarko Petroleum. Sure enough, two days later, Berkshire Hathaway announced a $10 billion investment in Occidental. “There’s some evidence that aircraft-tracking can be used to get an early read on corporate news. A 2018 paper from security researchers at the University of Oxford and Switzerland’s federal Science and Technology department, tracked aircraft from three dozen public companies and identified seven instances of merger-and-acquisitions activity.” *2.) For the first half of 2019, the DJIA gained +15.4%. The S&P 500 +18.5% and the NASDAQ +21.3%. Here are the top five winners in each of the averages: DJIA: Microsoft +33.0%, Visa +32.0%, American Express +31.0%, Cisco Systems +27.0%, Walt Disney and Apple, both at +27.0%. For the S&P 500: Coty +109.0%, Xerox +82.0%, Chipotle Mexican Grill +70.0%, Advanced Micro Devices +65.0% and Cadence Design Systems +63.0% (Anadarko Petroleum and MSCI were also +63.0%). For the NASDAQ: MercadoLibre +109.0%, AMD +65.0%, Cadence Design Systems +63.0%, Synopsys +53.0% and Lululemon (and Idexx Laboratories) +48.0%. *3.) Going back as far as 2009, First Trust Chief economist, Brian Wesbury has been accurately bullish on the expansion of the U.S. economy and stock market. At the end of 2018, in the midst of the Mnuchin Christmas Eve Massacre, Wesbury put out his forecast for an S&P 500 of 3,100 by the end of 2019. Inconceivable at the time, we are now only 3.7% away from that target. So, on Monday of this week, Wesbury again raised his year-end target for the S&P 500 to 3,250 and 29,250 for the DJIA. Wesbury is using the Capitalized Profits Model which he says: “…takes the government’s measure of profits from the GDP reports divided by interest rates to measure fair value for stocks. It looks at every quarter dating back to the early 1950s and we let each of those quarters tell us where the stock market would be today if equities had increased as much as the ratio of profits to the 10-year Treasury yield. We then take the median of all those predictions (each historical quarter generating its own prediction) to estimate fair value today…Another way to think about this is to ask what interest rate would put the market at fair value with current corporate profits. The answer is a 10-year yield of 3.45%, which is an interest rate we haven’t seen since early 2011 and doesn’t look likely any time in the future.” *4.) UBS chief U.S. economist Seth Carpenter says, according to MarketWatch, “Stop worrying: The U.S. economy isn’t about to slip into a recession. In fact, the economy is now reaccelerating after the trade-induced winter freeze…The tariffs are like a bump in the road, a one-time supply shock to manufacturing output and business investment that should dissipate…‘Capital spending growth was interrupted last winter as tariffs slowed activity, but business spending on equipment and structures is now reaccelerating…Both actual business spending and employment and production sentiment point to diminished, not increased risk.” *5.) We will soon find out if Brian Westbury’s and Seth Carpenter’s optimism is well placed. Second quarter earnings reports begin flooding in next week and we will see how well profits are holding up and what companies see for their businesses in the second half. *6.) Jim Cramer: “Save the bubble talk for the bath. On a day when the S&P 500 hit 3000 and the other averages broke out, I am going to end this bubble talk right here, right now, and say, keep the cash, you earned it…I am so sick and tired of hearing that it’s all about the Fed. It’s all about the companies for heaven’s sakes…Now, what do I mean by saying that there’s more to it than Fed bubbles, it’s that there is such a thing as ingenuity, as competitiveness and the power of innovation. I will tell you what I mean when we look at the Top 10 stocks that got us from S&P 2000 to S&P 3000, because they are all examples of sheer, raw brain power and technology at work right in front of you…” *7.) From the front lines of the trade/cold war: JP Morgan’s chief equity strategist Dubravko Lakos-Bujas according to MarketWatch “‘Markets are on thin ice’, when it comes to the impact of potential trade outcomes, he said. ‘If you have a trade deal, and if the trade deal coincides with one or two rate cuts from the Fed, we see an upside scenario of 3,200 to 3,300 for the S&P 500 index. If for whatever reason we go down the wrong path, and we get an escalation of the trade dispute, then we have a downside of 2,500,’ or a 16.6% decline from its record closing high…” *8.) In his Congressional testimony on Wednesday, Fed Chairman Jerome Powell without directly saying it, fully endorsed a July 31st rate cut and did nothing to pull the markets back from that expectation. Powell: “However, uncertainties about the outlook have increased in recent months. In particular, economic momentum appears to have slowed in some major foreign economies, and that weakness could affect the US economy. Moreover, a number of government policy issues have yet to be resolved, including trade developments, the federal debt ceiling, and Brexit. And there is a risk that weak inflation will be even more persistent than we currently anticipate.” *9.) The most important advice I received from grizzled veterans when I first got into money management business back in 1981 was – “Don’t fight the Fed” and “The Fed is either your friend or your enemy.” *10.) Right now, the Fed is our friend and that is good for stock prices.
The ISM Manufacturing Index for June came in at 51.7, slightly lower than estimates of 51.3 and May’s reading of 52.7 in May. Employment and production were the strongest components of the report, while inventories and new orders were the weakest.
The ISM Services Index for June fell to 55.1 from 56.9 in May, the weakest print since July 2017. New orders fell by 2.8 points to 55.8. Backlogs rose 3.5 points to 56. Inventories rose 1 point to 55, the best reading since November of last year. Employment was down by 3.1 points to 55.
The Census Bureau said that construction spending for the current year through May has been about 0.3% lower than during the same period of 2018. Growth has been led by investment in public infrastructure, up at an annualized rate of 33% in the 1st quarter and up an estimated 27% in the 2nd quarter. Residential construction spending is down 8% during the recent five months compared to 2018.
The Commerce Department said that the U.S. trade deficit rose to a 5-month high in May, up 8.4% to $55.5 billion as politically sensitive imbalances with China and Mexico widened. Exports increased 2% to $210.6 billion while imports climbed 3.3% to $266.2 billion. The trade deficit with Mexico rose 18.1% to a record $9.6 billion while the gap with China rose 12.2% to $30.2 billion.
The ADP/Moody’s Analytics private payrolls survey showed 102,000 new jobs created in June. Expectations were for 135,000.
The Labor Department said that the U.S. economy created 224,000 new nonfarm payrolls in June. The unemployment rate edged higher to 3.7% but remains at or near 50-year lows. Wage growth was up 3.1% year over year.
The Bureau of Labor Statistics (BLS) said that the JOLTS (Job Openings and Labor Turnover) report showed a decline in the number of job openings for May to 7.323 million, down from 7.372 million in April and well below the 7.473 million expected. It was the weakest print since February and one would have to go back to May of 2018 to find a weaker number. Also, another worrisome trend emerged in the so-called “take this job and shove it” indicator, otherwise known as the total level of quits, which shows whether workers are confident enough they can leave their current job to find a better paying job elsewhere. It declined to a 2019 low of 3.425 million, dropping by 91,000 in May.
The Bureau of Labor Statistics said that consumer prices (CPI) rose by 0.1% in June. The core rate, which strips out food and energy, rose by 0.3%. The headline annual rate of inflation remained subdued at 1.6%.
The National Federation of Independent Business (NFIB) said that small-business optimism in June declined to 103.3 versus an estimate of 104.0. and down from 105.0 in May. Plans to Hire fell by 2 points. Positions Not Able to Fill fell by 2 points. Capital Spending Plans fell by 4 points.
The June PMI services index for Europe was revised up to 53.6 from 53.4. China’s private sector Caixin services index for June fell to 52.0 from 52.7 in May, the weakest print since February. India’s services index fell to 49.6 from 50.2 and Japan’s was up slightly to 51.9 from 51.7.
According to the Financial Times, “Italy registered the lowest number of births on record last year, as well as the highest ever number of emigrants – two demographic trends that are weighing on the country’s weak growth prospects and fragile public finances. Fewer than 440,000 children were born in Italy in 2018, a 4% drop from the preceding year and lowest number since the modern state of Italy was created in 1861…Italy is set to be the only major European economy with a shrinking population in the five years to 2020, according to the UN. With 23% of the population aged 65 or above, it has the second-largest share of old people in the world after Japan.”
According to Bloomberg, current IMF (International Monetary Fund) head, Christine Lagarde is set to succeed Mario Draghi as the head of the ECB (European Central Bank) and will become the first woman to run euro-area monetary policy. Lagarde is 63 years old, a lawyer and former French finance minister.
The Baker Hughes total rig count remained unchanged from the week before at 967 rigs. Active oil rigs climbed by 4 to 793, while gas drilling rigs fell by 4 to 173.
According to CNBC, OPEC is set to extend oil production cut by nine more months. The deal is subject to ratification by non-OPEC members but is all but certain to be rubber stamped.
The Congressional Budget Office (CBO) said that raising the minimum wage to $15 per hour by 2025 could boost pay for 17 million people but could also come at a cost of 1.3 million jobs.
According to RealPage, a real estate software and analytics company, apartment demand spiked 11% in the 2nd quarter from the same time a year ago. That drove rents up an average of 3% nationally to $1,390 per month. Freddie Mac said that despite the increase, a record 82% of renters (up from 67% a year ago) said that renting is more affordable than owning
Strong SUV and truck demand drove car sales higher in June. Fiat Chrysler said sales rose 1.9% to 206,083 vehicles, led by a 45% increase in Ram truck sales. Hyundai said its June sales rose 1.5% to 64,202 vehicles, boosted by a 36% increase in its Santa Fe SUV. Ford’s sales for the 2nd quarter fell by 4.1% to 650,336 vehicles. Truck sales were up 7.5% while SUV sales fell by 8.6% and car sales declined by 21.4%.
Stifel says that it estimates the global cannabis market could reach $200 billion in the next 10 years, up from $8 billion in 2018. Currently 11 states have OK’d the recreational use of weed and 33 more allow the medical use of cannabis.
According to research from Nielsen, sales of salty snack foods and ice cream in states that have legalized recreational marijuana have an annual compound growth rate of 7.2% over the last 4 years versus 6.0% growth in states where weed is still illegal. Research from the University of Connecticut and Georgia State University found that based on retail scanner data, chip sales increased by 5.3%, cookie sales climbed by 4.1% and ice cream sales rose by 3.1% over the 4-year period in states where pot became legal.
“My own radical journey began with Mad Magazine.” – Tom Hayden. After 67 years, Mad Magazine has folded up shop. In the early days, the publication was labeled as “subversive” and at its circulation peak in 1973, the magazine had more than 2 million subscribers. It was a wellspring of satire (on popular culture, public figures, entertainment and politics). Contributors to the monthly satire included the likes of Barney Frank, Steve Allen, Winona Rider, Jimmy Kimmel, Ernie Kovacs, Sid Caesar and even President Richard Nixon. The address for the magazine’s headquarters: 485 MADison Avenue, New York, New York. (Thanks to Doug Kass for the above research).
Deutsche Bank has announced that it will withdraw from the global equities sales and trading business as part of an extensive restructuring plan to improve profitability. The bank said the plan will cost about 7.4 billion euros and 18,000 jobs by the end of 2022.
Netflix said that its show “Stranger Things 3” set a streaming record over the 4-day period from July 4th through July 8th with 40.7 million households watching. Netflix said that over 18 million viewers have finished the entire season.
Boeing said that year to date deliveries of 239 commercial airplanes was down by 37% for the first six months of 2019. After 8 years the world’s biggest plane maker is on track to lose its title to Airbus with no new orders for the grounded 737 MAX.
Google has said that it is acquiring Elastifile for between $200 million and $250 million. According to Google Cloud CEO Tom Kurian, “Elastifile is a pioneer in solving challenges associated with file storage for enterprise-grade applications running at scale in the cloud”, reports Seeking Alpha.
Cisco Systems said it plans to acquire Acacia Communications for $70 per share in cash in a $2.6 billion deal on a fully diluted basis. Cisco said that the deal will enhance its networking business.
Piper Jaffray has announced that it will merge with Sandler O’Neill in a deal valued at $485 million. The combined company will be called Piper Sandler and will join the investment bank focused on financial services with Piper’s investment banking platform.
According to the American Customer Service Index which polled 23,000 consumers of fast-food restaurants, the Georgia-based chicken sandwich chain, Chick-fil-A, was America’s favorite restaurant for the fourth year in a row with a score of 86 on a 100-point scale. Runners-up were: Wendy’s – 77, Burger King –76, Sonic – 76, Jack in the Box – 75 and McDonald’s – 69.
California-based Tex-Mex chain, Del Taco, said it had sold 2 million of its meatless tacos made with a plant-based substitute from Beyond Meat within 2 months after the launch of the product. It was so well received that the chain will now include a meatless burrito on the menu.
According to CNBC, Berkshire Hathaway CEO Warren Buffett is donating $3.6 billion of BRK shares to five foundations. The recipients include The Bill & Melinda Gates Foundation, Susan Thompson Buffett Foundation, Sherwood Foundation, Howard G. Buffett Foundation and The NoVo Foundation.
The billionaire co-founder of Home Depot, Bernie Marcus says he is planning to give away nearly his entire fortune, which according to Bloomberg is about $4.5 billion. The 90-year-old Marcus wants to give away as much as he can during the time he is alive. Upon his death, the bulk of his wealth will go to, and be distributed by, the Marcus Foundation which supports sustainability measures tied to community food resources.
Southwest Airlines said that the latest software delay on the Boeing 737 MAX will push the airline’s cancellation well past October 1st.
The Seattle Times says that Amazon will build its 43-story tower in Bellevue, Washington as the company has pulled out of Seattle after clashing with local officials.
According to Strategy Analytics, Roku led the U.S. streaming device market with 41 million users in the first quarter. Sony’s PlayStation took second with 31 million users followed by Microsoft with 29 million. Rounding out the top ten: Samsung TVs – 27 million, Google Chromecast and Android TV – 24 million, Amazon Fire TV – 22 million, Nintendo – 18 million, Apple TV – 13 million and LG Web OS TVs – 12 million.
Chevron Phillips Chemical has signed a deal with Qatar Petroleum to develop an $8 billion petrochemical plant on the Texas Gulf Coast.
Next week: Earnings from: Delta Air Lines, JP Morgan, Citigroup, Wells Fargo, Goldman Sachs, Bank of America, Domino’s Pizza, United Airlines, Netflix, IBM, United Rentals, Union Pacific, Microsoft and PepsiCo. Economic reports: U.S. Retail Sales for June, U.S. Industrial Production for June, U.S. Housing Starts for June and The Philly Fed Manufacturing Index for July.
WTI crude oil: $60.34 per barrel. 10-year U.S. Treasury note: 2.12%. Gold: $1,409 per ounce.
Sources: CNBC, Real Money Pro, Market Watch, Seeking Alpha, Estimize.com, First Trust Economics, 361 Capital, MSN Money, Bloomberg, The Wall Street Journal, The Calafia Beach Pundit, Yardeni Research and Zero Hedge.
At the time of publication, Cascade Investment Group and or its clients were long shares of: MSFT, V, AXP, CSCO, AAPL, DIS, COTY, XRX, CMG, CNS, BA, LUV, AMZN, ROKU, BA, NFLX, GOOGL, CVX, OXY, BRK, IDXX, UBS, JPM, BHGE, F, QSR, MCD, HD, DAL, C, GS, BAC, DPZ, IBM, URI, UNP, PEP.
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.
R.I.P. – Luis Alvarez
R.I.P. – Mad Magazine