Market Minutes for the week of June 25th:
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” – Warren Buffett
Here’s what I am thinking and hearing: 1.) According to Credit Suisse, capex (capital spending by corporate America) rose by 20.1% in the first quarter of this year hitting $162 billion. The corporate tax cuts appear to be working. 2.) Lots of incorrect news seems to be flying around with regard to tariffs. On Monday, Treasury Secretary Mnuchin said the U.S. will slap investment restrictions on China and other countries that threaten U.S. intellectual property rights on technology. Four hours later, White House economic advisor Peter Navarro comes out and says that Mnuchin’s statement was inaccurate and the U.S. is not planning on investment restrictions around intellectual property. What is it guys? Mnuchin’s comments drive the markets down 550 points and Navarro’s bring it back up by 300 points. How can anyone invest around this dysfunction? 3.) From Doug Kass, founder of Seabreeze Partners: “In large measure the decline is a function of hastily crafted (‘back of the napkin’) policy – delivered by tweets – from a White House that consistently conflates policy with politics. Though I have repeated this phrase often…in a flat and networked world, this dictation and delivery of policy is dangerous and fails to acknowledge history…There is too little first level thinking and little second level thinking (that understands second order consequences of actions) in Washington D.C.” 4.) Peter Boockvar, chief investment officer at Bleakley Advisory Group: “Let’s separate the three different issues that the Administration is focusing on addressing when it comes to their current strategy on trade taxes. Firstly, protecting the technology of American companies from Chinese theft, a very worthy goal…The second is trying to knock down the tariff induced trade barriers that other countries have relative to the U.S. We all want that. The last one, sort of a byproduct of number two, is trying to lower the U.S. trade deficit. This one I believe is much more misplaced as an end to itself as trade is not a zero-sum game and a deficit should not always be viewed as a negative and a surplus is not always a positive.” 5.) Dr. Edward Yardeni, founder of Yardeni Research: “This may all be Trump’s art of the deal-making. However, bullying the Chinese in public rather than negotiating with them in private is risky. The longer that the noisy dispute continues, the more it could harm global economic growth as businesses postpone spending until the smoke clears. The biggest risk, of course, is that the smoke is actually the fog of war. Trump’s approach risks escalating the trade skirmishes into an all-out trade war, which would depress global economic activity.” 6.) Brian Wesbury, chief economist at First Trust: “One thing to keep in mind is that an extra 25% tariff on all imports from China would cost consumers $135 billion, assuming no change in behavior. That’s 0.7% of GDP. Not a trivial sum – and not good for the U.S. economy – but unlikely, on its own, to cause a recession. Of greater concern is that a true trade war could harm the global supply chain and disrupt the efficient allocation of corporate capital around the world. This could put some companies that depend on Chinese affiliation in financial danger, possibly enough to strain the financial institutions that support them.” Hmmmm, sounds to me like a veiled reference to the Smoot-Hawley Tariff Act of 1930. That didn’t turn out very well. 7.) Chris Hill, former U.S. ambassador to Iraq, South Korea, Poland and Macedonia noted that although taking a hardline approach to China is overdue, the White House has failed to put a game plan together. “’They just go out there slugging away,’…[and] it becomes a question of who is going to say things last and then bracing for the ‘Twitter storm’ from Trump to follow”, according to Michelle Fox of CBNC. Chris Hill goes on to say that: “The whole thing adds up to a view that somehow they don’t have their act together and that’s what’s making people very nervous.” 8.) The Investment Company Institute said that investors pulled about $5.16 billion from equity funds in the week ended June 20th. That’s the largest weekly outflow since the week ended March 28th when outflows totaled $11.67 billion. TrimTabs says that global equity funds have seen outflows of $12.4 billion this month, something not seen since October 2008 at the start of the Great Recession. Seriously? 9.) Investors Intelligence said the number of Bulls dropped to 47.6% from 52% last week, a 6-week low, while Bears rose a 4-week high of 18.4%. The Correction side rose to 34% from 30.4% a week earlier. The American Association of Individual Investors said that Bulls sunk to 28.4% from 44%, just 2 weeks ago. Bears rose by 14% to 40.8%, the highest reading since early April. 10.) Wow, the worries over tariffs, retaliation and trade wars have just stopped this market dead in its tracks. What a shame. Stop me before I shoot myself in the foot!
The Dallas Fed Manufacturing Index improved in June to 36.5 from 26.8 in May for the best reading in 4 months. New orders, backlogs and employment all improved. Prices paid reached a 7-year high while prices received soared to their highest level in a decade.
The Philly Fed Manufacturing Index for June came in weak at 19.9 vs 34.4 in May. The new order component was also weak falling from 40.6 in May to 17.9 in June.
The Richmond Fed Manufacturing Index for June rose to 20 vs 16 in May. Shipments, new orders and employment were all strong in the month.
The Commerce Department reported that U.S. new home sales grew by 6.7% in May to the highest level since November 2017. Sales of new homes in the South surged to their highest levels (+17.9%) in nearly 11 years. Sales in the Northeast fell by 10.0% and in the West, by 8.7%. Sales in the Midwest were unchanged.
The National Association of Realtors (NAR) said that pending home sales in May fell by 0.5% for the fifth straight monthly drop. At the end of last month, the supply of homes for sale was higher than in April but still 6.1% lower than last year at this time.
The Conference Board’s consumer confidence index slipped to 126.4 for June, down from 128.8 in May. The Expectations component fell to a 6-month low and led the month over month over drop.
The Commerce Department said that U.S. orders for durable goods fell in May by 0.6%. Durable goods are everything from toasters to aircraft that are meant to last three years or more. The Commerce Department also said that the goods trade deficit fell 3.7% to $64.8 billion as exports outpaced imports in May.
The Commerce Department announced that final 1st quarter GDP was revised downward from 2.2% to 2.0% on the weight of the weakest consumer spending in 5 years.
Oil prices surged higher by nearly 5% (WTI crude +$3.04 per barrel) after OPEC agreed to an increase in output of 1 million barrels per day to compensate for losses in production at a time of rising global demand.
Oil prices got another boost after the State Department said that it will require oil companies to reduce Iranian imports of oil to zero by November in an effort to completely isolate Iran.
Oil prices have surged higher once again as U.S. crude inventories dropped by a surprising 9.9 million barrels.
With a new Italian government in place, there was a jump in economic sentiment in June. The ISTAT index climbed 8 points to 105 after declining 4 out of the last 5 months.
Retail sales in the U.K. rose strongly in June. The CBI retail sales index rose to 32 from 11, above a forecasted reading of 10.
According to the National Oceanic and Atmospheric Administration, the U.S. imported more seafood last year than ever before. The U.S. imported more than 6 billion pounds of seafood in 2017 valued at more than $21.5 billion. Nearly half a billion dollars of cod was imported during 2017. Also during that year, the U.S. exported 3.6 billion pounds of seafood valued at $6 billion.
Harley-Davidson says that the EU tariffs will add $2,200 to the cost of their motorcycles. The company said that the total cost for the rest of 2018 will be between $30 billion and $45 billion. On an annual basis, the costs could total up to $100 billion. Harley-Davidson also said they will shift production of EU bound motorcycles to international manufacturing facilities to avoid the tariff burden. 16% of HD’s total sales are in Europe and it’s the company’s biggest market outside the U.S.
General Electric confirmed that it is selling its distributed power operations to the U.S. buyout group Advent for $3.25 billion and values the company at about 9.7x its 2018 earnings before interest, tax, depreciation and amortization.
Bloomberg reports that Apple will launch its new AirPods and HomePods in 2019. The AirPods could launch at the same time as a new HomePod smart speaker, the Air Power wireless charging pad, and a pair of headphones from its Beats division.
Amazon said that it is building out its own last-mile delivery service. The program called “Delivery Service Partners,” will let franchisees operate their own local delivery networks of up to 40 delivery vans displaying the Prime logo. The delivery units will pick up packages from one of Amazon’s 75 delivery stations.
Amazon is rolling out new accessories for Fire HD and Fire AD 10 tablets that will turn them into a portable Echo with a screen.
Amazon announces that it is acquiring online pharmacy start-up PillPack for an undisclosed amount. PillPack delivers medications in pre-sorted dose packaging and processes refills and renewals. Earlier in the year, Walmart tried to purchase PillPack but was unsuccessful.
Kroger is partnering with Nuro, an autonomous car company, to bring driverless cars to its grocery delivery. The “last-mile” of the delivery is one of the hardest feats in the delivery of fresh food and the driverless car may be able to solve the problem.
JPMorgan International Finance will divest the minority stake holdings in Saudi Investment Bank it’s held since 1976. JPMorgan will sell its shares back to Saudi Investment Bank for $203 million. JP Morgan has been the only U.S. bank providing both commercial banking and securities services in the Kingdom.
The New York Post reports that Kraft Heinz is interested in buying Campbell Soup. If it is for sale, General Mills could be a buyer as well.
Conagra will acquire Pinnacle Foods in a cash and stock deal valued at $8.1 billion. Total value of the deal is $10.9 when the debt is included.
The Wall Street journal reports that Lyft has just completed another funding round of $600 million. The new valuation of $15.1 billion would make Lyft worth one-quarter of its rival Uber.
Chipotle has announced that it will add five new menu items – quesadillas, nachos, chocolate milkshakes, avocado tostadas and an updated salad – at its New York City test kitchen. A national launch is in the works.
Molson Coors has been in talks with up to four Canadian marijuana companies (two of which are Aphria and Aurora Cannabis) about possible merger opportunities as pot is about to become legal in Canada and beer sales have been declining.
IBM will build custom Box Skills that apply Watson AI technology to Box Skills framework in a new offering by the two companies.
UPS said it has opened a new 30,000 square meter advanced technology package sorting and delivery hub on the outskirts of Paris, France. The $100 million facility employs nearly 1,000 people and is a part of UPS’s ongoing $2 billion European plan.
Boeing has announced that it has received a commitment from Vietnamese startup air carrier Bamboo Airways to purchase 20 of Boeing’s 787 Dreamliner aircraft in a deal that could be worth $5.6 billion. Delivery is scheduled for April 2020.
Boeing is beginning the design of what could become the new 797 jet liner. The first version is to be called the “NMA-6X,” a 228-passenger medium-range aircraft with a 5,000-mile nautical range. Deliveries are forecast for 2025.
Boeing said that 1 out of every 4 planes that roll of its assembly lines are purchased by Chinese customers.
Carnival Cruise Lines reports fiscal 2nd quarter earnings of $0.68 per share on revenue of $4.36 billion, an increase of 10.4% year over year.
Lennar Homes reports fiscal 2nd quarter earnings of $1.58 per share on revenue of $5.46 billion, an increase of 67.5% year over year. The company received 14,400 new orders (+62.3%) for homes in the quarter.
General Mills reports fiscal 4th quarter earnings of $0.79 per share on revenue of $3.89 billion, an increase of 2.1% year over year.
Accenture reports fiscal 3rd quarter earnings of $1.79 per share on revenue of $10.31 billion, an increase of 16.2% year over year.
Walgreens reports fiscal 3rd quarter earnings of $1.53 per share on revenue of $34.33 billion, an increase of 14.0% year over year.
Next week: No earnings reports (2nd quarter earnings begin to flow the week of July 9th). Economic reports: U.S. Purchasing Manager’s Index for June, U.S. Manufacturing New Orders for May, U.S. ISM Non-Manufacturing Index for June, ADP Private Payrolls for June, and U.S. Non-Farm Payrolls for June.
WTI crude oil: $73.82 per barrel. 10-year U.S. Treasury note: 2.85%. Gold: $1,245 per ounce.
Sources: CNBC, Real Money Pro, 361 Capital, Seeking Alpha, MarketWatch, Estimize.com, Bloomberg, The Wall Street Journal, FXStreet and First Trust Economics.
The effect of Chinese tariffs on the price of soybeans:
Thinking of moving? Check this map out first:
The corporate tax cuts have powerful so far in 2018:
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.