“Profits are the lifeblood of enterprise. Don’t let anyone tell you different.” – Andy Grove
Here’s what I am thinking and hearing: *1.) According to Fidelity, the average employer 401(k) match reached 4.7% this year, a record high. Before 2011, the average employer match was in the 3% to low 4% range but has steadily been increasing in each quarter in the years since. “An employer match is often referred to as “free money,” but a better way to think about it is as part of your total compensation package. You want to contribute up to the match so that you’re getting all of the money that your employer owes you…Let’s say you’re offered a job with a $90,000 salary and 5% 401(k) employer match, and a job with a $94,000 salary and no match. The $90,000 base is actually the better deal, because if you contribute up to the match, your employer will throw in $4,500, bringing your total compensation to $94,500 for the year. Over time, that will be worth even more as your investment earnings compound”, reports CNBC. *2.) Tony Dwyer, Senior Economist and Chief Market Strategist for Canaccord Genuity: “There is no question the economy is slowing dramatically, but contrary to popular market opinion, that has always been the bull case for equities in 2019. The recent ISM manufacturing survey and monthly payroll data serve as confirmation the (1) lagged effects of the Fed tightening from ZIRP to 2.5%, and (2) increased fear of a full-blown trade war with China have negatively impacted economic activity. As the weaker data fuel recession fear, it is difficult to remember that it is in fact the base for our bullish view. The slower economic activity gives the Fed room to fix the policy mistake(s) in 2018, like what took place following the sharp rise in rates in 1994 that almost drove the U.S. economy into recession. It was the two-rate-cut “tweaks” in July and December of 1995 due to a sharp slowing in economic activity that kept credit, the economy and the market moving higher…Recessions don’t magically appear, they develop from a credit shutdown…It is hard to have a credit shutdown absent significantly higher levels of credit stress. Our favored credit market indicators continue to suggest a benign environment and point to continued growth ahead…” *3.) according to research from JP Morgan, history shows that an “insurance” rate cut while the economy is still fine, usually boosts the stock market. So-called “insurance” rate cuts within a defined backdrop of economic growth — which happened in 1995 and 1998 – resulted in solid equity market performance over the next 39 to 52 weeks from the date of the rate cut. *4.) From the front lines of the trade/cold war: Peter Boockvar of Bleakley Advisory Group: “Phew, a self imposed supply chain crisis averted [when Trump pulled the tariff threat back from Mexico]. What a relief but I gotta tell ya, now that the threat of tariffs can be thrown around like nothing, I don’t believe a multinational business with factories and supply needs globally can ever rest easy until this stops.” From Jim Cramer: “As long as the president believes that tariffs carry no risks and only rewards both in the ballot box and with the budget, we should expect barriers to be raised pretty much everywhere. He’s entitled to his alternative facts as long as he is president. The rest of us, I think we can separate fiction from fact but it doesn’t really matter, does it?” President Trump has now threatened new tariffs on top of the previously threatened $300 billion if Chinese President Xi refuses to attend the G-20 Summit meeting in late June. The International Monetary Fund (IMF) said that the ongoing trade tensions have had a “significant” impact on the Chinese economy. As a result, the IMF has lowered its growth forecast for 2019 Chinese GDP to 6.2% from 6.3% and expects Chinese economic growth to slow to 5.5 growth by 2024. The China Association of Automobile Manufacturers (CAAM) said that Chinese automobile sales had the worst month in history in May, falling 16.4% and that follows a decline of 14.6% in April and 5.2% in March. Foxconn, one of the world’s top manufacturers of electronics, which also assembles products for Apple, has announced plans to shift production away from its China factories and relocate to Mount Pleasant, Wisconsin with a new $10 billion factory where it will make servers, networking products and automotive central controls. The Wall Street Journal reports that “tariffs have already slammed farm exports and income, but the effects of trade uncertainty are rippling out. Farm equipment and chemical manufacturers have reported lower orders. Businesses are delaying investment decisions. Global trade flows are slowing, and commodity prices are coming down.” *5.) This week, it looks like stocks consolidated gains from last week’s awesome run. All-in-all, healthy action. Small cap stocks had a good week, further confirmation that stock pickers are becoming increasingly interested in the market. We have the Fed on our side now and that is a big positive and a large tailwind for the economy and the market.
The Labor Department said that May producer prices (excluding food, energy and trade services) rose by 0.4%, matching April’s gain of the same amount. Headline PPI edged up 0.1% in the month. Wholesale energy prices fell 1.0%, goods prices were unchanged, food prices fell by 0.3%, healthcare services increased by 0.2% and hotel accommodations prices rose by a whopping 10.1%.
The Labor Department also said that May consumer prices rose by 0.1% as the CPI slowed from 2.0% to 1.8% over the past 12 months. Falling gasoline (-0.5%) and used vehicle prices (-1.4%) held inflation in check. The cost of food rose 0.3%, medical care increased 0.3% and rents rose by 0.2%.
The Commerce Department announced that U.S. retail sales 0.5% in May and April was revised higher to +0.4%. Since consumer spending represents 2/3 of GDP, the 2nd quarter reading could be better than previously thought.
Inside of last week’s dismal jobs report the Labor Department stated that professional services added 33,000 jobs, hotels and restaurants added 26,000 and health-care providers hired 16,000 workers. Construction companies created only 4,000 jobs, retailers shed jobs for the fourth straight month and the federal government cut 15,000 jobs.
The report also showed that “the slowdown in hiring and shift toward lower playing jobs in social services and hospitality appears to have put a halt to broad wage gains. Although the average wage paid to American workers rose 6 cents to $27.83 an hour, the increase over the past 12 months slowed to 3.1% from 3.2%. It peaked at 3.4% earlier this year” according to MarketWatch.
If you take last Friday’s jobs report (+75,000) and compare it against the last two months’ revisions of minus 75,000 jobs, we actually have zero net new jobs versus what we thought we had at the end of April. Perhaps this is why the fed fund futures are predicting a 95% chance of a rate cut in July. The cut would not be an “emergency” cut but rather a correction (or “insurance cut”) to counter the last rate increase in 2018, which was clearly ill-timed.
Tom Graff, chief fixed income strategist for Brown Advisory: “The details don’t make it look any better. If you are hoping for a number like this to be a statistical anomaly, you want to see odd results in particular industries. No such luck this time. I don’t see any industry showing unusual figures. They all look bad. It looks like hiring just stopped…In other words, historically during good times firms generally see increasing demand for their products and want to expand their capacity to meet that demand. Hence, we see persistently strong hire rates. Once firms are no longer certain about end demand, they stop hiring entirely. Therefore, we seem to move rapidly from robust job growth to no job growth (or even contraction).”
Another of the Feds’ favorite indicators, the Job Openings and Labor Turnover (JOLTS) survey for April showed that job openings fell to 7.449 million vs 7.474 million in March (0.78 unemployed job seekers for each available job). For April, 1,752,000 people were either fired or laid off vs 1,788,000 in April of 2018. An additional 344,000 people either left their employer in April due to retirements, transfers to other locations, death, and separations due to disability.
The Treasury Department said that the U.S. budget deficit for May rose to a record $208 billion, well worse than last May’s $147 billion deficit. May’s deficit (not a traditionally high-spending month for the U.S. government) was the largest deficit for the month of May on record.
Peter Boockvar reports that last week’s data from Investors Intelligence “saw another decline in Bulls and again, most went to the Correction camp. Bulls fell to 42.7 from 49 last week. That’s the lowest since January 16th. Those expecting a Correction jumped by 5.1 points to 38.8 and that is the most since mid December. Bears, after touching a 14 month low two weeks ago, rose just 1.2 points to a still very low 18.5.”
The American Association of Individual Investors (AAII) saw last week’s Bullish sentiment fall 2.3 points to 22.5, the lowest reading since mid-December. Bears rose by 2.5 points to 42.6, the most since early January. The peak reading for Bears during the December Massacre was 50.3, so in terms of sentiment, the market has been oversold.
The Baker Hughes U.S drilling rig count for last week showed a decline of 9 to a total of 975 rigs. Oil drilling rigs fell by 11 to 789 while gas rigs gained 2 for a total of 186.
Pioneer Natural Resources’ CEO Scott Sheffield says the Permian Basin is producing an amazing amount of oil right now. A decade ago, when he came on Jim Cramer’s Mad Money, the Permian was producing 5 to 6 million barrels a day. He said that number would double by the turn of the decade. We are now at 12 million barrels a day and in a recent return to Mad Money, Sheffield says that number will soon become 17 million barrels per day.
The U.S. Energy Information Administration recently cut its 2019 world oil demand by 160,000 barrels per day to 1.22 million barrels per day, a 15% cut from the previous month’s forecast, citing demand concerns driven by the U.S.-China trade war.
According to Experian, auto loan borrowing for both new and used cars hit new records in the 1st quarter. The average amount borrowed to purchase a new car hit a record $32,187 while the amount for a used vehicle hit a record $20,137. The average monthly payment for a new car is $554 and $391 for a used car.
RM Sotheby’s says that a fully restored version of the Aston Martin DB5, made famous by James Bond in the 1964 film “Goldfinger,” will be auctioned off on August 15th in Monterey, California. The car has full Bond modifications including a Browning .30 caliber machine gun in each front fender and wheel-hub mounted tire-slashers. Auctioneers estimate the car, one of only three surviving Bond-modified DB5s, could go for $4 million to $6 million.
According to a study released by Harvard University’s Center for Housing Studies, growth in remodeling spending is expected to decline in half of America’s largest cities in 2019. MarketWatch reports, “In 29 of the 49 cities studied, spending growth on remodeling is expected [to] drop relative to 2018 levels. In 22 cities, it will hit its lowest point in three years.” But that trend may be in jeopardy as another Harvard study found that 80% of America’s 137 million homes are at least 20 years old and 40% are at least 50 years old. According to Zillow, new garage doors and kitchen remodels (with steam ovens) have added up to a 30% premium to the sale of the home.
According to data from real estate data firm Attom Data Solutions, just over 49,000 single-family homes and condos were flipped in the first quarter of this year. These homes comprised 7.2% of all home sales nationwide during that time frame and represents the highest flipping rate since the first quarter of 2010. That isn’t necessarily a positive indicator according to Attom’s chief production officer Todd Teta who observes that the number of homes that were flipped in the first quarter was actually down 8% from 2018 to a three-year low. In the quarter, homes flipped sold for a median price of $215,000. With median purchase price of $155,000, the gross flipping profit was just $60,000, down $8,000 from a year ago, another three-year low.
From Blaine Rollins of 361 Capital: “If you need any more evidence that Denver’s market is habanero hot…[the Denver Post reports] Don’t declare it buyer’s market just yet. A Denver row home contaminated with meth is under contract for $500,000. The row home in the Five Points neighborhood came with the following description on the real estate website Zillow: ‘Investor special. Home has been designated as contaminated with methamphetamine. Cash only deal. Do not enter the property without proper hazmat protection.”
On the other side of the coin, here are the best cities for first-time home buyers according to Livability: Louisville, Ky. (median home price – $176,300). Knoxville, Tenn. (median home price – $184,000). Winston-Salem, N.C. (median home price – $141,000). Pueblo, Colo. (median home price – $192,800). Cincinnati, Oh. (median home price – $162,000). Oklahoma City, Okla. (median home price – $148,900). Pittsburgh, Pa. (median home price – $171,000).
MarketWatch reports “one in three (34%) U.S. adults aged 21 and up is interested in using legalized cannabis, but most aren’t just looking to get high…Top reasons cited for potential cannabis consumption included treatment for chronic pain (85%), mental-health improvement (82%), treatment of minor injuries (81%), sleep aid (77%), and relaxation (74%). Additional sources of interest in consuming cannabis included the treatment of a non-pain condition (63%), disease or ailment prevention (60%), improvement of physical health (58%) and having a good time with family and friends (48%). Enhancement of spirituality rounded out the bottom of the list, at 28%.”
Barnes & Noble will be acquired by hedge fund Elliott Advisors UK Ltd. in an all-cash deal valued at about $683 million, including the assumption of debt.
Salesforce.com will acquire Tableau Software (DATA) for $15.7 billion in stock, net of cash. Each Class A and Class B share will be exchanged for 1.103 shares of Salesforce.com (CRM).
Merck said on Monday that it will acquire privately held biopharmaceutical company Tilos Therapeutics in a deal that could be valued at up to $773 million. Tilos produces therapeutics for the treatment of cancer, fibrosis and autoimmune diseases.
Raytheon and United Technologies have agreed to a merger of the two aerospace tech giants. With combined annual sales of around $74 billion, the new company would be the second-largest defense-and-aerospace company behind Boeing. The new company will be located in Boston, Mass.
Shutterfly has approved to be acquired in an all-cash offer from Apollo Global Management for $51 per share, or an enterprise value of $2.7 billion.
French technology giant Dassault Systèmes is nearing a deal to acquire Medidata according to sources. The move is designed to boost Dassault’s life sciences unit. “Medidata’s software is used to help clinics manage their back office operations and their data, and it provides analytical tools so they can make sense of massive amounts of information”, according to CNBC.
FedEx has said it will not renew its contract with Amazon to deliver their packages. According to Moody’s, FedEx Express will benefit in the long-run because Amazon is a customer that requires massive amounts of residential, small-package deliveries instead of more worthwhile business-to-business contracts. The Amazon contract is among the least-profitable businesses within FedEx.
Supermarket chain Kroger has said that it will begin to sell CBD creams, balms and oils in nearly 1,000 stores across 17 states. Selling CBD-infused beauty and skin-care products brings far less risk than edibles, which is why retailers such as Kroger are starting to stock those types of products first.
CVS says it will open 1,500 HealthHUB stores over the next two years. HealthHUBs are remodeled CVS drugstores that include more health services and products.
“Amazon.com Inc. has launched an AI-powered shopping feature, StyleSnap, that helps shoppers with fashion recommendations. Users upload a photo of an outfit that they like on the Amazon app and StyleSnap will suggest items from the site that match the look”, according to MarketWatch.
Amazon has launched a credit card, in partnership with Synchrony Financial, for those who might not have good enough credit to get one otherwise. “The ‘Amazon Credit Builder’ lets its users build up credit through a secured card, alongside budgeting tools and tips. It allows people eventually to ‘graduate’ to another Amazon Store card once they’ve established credit…This new Amazon card could open the door to a huge segment of U.S. buyers. According to a 2018 FICO survey, more than 11% of the population has a credit score of below 550. About 4% of the population has a “bad credit score,” which according to FICO Score is between 300 and 499. Meanwhile according to a 2017 survey by the FDIC, 25% of the U.S. households are either unbanked or underbanked”, reports CNBC.
Apple is reportedly looking to acquire a new autonomous vehicle startup according to CNBC. Drive.ai, is a self-driving shuttle service that has raised $77 million and was valued at $200 million two years ago. “Apple has largely kept its plans for self-driving cars and other car technology under wraps as rivals like Alphabet’s [(Google’s)] Waymo and Uber have begun testing their technology publicly”, according to CNBC.
CrowdStrike, a cloud-based security software company that provides services to Amazon Web Services and Credit Suisse, went public on Wednesday at $34 per share and immediately opened at $63.50 pushing its valuation to over $11 billion. Google’s CapitalG made an earlier private investment of $100 million in CRWD which is now worth $1.2 billion. CapitialG has had a piece of almost all of this year’s Silicon Valley IPOs which, according to the latest quarterly report, pushing Alphabet’s [(Google’s)] non-marketable securities portfolio to almost $13 billion.
Boeing said that it delivered 30 commercial aircraft in May, down 56% from the 68 it made in May of last year. Deliveries of 737s plummeted from 47 a year ago to just 8 in May. All were an older model called the 737 NG. Separately, the FAA said the Boeing 737 MAX will be back in the air by December.
Next week: Earnings from: Adobe Systems, Oracle and Kroger. Economic reports: U.S. Housing Starts for May, U.S. Existing Home Sales for May and The Philly Fed Manufacturing Index.
WTI crude oil: $52.50 per barrel. 10-year U.S. Treasury note: 2.10 %. 30-year mortgage: 3.82%.
Sources: CNBC, Real Money Pro, BankRate, 361 Capital, First Trust Economics, Seeking Alpha, MarketWatch, The Wall Street Journal, Yardeni Research, The Calafia Beach Pundit, Estimize.com, Morningstar, Zero Hedge, Bloomberg and Charlie Bilello,
R.I.P. Pat Bowlen. Thank you for giving us a first-class football organization.
At the time of publication Cascade Investment Group and /or its clients owned shares of BHGE, ZG, CRM, MRK, DATA, UTX, FDX, RTN, AMZN, KR, CVS, AAPL, GOOGL, UBER, CRWD, BA, ADBE, ORCL, NFLX.
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.
Job openings versus those looking for work:
Core CPI (shaded areas = recession):