“It’s hard to beat a person that never gives up.” – Babe Ruth
Here’s what I am thinking and hearing: *1.) Wall Street is confused and uncertain. When this happens, stocks get sold and Treasury bonds get bought. Corporate America is uncertain and hesitant. When this happens, capital spending slows or stops. The unpredictable and irrational behavior of President Trump, who seems to be tossing the threat of tariffs around like hand grenades as “tools” for broader policy purposes, is hurting the economy. The yield on the 10-year Treasury fell to 2.07% on Monday. That’s all the way down from 2.79% in early March. As Chicago Fed President Charles Evans said earlier in the week: “…the market sees something that I haven’t yet seen…” Jim Caron, portfolio manager at Morgan Stanley, spoke with CNBC about why bond yields are falling: “Caron said the Mexican tariffs injected a level of uncertainty into the market that will be difficult to repair, even if the tariffs are never acted on. ‘The bottom line is all of this makes it difficult to be an investor because I am now looking at extraneous items, outside the market. To make an informed economic decision, which is making it very difficult…[and] why you become more defensive. You raise more cash and you basically start to become more defensive.’” *2.) Peter Boockvar, chief investment officer at Bleakley Financial Group: “On Mexico, I’m hopeful that we won’t be so stupid to address a clear problem with stemming the flow of mostly illegal Central American migrants by implementing a blanket tariff on everything coming in. I’ll say this again, our dalliance with tariffs is playing with fire when it comes to a possible global recession. Walk it back or threaten what is now the longest U.S. expansion on record.” More Boockvar on the topic of the new Department of Justice probe into Big Tech: “So now the U.S. government is going after our most successful companies for being too successful. The companies that blazed new trails that we never knew existed. The companies that employ hundreds of thousands of employees and have provided services to the U.S. consumer that have all made our lives more efficient and lower cost and with Facebook and Google, we get them for free. I don’t believe this is a good thing and for the stock market, the leaders of this bull market are now under threat after the tariff induced slowdown has done to so many other groups. Self induced disruption and the history books are going to have plenty of fodder with all of this.” *3.) What has happened to the “business” president? Jim Cramer: “Whims per share? Is that the best way to figure out what stocks are worth these days? That’s what I am beginning to think after the president’s use of tariffs to coerce Mexico into help stopping emigration and illegal border crossings. What would whims per share look like? Pretty simple. You would have to analyze how corruptive and negative each move by President Trump might be for business and then slap a discount on it that’s worthy of a readjustment in what we pay for stocks. Yes, you would multiply the earnings by the presidential whim discount, with each whim creating a decline in the VALUE of future earnings. So, you have China exposure? Perhaps multiply the future earnings by…0.6. You multiply earnings from Mexico by 0.8. How about Europe? Point nine? Until we decide to put tariffs on Europe because many countries don’t pay their fair share to NATO?” *4.) David Rosenberg, Chief Economist and Market Strategist at Gluskin, Sheff + Associates has deciphered a cunning plan emerging from the White House. With somewhat tongue-in-cheek he says: “Maybe Trump is a genius, after all. What if he finally gets the steep Fed rate cuts he has been demanding? After that he ends the trade wars, tariffs go to zero, and the stock market surges to new highs – just in time for the 2020 election!” *5.) According to State Street Global Advisors and Matthew Bartolini, head of SPDR Americas research: “Global equities were tweeted into a tailspin” as equity ETFs suffered the largest monthly outflows in their history in May, losing $19.9 billion of assets. Sector ETFs also suffered an $8.8 billion outflow while U.S Treasury ETFs attracted $5.6 billion of inflows. Tony Dwyer, chief market strategist at Canaccord Genuity: “When you have extreme overbought and high optimism [like the beginning of May] where everyone is on the same side of the boat, it sets the stage for a market correction…The opposite is true when the market has become extremely oversold and everyone has quickly shifted to the other side of the boat…Fewer than 25% of the…individual investors polled by the American Association of Individual Investors (AAII) are bullish.” *6.) From the front lines of the trade/cold war, CNBC reports, “Farmer sentiment plunged to its lowest level since October 2016…May’s Purdue University/CME Group Ag Economy Barometer is now at levels that have erased all improvements recorded following the November 2016 election…The weaker farm sentiment also comes as corn and soybean producers in the Midwest face one of the wettest spring seasons in decades and the risk of lower yielding crops.” According to the Department of Agriculture, during the first three months of 2019, U.S. agricultural exports to China were 40% below the same period last year. And that comes on top of a steep decline in 2018, when the U.S. sold $9.2 billion of farm goods to China, versus $19.5 billion in 2017. According to the New York Times, “The United States imported more than $345 billion in goods from Mexico last year, and shipped $265 billion the other way.” Blaine Rollins from 361 Capital: “If you are going to shoot yourself in the foot, why not use a machine gun. The U.S. – Mexico manufacturing supply chains are highly integrated, with two-thirds of U.S. imports taking place intra-company (between factories owned by the same firm). Some manufactured items cross the border more than once, which will become cost-prohibitive [under the proposed Trump tariffs].” Finally, while tossing trade grenades to and fro, President Trump opened another potential front in his trade war, terminating India’s designation as a “developing nation” and thereby eliminating an exception that permitted the country to export nearly 2,000 products to the U.S. duty-free.
The ADP/Moody’s Analytics private payrolls survey for May found that the economy generated only 27,000 new jobs in the private sector, badly missing the forecast of 175,000. Small business slashed 43,000 jobs in May, mostly concentrated in a 36,000 loss for construction. Medium sized firms added 11,000 jobs and large companies generated 68,000 new payrolls. Mark Zandi, Chief Economist for ADP/Moody’s said: “Growth is slowing, and it’s slowing very sharply. Business capex is dead in the water.”
The Labor Department said that the U.S. economy generated 75,000 new nonfarm payrolls in May.
The Commerce Department said that factory orders for newly made U.S. goods fell in April by 0.8%, pulled down by soft demand for transportation equipment, computers and electronics. Shipments of manufactured goods were lower by 0.5% in April for the biggest drop since April of 2017 influenced by Boeing’s decision to cut production of the 737 MAX.
The Institute for Supply Management (ISM) said its manufacturing index fell in May to 52.1 for the lowest reading since October of 2016. By component: the production index rose by 1 point to 51.3, the employment index rose 1.3 points to 53.7 and the prices index showed a strong gain of 3.2 points to 53.2. Of the 18 industries surveyed, 11 saw growth versus 13 in April. Those in outright contraction rose from 5 to 6 in the month. Peter Boockvar’s bottom line: “If there is a center of trade worry/tariff storm, it is manufacturing and the impact is continuing to get more obvious. Markit revised its manufacturing index down to 50.5 from 52.6 in April and that is the lowest since September of 2009. New orders are at the weakest since August of 2009.”
The Institute for Supply Management (ISM) said that its services index rose 1.4 points in May. Of the 18 industries surveyed, 16 saw growth versus 15 in April. The New Orders component rose by 0.5 points and the Employment component rose by 4.4 points. To 58.1, the highest reading since October of 2018.
The Chicago PMI index for May rose to 54.2 from 52.6. The average year to date is now 57.4 versus 62.4 in May of last year.
The University of Michigan Consumer Sentiment Survey for May fell to 100 but is still up from 97.2 in April. By component: Current Conditions – down 2.3 points, Expectations – higher by 6 points, Income Expectations – higher by 5 points, Spending Intentions – flat. Bottom line, consumer confidence remains strong because the labor market is solid.
PMIs from around the globe: China Caixin – 50.2 (flat), Taiwan – 48.4 (up 0.2), Malaysia – 48.8 (down 0.6), Japan – 49.8 (down 0.4), South Korea – 48.4 (down 1.8), India –52.7 (up 0.9), Vietnam – 52 (down 0.5), Philippines – 51.2 (up 0.3), UK – 49.4 (down 3.7), Germany – 44.3, Hong Kong 46.9 (down 1.5), Singapore – 52.1 (down 1.3) and the Eurozone – 47.7 (flat).
10-year bond yields: Germany -0.21%. Netherlands -0.04%. France 10-year +.21%. Japan -0.10%.
According to CNBC, the Fed’s Beige Book said that, “the U.S. economy expanded at ‘a modest pace overall’ from April to mid-May, but growth was partly held in check by labor shortages and worries over tariffs on China.” The Beige Book suggests that the economy was showing gradual improvement until the latest flare-up in trade tensions with China.
From Scott Grannis, economist and founder of the Calafia Beach Pundit: “I’ve been tracking truck tonnage for a long time, and it’s been a reliable—and generally bullish—indicator of underlying economic activity. It measures the actual tonnage of freight hauled by the nation’s carriers, and this physical measure of the economy’s size has also tracked the gains of the U.S. equity market (see chart below). Truck tonnage surged by almost 8% in the year ending April 2019, and it’s up 22% since just before the 2016 elections. Today there is a sizable difference between the two, with truck tonnage suggesting the economy is virtually booming, whereas the equity market has been dominated by caution for the past year or so.” More from the Calafia Beach Pundit: “Now the bond market is telling the Fed that at least two rate cuts are needed. They are needed to offset the increasing uncertainties surrounding Trump’s trade/tariff wars…Higher tariffs reduce future economic growth expectations and increase general uncertainty…If the Fed fails to offset the increased demand for money this creates, then deflationary forces will take root and the risk of a recession (though still very low) will increase.”
CNBC reports: “Federal Reserve Chairman Jerome Powell said the central bank is watching current economic developments and will do what it must to keep the near-record expansion going.” MarketWatch reports: “James Bullard, president of the St. Louis Fed, said the resolution of trade conflicts is likely to be more difficult than previously believed, a development that could chill business investment and add pressure on a U.S. economy whose growth has already waned since last year.” Because of the trade wars and low inflation, Bullard said the Fed may need to cut rates sooner than later. Seeking Alpha reports Chicago Fed President Charles Evans said: “‘Markets’ seem to be seeing something that we’re not seeing as quickly…We need to pay attention to that.” Fed Vice Chairman Richard Clarida said according to the Wall Street Journal: “Let me be very clear that we’re attuned to potential risks to the outlook…And if we saw a downside risk to the outlook, then that would be a factor that could call for a more accommodative policy.”
Baker Hughes said that last week’s drilling rig count rose by 1 rig to a total of 984. Active U.S. oil rigs increased by 3 to 800. Natural gas rigs actively drilling held steady at 184.
According to new Pew Research poll, more Americans are worried about “fake news” than are worried about racism, climate change and terrorism. The percentage of those worried about issues shakes out like this: Drug addiction – 70%. Affordable health care – 67%. U.S. political system – 52%. Gap between rich and poor – 51%. Fake news – 50%. Violent crime – 49%. Climate change – 46%. Racism – 40%. Illegal immigration – 38%. Terrorism – 34%. Sexism – 26%. According to the opinions of those surveyed, political leaders and activists are more responsible for “fake news” than journalists.
Tony Rice is a 97-year old U.S army veteran who parachuted into Nazi-occupied France on D-Day 75 years ago. Well, Mr. Rice returned to Normandy on Wednesday the same way he did 75 years ago. He parachuted in! “Still buff and sprightly, and having prepared for six months with a physical trainer, Rice swooped down with an American flag fluttering beneath him and landed to a wave of applause from the crowd of thousands that gathered to watch the aerial display”, reports Business Insider.
According to the Los Angeles Times, a huge blob appearing on the National Weather Service’s radar wasn’t a rain cloud, but rather a swarm of migrating ladybugs. Meteorologist Joe Dandrea said the blob of ladybugs was flying at between 5,000 and 9,000 feet, with the most concentrated group measuring about 10 miles wide (see radar image below).
On the heels of the announcement (leak) that the Justice Department, FCC and a House Judiciary Committee would begin an investigation into competitive practices in the technology industry, Jim Cramer surmises that Trump wants to crack down on Big Tech because he views them as political opponents. Cramer: “I know this sounds odd, but are these companies [Facebook, Apple, Amazon, Netflix, Google] the president sees as uniquely Democratic…Those companies used to seem like the crown jewels of the U.S. economy. Now they’re being treated more like enemies of the state.”
States Attorneys General from California, Hawaii, Maine and Washington D.C. have now filed lawsuits against opioid maker Purdue Pharma, and the Sackler family for falsely promoting the drug by downplaying the risk of addiction while the drug has emerged as one of the most widely abused opioids in U.S. history. “The California suit alleges that Purdue and Sackler knew in 1997 that drugs containing oxycodone, such as OxyContin, were widely abused…The Center for Disease Control and Prevention said opioids are the main driver of drug overdose deaths. Opioids were involved in 47,600 overdose deaths in the U.S. in 2017”, reports MarketWatch.
Ohio doctor William Husel, age 43, has surrendered to Columbus, Ohio authorities on charges he administered large doses of the synthetic opioid Fentanyl to 29 patients at Mount Carmel West Hospital, in order hasten their deaths. He faces multiple counts of murder while the hospital’s chief pharmacy officer, Janet Whittey, faces numerous lawsuits from the victims’ families.
Apple made a number of announcements on Monday that seem to be steering revenue sources away from sales of the iPhone. “Apple is trying to adapt by squeezing money from digital services tailored for the more than 900 million iPhones currently in use. As a part of that effort, Apple is supplementing its music streaming service with a video gaming bundle and a Netflix-like video streaming service scheduled to debut this fall.” The iTunes software rolled out 16 years ago, will be completely ushered out. “Apple has already phased out iTunes from the iPhone and iPad, but now is expected to do the same on the Mac and other personal computers. Instead of iTunes, separate apps for music, video and podcasts are expected to be offered for computers, mirroring how Apple already handles those services on mobile devices. Apple also is expected to provide a glimpse of a separate app store for the smartwatch to lessen its dependence on the iPhone.”
Newell Brands has agreed to sell United States Playing Card Company to Cartamundi Group for an undisclosed consideration. USPC produces and distributes playing cards and in 2018 had net sales of $112 million.
Google has agreed to acquire data analytics company “Looker” for $2.6 billion in cash in an attempt to gain market share on Amazon Web Services.
Costco reports that same-store comparable sales rose by 4.2% in May. After backing out fuel and F/X, total comps were up by 4.3% in the current quarter.
Cracker Barrel reports fiscal 3rd quarter earnings of $2.09 per share on revenue of $739.6 million, an increase of 2.5% year over year.
Salesforce.com reports 1st quarter earnings of $0.66 per share on revenue of $3.74 billion, an increase of 24.3% year over year.
Beyond Meat reports 1st quarter earnings of -$0.01 per share on revenue of $40.21 million, an increase of 214.6% year over year.
Zoom Video Communications reports 1st quarter earnings of $0.03 per share on revenue of $121.99 million, an increase of 103.1 year over year.
DocuSign reports 1st quarter earnings of $0.07 per share on revenue of $213.96 million, an increase of 37.3% year over year.
Next week: Earnings from: Restoration Hardware and Lululemon. Economic reports: Producer Price Index for May, Consumer Price Index for May, U.S. Retail Sales for May and U.S. Industrial Production for May.
WTI crude oil: $53.44 per barrel. 10-year U.S. Treasury note: 2.06% Gold: $1,342 per ounce.
Sources: CNBC, Real Money Pro, Seeking Alpha, MarketWatch, Bloomberg, Estimize.com, The Calafia Beach Pundit, Zero Hedge, The Wall Street Journal, 361 Capital, First Trust Economics, The Business Insider and MSN Money.
At the time of publication Cascade Investment Group and /or its clients owned shares of FB, AAPL, AMZN, NFLX, GOOGL, BHGE, NWL, COST, CBRL, CRM, ZM, DOCU.
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.
National Weather Service radar showing a swarm of ladybugs over Southern California: