“[Baseball] is a game with a lot of waiting in it; it is a game with increasingly heightened anticipation of increasingly limited action.” – John Irving
Here’s what I am thinking and hearing: *1) I grew up playing baseball and I truly love the game but, I think John Irving’s quote is appropriate for those who don’t understand the game. *2.) From the amazingly accurate First Trust chief economist, Brian Wesbury: “As the summer goes on, we expect evidence will continue to show that the economy isn’t slipping into recession. Why? We think the Trump Administration is either (a) going to forge a trade deal with China or, (b) in the absence of a deal with China, move toward freer trade with other countries and regions (Japan, South Korea, the EU…etc.) to help organize an effort to get China to conform to normal trade rules. None of this means the US economy will grow forever. It won’t. But too many analysts and investors are needlessly fearful of a recession starting soon. We don’t see one this year or in 2020. Beyond that, forecasts are merely guessing. Appetite for risk should improve from here. Smart investors should get in front of it.” *3.) From the front lines of the trade/cold war: Because of Trump’s tariffs and proposed new ones on China, many businesses have pulled demand for Chinese goods forward. So much so, that the ports of Los Angeles and Long Beach (which handle 47.5% of container trade with China) are bursting at the seams, with nowhere to put incoming loads. The executive director for the Port of Los Angeles Eugene Seroka: “Trade chaos has ‘really gummed up the operations of the supply chain. We’ve got a lot of cargo that just sits.’…The trade war has left corporate America uncertain about the future by pulling back investments.” He adds “A lot of money is sitting on the sidelines…Do you buy more trucks? Do you hire more people? Do you build another warehouse? Do you invest in digital technology?…Few companies want to invest at this point in time in the supply chain, not knowing where it is going in the future.” Is Trump really “crazy like a fox” when it comes to his tariff battle? Chen Zhao, co-founder of Montreal-based Alpine Macro and former co-director of macro research at Brandywine Global Investment Management thinks so. According to Seeking Alpha, “Zhao believes Donald Trump is gaming everybody, pushing the tariff envelope as far as he can in an effort to make the Fed so nervous about the prospects of a downturn in global growth, that Jerome Powell has no choice but to cut rates. Zhao says there’s a ‘high probability’ that once the Fed eases, Trump will lower tariffs and hope that stocks soar on a combination of looser Fed policy and the end of the trade war.” My added thought, just in time for the 2020 elections? Xi and Trump will meet on Saturday in Japan but I think they will commit to reopening the trade talks at some point and Trump will postpone incremental tariffs on the remaining $300 billion of goods not currently impacted. *4.) In his most recent column, Scott Grannis of the Calafia Beach Pundit examines the current financial state of U.S. households. Scott says: “Chart #1 shows households’ financial burdens, which are defined as monthly debt service payments as a percent of disposable income. This is a robust measure of debt burdens since it compares a flow (debt payments) to a flow of (income). By this measure, households’ debt burdens are at historically low levels, and have been for a number of years. No sign of excessive borrowing, as there was prior to the past three recessions. Chart #2 compares a stock (liabilities) to a stock (assets), and by this measure household leverage is as low as it has been since the mid-1980s. Household net worth (Chart #3) has reached another all-time high: $109 trillion. This has been achieved primarily by increased savings and investments in both stocks and bonds. Home price appreciation has played only a minor role…Chart #4 shows the inflation-adjusted value of household net worth, which has also reached an all-time high. It’s important to note that this measure of financial well-being has been increasing by about 3.6% per year for many decades…Chart #5 shows the inflation-adjusted, per capita level of net worth, which is also at an all-time high ($329,000 per person).” *5.) As the end of the 2nd quarter and the 1st half draws near here’s what we’ve seen. The markets have rebounded very nicely from the Mnuchin Christmas Eve Massacre, up between 15.0% and 19.0% for the three major averages. The trade war between China and the U.S. has intensified, slowing the global and U.S economies. Corporate earnings remain moving higher, but at a slower pace. Fed policy has done a 180, going from an ill-timed rate increase in December to a probable cut in July. All the major money center banks, with the exception of Credit Suisse, passed the recent stress tests and won approval to boost dividend payouts. Going forward into the 2nd half, I could see President Trump taking a more conciliatory stance towards China – after the Fed cuts rates in July. He desperately wants a second term and the way to do it is to reignite economic growth into 2020. Lower rates and an end to the trade war would probably do the trick as both can produce strong economic tailwinds. If this scenario does in fact play out, not only do I think the markets can keep these 1st half gains, we could tack on another few percentage points of return between now and the end of the year.
The Philly Fed’s manufacturing index dropped to 0.3 in June from 16.6 in May. That was the lowest reading for the index since February, when it hit zero. Lower prices contributed to the index’s sharp drop and its prices-received index, which reflects manufacturer’s own prices, sunk 17 points to 0.6, its lowest level since October of 2016.
The Dallas Fed’s manufacturing index for June fell to a -12.1 from -5.3 in May. That’s the weakest reading since June of 2016. New orders rose 1.3 points month over month. Backlogs were positive after 6 months of negative readings. The new orders outlook decreased to 22.3 from 35.2 and capital spending plans were down slightly.
The Chicago purchasing manager’s index (PMI) unexpectedly fell into the contraction zone in June to 49.7 vs 54.2 in May.
The Commerce Department said that May durable goods orders (ex-aircraft) rose solidly at a 0.4% rate. Orders for machinery, computers and electrical products rebounded sharply from April when durable goods orders fell 1.0%.
For the third month in a row, consumer spending increased, up 0.4% in May. Personal incomes advanced 0.5% for the second straight monthly increase. Consumer spending accounts for two-thirds of GDP so this is good news for the second quarter.
The Conference Board said that June consumer confidence fell to 121.5 from 131.3 in May and is the lowest reading since September 2017.
The most current (2nd Q) National Federation of Independent Business (NFIB) small business optimism survey of 1,400 CEO’s of small and mid sized companies, fell to the lowest level since Q4 of 2009 when they were asked the question: “about the economy, their hiring and investment plans, and prospects for their revenues and profitability.”
Peter Boockvar, Chief Investment Officer at Bleakley Advisory Group: “Bottom line, the slowdown in U.S. manufacturing is in place with three key questions being, what comes of the trade talks, what’s the degree of the moderation, and to what extent does it infect the service sector.”
According to the U.S. Census Department, sales of newly built homes fell 7.8% in May and were 3.7% lower than May of 2018. The median price of a new home sold in May was $308,000, down 2.7% on an annual basis.
The S&P CoreLogic Case-Shiller 20-city home price index was unchanged in April compared to March on a seasonally adjusted basis and was 2.5% higher compared to a year ago in April. The cities with the strongest annual gains are the usual suspects: Las Vegas +7.1%, Phoenix +6.0% and Tampa +5.6%.
Fed President Jerome Powell said last week that the case has strengthened for future interest rate cuts. Powell said: “Overall, our policy discussion focused on the appropriate response to the uncertain environment. Many participants believe that some cut to the fed funds rate would be appropriate in the scenario they see as most likely.”
Goldman Sachs has changed its tune regarding the Fed. The bank now sees two rate cuts before the end of the year and an early end to the balance sheet roll off. Jan Hatzius, Goldman’s chief economist: “The results of [last week’s] meeting suggest that many FOMC participants are increasingly influenced by the expectations embedded in bond market pricing and other outside influences…The FOMC might well deliver a 50 [basis point] cut for fear of disappointing the market, even if the economic data do not paint a particularly worrisome picture.” Hatzius also mentioned a quote from former Democratic strategist James Carville, who once said he wanted to be reincarnated as the bond market because “you can intimidate everybody.”
The other side of the argument comes from consistently accurate Brian Wesbury, Chief Economist at First Trust: “The narrative that the U.S. economy is in trouble – some say teetering on the edge of recession – has become so powerful and persuasive that few investors give it a second thought. So of course, they believe, the Fed should cut interest rates. We haven’t seen anything like it since the Fed was hiking rates in the deflationary late- ‘90s. Those rate hikes, which were totally unwarranted, ended up causing a recession…It is true there have been some weak economic data points as of late. The bears have been pointing, for example, to the Markit Services and Manufacturing indices. But, these are surveys and have never, to our knowledge, been successfully used to predict a recession. Others are fretting over the tepid 75,000 new jobs added in May. But since this recovery began, the initial payroll reports have come in weak on multiple occasions without signaling recession, just look at May 2012, or December 2013, or May 2016, or September 2017, or February 2019. All months at first came in weaker than the May report and not one signaled recession. What investors should be focused on is initial unemployment claims as a share of total employment at the lowest reading ever. Job openings, meanwhile, are 1.6 million greater than the total unemployed. Retail sales are booming, up 10.9% in the past three months at an annual rate. After revisions, real GDP likely grew 3.3% at an annual rate in Q1 and is likely to rise 2.0% in Q2 (held down by a 1.0 point slowdown in inventories). There is absolutely no evidence of recession.”
To say that the recent IPO of Beyond Meat has been successful, is an understatement. Since going public in early May, the stock is higher by nearly 600%, taking its market cap above $10 billion. The plant-based meat company is now bigger than 80 S&P 500 companies, including Macy’s, Xerox and Mylan Labs. Is the IPO market getting frothy? I’d say so.
Crain’s reports that Facebook is in talks for at least 1 million square feet in the fast-growing Hudson Yards project, quickly establishing a technology sector on the west side of Manhattan.
Amazon has announced that it has opened Amazon Professional Beauty Store to offer professional stylists, barbers, and estheticians beauty supplies found in salons and spas.
Amazon announces Amazon Prime Days are scheduled for July 15th and 16th. The company has also announced a Roku TV competitor with its Toshiba 4K Smart TV HDR. It has an LCD panel with a contrast ratio of 4,000:1 and HDR in the Dolby Vision standard, a 4K refresh rate and a 60Hz refresh rate. The 55-inch sells for $499.99.
According to CNBC, FAA pilots have discovered a new flaw in the 737 MAX’s software during simulator testing and will most likely further delay the plane’s return to the air.
AbbVie has announced that it will acquire Botox-maker Allergan for nearly $63 billion. The purchase will allow ABBV to diversify away from its best-selling anti-arthritis drug, Humira.
Del Frisco’s Restaurant Group has agreed to be purchased by private equity firm L Catterton for $8.00 per share. The deal will value the company at approximately $650 million.
Caesar’s Entertainment Corp. has agreed to be purchased by Eldorado Resorts Inc. for nearly $8.6 billion. Under the terms of the deal, Caesar’s shareholders will receive $8.40 in cash and 0.0899 Eldorado shares for each Caesar’s share held.
Apple is expected to release three new iPhones this year. The new iPhone XR will have a 6.1-inch LCD screen like the current version, but will have two cameras as opposed to one. The battery size for the 2019 phones will be bumped higher to make it possible to charge other devices using the iPhone. “The next iPhone XR is expected to get other miscellaneous new features that are rumored to appear on the successors to the iPhone XS and iPhone XS Max, too. These include a new processor, an improved Face ID camera, a sharper 12-megapixel selfie camera, and support for bilateral wireless charging”, according to Business Insider.
Goldman Sachs boosts its quarter dividend by nearly 50% to $1.25 per share from $0.85 per share and authorizes a new $7 billion buyback program after passing the recent Fed stress tests.
JP Morgan boosts its quarterly dividend from $0.80 per share to $0.90 per share and increases it share buyback by $8.6 billion after passing the Fed stress tests.
Bank of America boosted its quarterly dividend from $0.15 per share to $0.18 per share and increased its share buyback program by $7.8 billion after passing the Fed stress tests
Wells Fargo boosted its quarterly dividend from $0.45 per share to $0.51 per share and can now buyback up to $23.1 billion in stock after passing the Fed stress tests.
Citigroup boosted its quarterly dividend from $0.45 per share to $0.51 per share and can now buyback up to $6.0 billion in stock after passing the Fed stress tests.
Canopy Growth reports fiscal 4th quarter earnings of -C$0.98 per share on revenue of C$94.1 million, an increase of 312.5% year over year.
FedEx reports fiscal 4th quarter earnings of $5.01 per share on revenue of $17.8 billion, an increase of 2.9% year over year.
Nike reports fiscal 4th quarter earnings of $0.62 per share on revenue of $10.18 billion, an increase of 4.0% year over year.
Walgreens Boots reports fiscal 3rd quarter earnings of $ $1.47 per share on revenue of $34.59 billion, an increase of 0.8% year over year.
Next week: Earnings from: None. Economic reports: U.S. Purchasing Manger’s Index for June, U.S. Manufacturing New Orders for June, ADP Private Payrolls for June and U.S. Non-Farm Payrolls for June.
WTI crude oil: $59.64 per barrel. 10-year U.S. Treasury note: 2.00%. Gold: $1,415 per ounce.
Sources: CNBC, Real Money Pro, 361 Capital, First Trust Economics, Seeking Alpha, MarketWatch, The Wall Street Journal, The Calafia Beach Pundit, Bloomberg, and Zero Hedge.
At the time of publication Cascade Investment Group and /or its clients owned shares of GS, M, XRX, FB, AMZN, ROKU, BA, ABBV, AGN, AAPL, JPM, BAL, WFC, C, CGC, FDX, NKE, WBA.
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.