Market Minutes for the week of June 4th:
“Fragility is the quality of things that are vulnerable to volatility.” — Nassim Nicholas Taleb
Here’s what I am thinking and hearing: 1.) The economic reports from last week have sent economists back to their econometric models to rerun 2nd quarter GDP forecasts. Consumer spending +0.6% in May, construction spending +1.8% in May, ISM Manufacturing Index +0.9 points to 158.7 in May and 233,000 new nonfarm jobs created in May all point to solid GDP growth for the 2nd quarter. The Atlanta Fed Tracker GDPNow puts Q2 growth at +4.8% and the CNBC Rapid GDP Update puts it at +3.6%. 2.) I can’t wait for 2nd quarter earnings from corporate America (they start flowing during the second week of July) because they are going to be good! 3.) According to UBS, if current conditions persist, corporations are likely this year to inject more than $2.5 trillion into “flow” — the combination of share buybacks, dividends, and mergers and acquisitions activity. The Federal Reserve estimates that companies still have $2.5 trillion in cash parked domestically and another $3.5 trillion still overseas. So, when all is said and done, UBS expects dividend issuance to top $500 billion, buybacks to range from $700 billion to $800 billion, and M&A activity to constitute another $1.3 trillion. 4.) Netflix is headed to the S&P 100 index and Twitter is now included in the S&P 500 index. How times have changed. 5.) Jamie Dimon CEO of JPMorgan Chase and also chairman of the Business Roundtable said in a conference call with business reporters: “What I can tell you anecdotally is that the administration’s trade policy is a huge concern to about every member of the organization to the extent that they see clouds on the economic horizon.” 6.) The Wall Street Journal said that as part of the ongoing trade talks, China has proposed a package to buy $70 billion of soybeans, corn, natural gas, crude oil and coal if…the Trump administration backs away from tariffs. That’s a big if! 7.) Mexico will reportedly impose retaliatory tariffs on U.S. pork, cheese, apples, potatoes, Tennessee whiskey and steel. Whiskey…in Mexico?? War, what is it good for? Absolutely nothing! 8.) J.P. Morgan’s chief quantitative strategist Marko Kolanovic estimates that Trump’s tough talk on trade and tariffs has cost over $1.25 trillion in market value since March. The damage could be temporary if trade talks produce solutions other than tariffs, but “if this uncertainty hangs over the market for an extended period, the damage could become more permanent”, he stated. Kolanovic illustrates the potential headwind to the economy from trade war damage by estimating that the loss of $1.25 trillion in market value is equal to two-thirds the value of total fiscal stimulus. Hmmm. 9.) The shortage of truck drivers is becoming a real problem. An industry trade group reports that in order to handle all of the goods that currently need to be shipped, at least 30,000 additional drivers are needed in the U.S. That number is expected to go higher as older truckers retire (more than half of the nation’s 3.5 million truckers are 45 years old or older). The ISM says: “The supply chain is shuttering because of a lack of drivers and equipment [especially flat-beds] causing delays in multiple modes of transportation.” The American Trucking Association (ATA) also notes that total truck tonnage was up 9.5% year over year ending April 2018. 10.) Short selling is not for the faint of heart. On Wednesday, the stock of electric car maker Tesla rose $27 (9.7%) to $319.50 per share. According to S3 Partners, investors betting against Tesla lost more than $1 billion during the 6.5-hour trading session. Tesla is one of the most heavily shorted stocks in the world and Tesla bears have lost close to $5 billion in mark-to-market losses since 2016.
The Institute for Supply Management (ISM) said that its measure of non-manufacturing industries rose to 58.6 in May. The ISM said that all 14 of the U.S. non-manufacturing industries tracked by the index have seen 100 consecutive months of expansion.
The Labor Department said that the unemployment rate for blacks fell to 5.9% in May, the lowest level since 1972 when the government started keeping that data.
More on May payrolls from First Trust chief economist Brian Wesbury: “Nonfarm payrolls grew by 223,000 in May and are up 2.4 million in the past year. Civilian employment, an alternative gauge of jobs that better measures small business start-ups, grew by 293,000 in May and is up 2.3 million in the past year. And, importantly, it’s the private sector driving growth, not government. Government jobs are up a total of 21,000 in the past year. Meanwhile, manufacturing payrolls are up 259,000 in the past year, the fastest 12-month increase since 1998…But we’re not done. The unemployment rate dropped to 3.8% in May, tying the lowest reading since 1969. We think we’re headed lower, forecasting a 3.2% rate by the end of 2019 with a chance for a 2-handle on the unemployment rate sometime in 2020.”
According to MarketWatch and the Labor Department, nine out of ten new jobs created in the last 12 months have gone to those with a college degree. “A three-month average finds that 91% of the net increase in jobs held by those at least 25 years old are filled by those with at least a bachelor’s degree”, reports Steve Goldstein of MarketWatch. Anthony Carnevale, director of Georgetown University’s Center on Education and the Workforce, says what is happening is what he calls “upscaling.” Of the 55 million job openings in this decade, approximately three-fifths are to replace Baby Boomers aging out of the workforce. In other words, employers are now demanding these replacements to be better qualified and trained, rather than letting them learn on the job.
The Bureau of Labor Statistics reports that there are more jobs available than there are workers, something that has not ever happened before. The Job Openings and Labor Turnover Survey (JOLTS) is one of the Fed’s go to economic statistics and it showed 6.7 million job openings in April and only 6.4 million workers available to fill them. Normally, such a mismatch would trigger accelerated wage growth, but that isn’t happening as wages are up a sluggish 2.7% year over year through May.
The Labor Department said that U.S. worker productivity rose by 0.4% in the 1st quarter. Unit labor costs, the price of labor per single unit of output, climbed at a pace of 2.9% in the first three months of this year.
The Commerce Department announced that the U.S. trade deficit fell by 2.1% to a seven-month low ($46.2 billion) in April as exports rose to a record high of $211.2 billion, lifted by an increase in shipments of industrial materials and soybeans. Imports fell by 0.2% to $257.4 billion. The politically sensitive goods trade deficit with China increased by 8.1% or $28 billion and the deficit with Mexico narrowed by 29.8% or $5.7 billion for the month of April.
The Greek economy grew by 2.3% year over year in Q1 with a quarter over quarter gain of 0.8%. The 2.3% growth rate is the strongest since Q1 of 2008 as it recovers from its own Great Depression.
Dr. Edward Yardeni: “Italy always seems to be in a political crisis. Governments don’t last very long there, as the ruling party’s coalition tends to splinter rapidly, requiring yet another election and another effort to form a government by mostly incompatible coalitions.”
Italy’s (and the EU’s) troubles are not yet done even though a new coalition government has been formed. Take for example Matteo Salvini, the new Interior Minister’s comments on Italy’s view of the EU: “As Italians, not as slaves of Berlin or Brussels.” The New Yorker Magazine observes: “Looking further ahead, however, there is great uncertainty surrounding not just Italy but the entire nineteen-nation eurozone. For the first time since it was formed, in 1999, the monetary union will be confronting a government in one of its core member countries that is implacably opposed to many of its rules and policies.” Der Spiegel Magazine says: “Bye love! Italy destroys itself and tears Europe apart with it.”
It will be tough for Italy to leave the EU Business Insider reports that: “Article 75 of the Italian constitution forbids referendums dealing with international treaties. That means the country’s constitution would need to be changed before a referendum could be held on the EU and Euro membership. A two-thirds majority in the lower house of parliament is needed to change the constitution. Such a majority looks unlikely right now…”
Apple’s Worldwide Developers Conference (WWDC) was held last Monday in San Jose, California and here are some of the new developments for the Mac, iPhone, iPad and Apple Watch. For the iPhone and iPad: It will feel faster and more responsive and will be available for all devices supported by iOS 11, including the 2013 iPhone 5. Siri will see some improvements in iOS 12. The new “Shortcuts” app allows users to set pre-determined Siri queries that automatically launch apps. For example, if you say, “help me relax,” Siri will start playing music and dim the lights. To deal with the cell phone addiction issue, Apple will provide a weekly summary to show exactly how you used your iPhone. “It shows how much time you spent on your device, how long you spent inside specific apps, how often you picked up your phone (and when), and which apps are sending you the most notifications”, reports Todd Haselton of CNBC. App limits will be offered so you can set how long you can use an app each day. For parents, you can set limits on Instagram on your kids’ phones to better supervise and limit time wasting activities. For messaging, “Apple is going to let you customize your own animated emoji, or Animoji with a spin-off called ‘Memoji’ – it’s basically a 3D version of yourself that can move based on your facial expressions…FaceTime is getting group calling support with the ability to add up to 32 people into a single FaceTime video. Apple is integrating FaceTime into Messages, too, so you can turn a group chat chain right into a group video chat.” A new app called ‘Measure’ will allow the iPhone to make measurements and check dimensions of an object eliminating the need to keep a tape measure handy. “iOS 12 has a ton of updates to its photo features…’search suggestions’…will highlight key moments, places and events it thinks you will be interested in…A new ‘For You’ tab includes the memory movies, photos that were taken on the same day in past years, and suggestions for photo effects you might want to apply…Apple is also updating some of its apps. News, for example…has a new browse tab to find channels, topics for your favorite news sources…The Stocks app has new chartlines that show stock performance throughout the day…[and] will also include stories from Apple News that apply to the stocks you are searching…CarPlay is getting an update in iOS 12…[that] will finally support third-party navigation apps, including Waze and Google Maps.” Last but not least, Apple will limit ‘fingerprinting’, the ability for companies to pinpoint precisely which device is visiting a website. Users will also need to ‘opt-in’ to allow websites to track their browsing behavior on Safari. This also includes sites with a ‘share’ button usually provided by Facebook and Google.
Sanofi, the maker of the sleep inducing drug Ambien said in response to the offensive Roseanne Barr tweet: “While all pharmaceutical treatments have side effects, racism is not a known side effect of any Sanofi medication.” The comedian/actress had blamed her distasteful tweet on the insomnia medication, Ambien.
Starbucks CEO Howard Schultz has announced his departure as executive chairman of the company in June. He will also step down from the board after 40 years with Starbucks. Under his leadership the company grew from 11 stores to 28,000 and he will be honored as chairman emeritus. There is speculation that he will run for the presidency as a Democrat in 2020.
McDonald’s says it will upgrade 1,000 stores with mobile order technology and payment kiosks every quarter for the next eight to nine quarters. International markets in Canada, Australia and the U.K. are already fully integrated.
Microsoft has acquired code-repository platform GitHub for $7.5 billion in Microsoft stock. The deal is expected to close in this calendar year and Microsoft expects the deal to be accretive to non-GAAP operating income in fiscal 2020.
Adobe Systems has agreed to acquire Magento Commerce for $1.68 billion. Magento has a platform for open commerce innovation, providing cloud solutions and a global community for its users.
Mastercard is exploring ways to integrate its payments system into voice assistants made by Google and Amazon which would allow people to pay for purchases using their voice. Recently, the company made it possible for people to pay with the ‘Masterpass’ for products within Facebook Messenger.
According to CNBC, Amazon is upping its investment in India by $2 billion, which follows its previous commitment of $5 billion to the Indian market. The move is an effort to compete with Walmart which took a majority stake the Indian e-commerce giant Flipkart.
Apple announced at its recent WWDC a new operating system for its Apple Watch called ‘watchOS 5’. Popularity-wise, the device grew by 60% last year according to CEO Tim Cook. The new system will support yoga and hiking, and will provide new ways to challenge friends to fitness competitions. Podcasts will also be available on the wearable device in coming months.
Advent International will invest an 80% stake in Walmart Brazil. Walmart will retain the remaining 20% upon the completion of the transaction.
Walmart is launching a personal shopping service called ‘Jetblack’. The service will cost $50 per month and will include perks such as gift recommendations, free wrapping, fast delivery and easy returns. The service will be launched in New York first and then rolled out to other cities.
The SoftBank Vision Fund has said it will invest $2.25 billion in GM Cruise Holdings and General Motors will kick in another$1.1 billion of its own funds to bolster the company’s plans to commercialize automated vehicle technology on a large scale beginning in 2019.
May auto sales for U.S. car makers were mixed at best. Ford said total unit sales were up 0.7%. Fiat Chrysler said sales were higher by 11% and GM no longer reports monthly sales (quarterly only). Kelly Blue Book said the average new vehicle transaction price hit $35,635, a 3.4% increase from a year ago. Prices for full-sized pickup trucks climbed to $48,213 and full-sized SUV’s jumped to $63,349.
In 2017, U.S. auto sales fell by 2.0% after hitting a record high 17.55 million in 2016. Sales are expected to drop again this year, partly due to rising interest rates, rising fuel prices, and a glut of used vehicles coming off lease.
UnitedHealth Group has announced an enormous buyback of 100,000 million shares (close to 10% of the outstanding shares) and they have raised the quarterly dividend by 20% from $0.75 per share to $0.90 per share, creating a forward dividend yield of 1.47%.
Boeing announces that it has formed a joint venture with French engine manufacturer Safran to build auxiliary power units. APU engines are essentially used while the plane is on the ground to start the main engines and power aircraft systems. The market has long been dominated by Honeywell and United Technologies.
Boeing has also announced that it has made an investment in Kittyhawk, a San Francisco-based company that offers an integrated approach to the safe operation of drones.
Southwest Airlines said it expects revenue to fall in the 2nd quarter after a decline in bookings following the deadly engine failure aboard Southwest Flight 1380. The airline carries more travelers within the U.S. than any other carrier and is forecasting a 3% revenue shortfall for the current quarter.
United Airlines is experimenting with eliminating three of the five boarding groups at the gate and narrowing the system down to just two categories after the airline received many complaints about “rushing the gate” when boarding was announced. The experiment will begin soon at LAX, Chicago O’Hare and Houston George Bush International.
United Airlines has rolled out its third Polaris lounge, this one at Newark Liberty airport. The Polaris concept was started in 2016 and is designed to cater to the frequent international business traveler. This lounge at Newark will feature showers with rainfall shower heads, 10 daybeds with Saks Fifth Avenue-branded blankets and an extensive menu that features dishes such as polenta fries and braised lamb.
JetBlue has new emotional support animal rules for flight. Started July 1, only dogs, cats and miniature horses (seriously…tiny horses?) will be allowed to board and passengers will have to sign a document taking responsibility for injuries to passengers or damage to property.
According to market research company J.D. Power, here are the U.S airlines that rank highest in customer satisfaction for 2018: 1.) Alaska Airlines. 2.) Delta Air Lines. 3.) Air Canada. 4.) American Airlines. 5.) United Airlines. The best budget airlines: 1.) Southwest Airlines. 2.) JetBlue Airlines. 3.) WestJet. 4.) Allegiant Airlines. 5.) Frontier Airlines.
Wells Fargo has said it will sell 52 of its branch banks in Indiana, Ohio, Michigan and Wisconsin to Flagstar Bancorp for an undisclosed amount. The move is part of Wells Fargo’s plan to shed 5,000 branches by the end of 2020.
Lululemon Athletica reports 1st quarter earnings of $0.55 per share on revenue of $649.7 million, an increase of 24.9% year over year.
Thor Industries reports fiscal 3rd quarter earnings of $2.53 per share on revenue of $2.25 billion, an increase of 11.9% year over year.
Next week: Earnings from: Adobe and Jabil Circuit. Economic reports: U.S. CPI for May, U.S. PPI for May, U.S. Retail Sales for May, and U.S. Industrial Production for May.
WTI crude oil: $65.84 per barrel. 10-year U.S. Treasury note: 2.93%. Gold: $1,307 per ounce.
Sources: Real Money Pro, CNBC, First Trust Economics, 361 Capital, Seeking Alpha, MarketWatch, Bloomberg, the Wall Street Journal, Estimize.com, Yardeni Research, The Calafia Beach Pundit and The New Yorker Magazine.
P.S. Who was the only Major League Baseball player to land at Normandy on D-Day and also enshrined in the Baseball Hall of Fame? Answer: Yogi Berra.
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.