Market Minutes for the week of March 12th:
“Rex, eat your salad!” — President Donald Trump
Here’s what I am seeing, hearing and thinking: 1.) Rex Tillerson’s tenure as Secretary of State (405 days) wasn’t the shortest in history. That dubious distinction goes to Elihu Washburne, who held the post for a mere 11 days under Ulysses S. Grant. Measured another way, Tillerson lasted 40.5 “Scaramuccis”, a measurement some have developed after the 10-day tenure of former White House communications director Anthony Scaramucci. 2.) It appears that economist and conservative commentator Larry Kudlow is the “lucky guy” picked to replace Gary Cohn as the Administration’s Director of the National Economic Counsil. Kudlow is a free trade advocate and generally opposed to tariffs. 3.) Analysts at JPMorgan have blamed 12 artificial intelligence (AI) hedge funds for playing a large role in the equities sell-off that hit the global markets last month. The bank said that it believes the AI funds, which use machine learning to anticipate market trends, played a “big role in February’s de-risking” as their models quickly sold their holdings as volatility rose. Rotten stuff! 4.) Trump’s squashing of the Broadcom/Qualcomm merger may be a bigger deal than we think. Clearly, there are concerns within the Treasury Department and the administration over the amount of business Singapore-based Broadcom does with China (greater than 50% of its sales). Would a merger with U.S.- based Qualcomm (and its crown jewel 5G platform) represent a potential national security risk? Most of the Silicon Valley companies do a lot of business with China. Is the Trump administration establishing a new precedent that says: “Do too much business in China and you’re a Chinese company?” We pretty much get where Trump is coming from with this. Jim Cramer says, “…China is now an official pariah in both name and deed, whether it’s in low tech or high…The problem is that the Trump administration’s vehicles are so strange that their positions do nothing but frighten everyone in business.” 5.) Is the President’s position one of concern about intellectual property going into Chinese hands or…does he have no desire to stop commerce with China but rather to try and limit the amount of theft he perceives occurs with our companies by the Chinese? 6.) More on tariffs: According to an article from the New York Times, three out of every five rows of soybeans planted in the U.S. end up being exported. One-half of those, valued at $14 billion in 2016, go to China. A retaliatory tariff on our soybeans by the Chinese would be rather disruptive to the U.S. agricultural economy. As a U.S. farmer with that possible outcome hanging in the balance, how do you decide how many soybeans to plant this season? 7.) More on tariffs: The consultants at ICT International conducted a study “on behalf of five pipeline industry bodies [and] found that approximately 77% of the steel used in line pipe in recent years was imported, either in the form of finished pipe or the raw material used to fabricate it…Once Trump’s tariffs become law, pipeline companies will see the cost of the steel they need go up”, which they will in turn pass along to the oil and gas producers that use their lines. “A 25% increase in the cost of imported line pipe, fittings and valves would raise the cost of a 280-mile oil pipeline – typical of those needed to carry shale oil from the Permian Basin to the Gulf Coast – by $76 million. For a mega-project, like the Dakota Access Pipeline, …the cost increase could be as much as $300 million”, according to Bloomberg’s Julian Lee 8.) I have the feeling that the global markets are getting an uneasy feeling about the increasingly protectionist rhetoric coming from the Trump administration and other nations retaliatory responses to the chatter. 9.) Safe travels Stephen Hawking and best of luck on your next journey. R.I.P.
The Commerce Department said that U.S. retail sales fell unexpectedly by 0.1% in February for the third-straight monthly decline. Economists were expecting sales to rise by 0.4% in the month.
The Commerce Department also said that U.S. business inventories increased by 0.6% in January as sales recorded their biggest drop in one and a half years. Increasing inventories are usually a net positive to the GDP calculation.
The Bureau of Labor Statistics announced that U.S. labor force jumped by 806,000 last month, the biggest move since September of 2003. The number now stands at 162 million workers. 95 million Americans still sit on the labor sidelines but the recent move into the game is still significant.
The Department of Labor reported that among workers ages 25 to 54 who are not kept out of the labor force due to retirement or education saw participation rates rise to their highest levels in years. The share of employed 25 to 54-year olds climbed to 79.3%, the best level since 2008, while the labor force participation rate of this age group rose to 82.2%, the highest level in eight years.
The Federal Reserve said that at the end of 2017, U.S. households had assets of $114.4 trillion and liabilities of $15.7 trillion for a total U.S. household net worth of $98.7 trillion.
The Atlanta Fed tracker GDPNow is forecasting 1st quarter GDP growth of 1.9%. That’s down from 2.5% a few days ago and down from 4.0% a month ago. The forecast is now more in line with Wall Street banks J.P. Morgan (from 2.5% to 2.0%) and Goldman Sachs (from 2.0% to 1.8%).
The Department of Labor said that consumer prices rose by 0.2% in February, right in line with the forecasts and puts the core CPI at 1.8% year over year. The January CPI was 0.5%.
The Department of Labor also said that producer prices rose by 0.2% in February, right in line with forecasts.
The National Federation of Independent Business (NFIB) optimism index improved again in February as it rose by 0.7 points month over month to 107, the best level since 1983.
More praise for Larry Kudlow from Jim DePorre: “The single biggest positive of the Trump administration has been the surge in business optimism. According to the National Federation of Independent Business survey, optimism is at the highest level in three decades. For the first time since 2005, taxes received the fewest votes as the number 1 problem for small business. Larry Kudlow embodies the policies that are driving that optimism. Low taxes and free-market capitalism is his mantra. The economy is not the stock market but with people like Larry, the chances that this bull market will continue, is enhanced.”
Baker Hughes said that the U.S. drilling rig count rose by 3 to 984. The number of active oil rigs fell by 4 to 796 while the number of active gas rigs rose by 7 to 188.
The Mortgage Bankers Association said that in addition to a tight supply of existing homes, the price of homes according to the S&P CoreLogic Case-Shiller Home Price Index, is rising at a 6.2% rate while wage growth is advancing at only a 2.6% rate. If this dynamic persists, it will continue to be a problem for first-time homebuyers.
The Mortgage Bankers Association reported that applications for mortgage refinancing have fallen to a decade low (40% of all mortgage applications) as interest rates on home loans have risen every week in 2018. Refinancing applications are down 18% from a year ago as the recent average contract interest rate for a 30-year fixed mortgage with conforming balances ($453,100 or less) stands at 4.69%.
According to Remodeling Magazine, the single best renovation offering the best return for the money invested (98%) is…a new garage door. Manufactured stone veneer is second, returning 97% of its initial cost in resale. Front door replacement, especially steel, makes up the top three.
According to MarketWatch’s Jacob Passy, “the average rent for apartments in multifamily buildings only increased $1 between January and February to $1,364…On a year over year basis, rental prices were only 2.7% higher, making it the weakest seasonal gain since the housing market recovery began. Since last summer, rental prices have barely changed – hovering around an all-time high of $1,365 set in August…”
More on Larry Kudlow from Jim Cramer who co-hosted the “Kudlow & Cramer” show with Larry which aired on CNBC from 2002 to 2005: “First, let me distill Larry’s philosophy to one word: growth. Larry’s the most pro-growth person I have ever met. In our time together we didn’t see eye to eye on much but the glue, what held it all together was our affinity for growth because growth can cure so much and growth can make our country stronger and more powerful than any other elixir…Larry is a fantastic speaker and a legendarily congenial and articulate statesman…I think that Larry will be an eloquent defender of the president’s agenda and will flesh out the tweets that often are the president’s own worst enemies. No he won’t be much help on the errant tweets about Saturday Night Live, but he will be a heck of a lot more empirical and rigorous about what the president’s policies have done for business because Larry is the most pro-business person I have ever met.”
Doug Kass on Larry Kudlow: “Larry’s proximity to Washington, D.C. during his sojourn with President Reagan has provided him with a strong sense of process and policy. He is a keen student of economic history. This knowledge provides him with a broad economic perspective, a lot of which is reflected in the body of his recent book: JFK and the Reagan Revolution: A Secret History of American Prosperity, demonstrating that he has the requisite depth of understanding of practical economic policy alternatives (tax, trade, tariff, infrastructure, etc.) that will significantly influence the trajectory of economic growth.”
Since Congress moved to slash the corporate tax rate from the highest-in-the-world 35% to 21%, TrimTabs says that share buyback announcements in 2018 have averaged $4.8 billion per day, double the pace for last year during the same time period. David Santschi, director of liquidity research at TrimTabs says, “Share repurchases are arguably the most conservative things companies can do with their money other than pay down debt. But why pay down debt when central banks allow you to borrow for almost nothing on an after-tax basis?”
Its been a tough PR week for United Airlines. First, a passenger was forced by a flight attendant to put a 10-month old puppy in the overhead bin where it suffocated and died on a flight from Houston to New York. Then, on Tuesday, the airline mistakenly flew a Kansas family’s dog to Japan! When the family flying from Oregon to Kansas City went to the cargo facility to retrieve their 10-year old German Shepard “Irgo,” they were instead given a Great Dane who was supposed to be flying to Japan. United has now put Irgo back on a flight to Kansas City but it is yet unclear his time of arrival.
According to the Department of Transportation, United Airlines unfortunately had the most animal deaths of all U.S. airlines in 2017 when it had 18 animals die inflight, up from 9 in 2016. The safest airline for pet travel last year was Delta with only 1 regrettable event.
Mars, the candy company and world’s largest manufacturer of pet foods, is starting a new $100 million venture fund to back pet-tech and pet-care products and services. The fund will be called the Companion Fund and run by Ben Jacobs, who sold his company “Whistle” to Mars in 2016 for $117 million. Whistle makes GPS-based location and activity trackers for pets.
Singapore-based Broadcom has pledged to invest $1.5 billion in training American engineers to make the U.S. a leader in 5G technology, in order to ease U.S. regulatory concerns as the company tries to acquire Qualcomm.
Hold the presses! President Trump has now nixed the proposed merger of Broadcom and Qualcomm due to national security concerns. Broadcom is headquartered in Singapore and Qualcomm is a Delaware incorporated company.
Goldman Sachs CEO Lloyd Blankfein announced last Friday that he will retire at the end of the year and co-COO Harvey Schwartz announced that he will retire at the end of April so, that leaves David Solomon as apparently the first in line to become the next Big Boss at Goldman.
Uber competitor Lyft says it surpassed $1 billion in revenue in the 4th quarter of 2017, up 168% from a year ago. That growth is almost 3 times as fast as Uber, which saw an increase in revenue of 61% in Q4 vs a year ago.
Music streaming service Spotify is planning on listing its shares on the NYSE the week of April 2nd. Private share sales have ranged between $90 and $132.50, which would value the company at nearly $23.4 billion.
Netflix is developing a news show similar to CBS’s “60 Minutes” and ABC’s “20/20” according to MarketWatch. The company is planning what it sees as a weekly current affairs show “encompassing both sides of the political divide.”
Salesforce.com has said that it will acquire B2B commerce platform provider CloudCraze for an undisclosed sum. CloudCraze has a client list that includes Coca-Cola, Cummins, Land O’ Lakes and Ecolab.
Apple said that it has agreed to buy Texture, an online magazine subscription service owned by Condé Nast, Hearst, Meredith, Rogers Media and private equity firm KKR. Terms were not disclosed but Texture gives digital access to 200 magazines for one monthly fee.
Apple has announced that Apple Music has hit 38 million paid subscribers, up by 2 million from last month. Spotify has 71 million premium subscribers, Amazon Music has 16 million, Pandora has 5.48 million and Google doesn’t release its subscriber base for Google Play Music.
Denny’s Corp. said this week that it has partnered with Amazon to add Alexa to its Denny’s on Demand digital ordering. The chain launched the on-demand service last May and has since delivered 1.3 million orders.
Walmart has said that it is expanding its online grocery delivery service to include 100 cities by the end of 2018. It currently is available in six metropolitan areas. The addition will help the retailer reach 40% of American households.
Ikea is rolling out a nationwide assembly service in partnership with TaskRabbit this year. It is available now on Ikea’s website and will soon become available at stores in major markets. The service lets customers to book a “tasker” for a flat price to assemble purchased furniture as soon as the following day after the purchase.
Athletic apparel start-up Outdoor Voices has raised $34 million in a “series C” funding round led by Google Ventures. The company’s success has been attributed to its large and growing following on social media. It has more than 200,000 followers on Instagram and has brand ambassadors that include Natalie Portman, Frank Ocean and Gwyneth Paltrow.
Eyeglass retailer Warby Parker has raised $75 million in a “series E” funding round led by T. Rowe Price and brings the total funding to $300 million. CNBC reports that the company is planning to open nearly 100 stores by the end of this year, expanding beyond its booming e-commerce business.
Taco Bell has said that its Nacho Fries have become the most successful launch in the company’s history. Since January 25th, more than 53 million orders of Nacho Fries have been sold and the fries have also been included in more than a third of all Taco Bell orders.
Starbucks’ Seattle Roastery is now offering a cold brew made from coffee beans and aged in gin barrels. The company said the cold brew will pick up flavor notes of pepper, cardamom and vanilla from the gin barrel. The alcohol is burned off in the roasting process, but packs in the flavor.
I can just see the look on Clark Griswold’s face. Disney has announced that it will begin charging guests at Walt Disney World Resort hotels a fee for overnight parking. How much the guests pay will depend on the hotel. The least expensive tier of hotels will charge $13/night, the moderate tier — $19/night and the most expensive tier — $24/night. Parking at the theme parks will still be free for hotel guests however.
For the next two weeks there will be no Market Minutes because the author will be out of the country on a journey to the Holy Land.
Next week: Earnings from: Oracle, FedEx, Lennar Home. Guess, Nike, Accenture, KB Home and Con- Agra. Economic reports: U.S. Existing Home Sales for February, Single Family New Home Sales for February and U.S Durable Goods Orders for February.
For the week of March 26th: Earnings from: Paychex, Carnival Cruise Line, Sonic, Lululemon and GameStop. Economic reports: Case-Shiller Home Price Index/Composite 20 for January, U.S. Consumer Sentiment Index for March and U.S. Core PCEPI (Personal Consumption Expenditure Index) for February.
WTI crude oil: $60.40 per barrel. 10-year U.S. Treasury note: 2.80%. Gold: $1,323 per ounce.
Sources: 361 Capital, Real Money Pro, CNBC, Seeking Alpha, MarketWatch, Estimize.com, First Trust Economics, The Financial Times, Bloomberg and the New York Times.
Daylight savings time seems to come earlier and earlier each year. I am not a big fan of this summer-day- expander in March. Too early. However, according to Mark “The Cat Whisperer,” there is one benefit to the lost hour:
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.