Market Minutes for the week of March 25th:
“A wise man makes his own decisions, an arrogant man follows public opinion.” – Chinese Proverb
Here’s what I am thinking and hearing: *1.) Standard & Poor’s and Dow Jones Indices report that S&P 500 4th quarter buybacks set the fourth consecutive quarterly record – the longest streak in the 20 years that SPDJI has tracked it. Total 2018 buybacks set a record at $806.4 billion, up 55.3% year over year and up 36.9% from the previous record of $589.1 billion set back in 2007. Almost every S&P 500 constituent – 444 — repurchased shares in 2018. *2.) Contrast those statistics with this from Zero Hedge: “For the past two months, we have been highlighting what emerged as one of the greatest paradoxes of this market in 2019: even as stocks kept grinding higher, having almost wiped out all their Q4 losses as recently as last week [ending 3-08], investors were locked in non-stop liquidation mode, selling stocks and pulling money out of equity funds week after week after week, for 12 consecutive weeks since December…Bank of America calculates, 2019 is now the worst start to year for equity outflows since 2008.” *3.) Goldman Sachs says that the yield curve has inverted in an unusual way, and it’s not sending the same powerful recession signal that it has in the past. Goldman analysts, like others, are blaming the slide in the 10-year Treasury on pressures from the global bond market, where low and negative rates on sovereign bonds are driving buyers into U.S. Treasuries. Yields move in the opposite direction of price, so they decline as buyers force the price higher. Goldman also observed that credit spreads have not widened in a material way. Widening credit spreads are usually an early indicator of a recession and that is not happening. *4). J.P. Morgan’s Marco Kolanovic, global head of macro quantitative and derivative research weighs in on the inversion of the yield curve in a MarketWatch report: “‘Historically, equity markets tend to produce some of the strongest returns in the months and quarters following an inversion. Only after [around] 30 months does the S&P 500 return drop below average.’…Kolanovic looked at the path equity markets took after the first instances of a 10-year 3-month inversion in 1978, 1989, 1998 and 2006. He acknowledged that it’s impossible to derive reliable statistics from such a small sample, but said he believed the inversion showed a strong similarity because they are a ‘result of a specific setup of monetary policy and the economic cycle, and hence are likely to produce a similar response by investors and central bankers.’ …[Specifically:] – given the low 10-year yield, investors reallocate to equities [sending multiples higher]… – Following inversion, the Fed tends to stop hiking or even commence cutting [rates]… – As a result, performance of the stock market after the onset of inversion tends to be extraordinarily strong… [where] 12-month performance tends to be in the 80-90th percentile. The pace of market gains tends to be above average for up to 30 months… – Following inversions, Cyclicals (Energy, Tech, Industrials) [tended to] outperform Defensives (Staples, Utilities, Health Care)… *5.) From the front lines of the trade war: according to Bloomberg, a recent study from, “ the Federal Reserve Bank of New York, Princeton University, and Columbia University found that tariffs imposed last year by Trump on products ranging from washing machines and steel to some $250 billion in Chinese imports were costing U.S. companies and consumers $3 billion a month in additional tax costs and companies a further $1.4 billion in deadweight losses. They were also causing the diversion of $165 billion a year in trade leading to significant costs for companies having to reorganize supply chains.” From 361 Capital: “It now looks like the China trade meeting and deal will be delayed into April at a minimum. So with the spring planting season in front of the farmers, what do they plant?”
The Dallas Fed said that its manufacturing index expanded in March but at a much slower pace than in February. The index fell 15 points to a reading of 12.7.
The Fed’s New York Empire State manufacturing index for March, fell 5.1 points to a reading of 3.7 vs a forecasted reading of 10. Last month’s reading was 8.8.
The Fed’s Philadelphia manufacturing index for March rebounded to 13.7 vs a reading of -4.1 in February. New Orders increased slightly while shipping in the region rebounded strongly.
The Markit U.S. manufacturing and services composite index for March decreased to 54.3 from 55.5 with both components declining month over month to a six-month low.
The Conference Board said March consumer confidence fell sharply to 124.1 from 131.4 and well below the forecasted reading of 132.5, the 2nd lowest level since December of 2017. The “Present Situation” component fell to the lowest level since last May.
The Commerce Department said that U.S. housing starts for February fell by 8.7% to a seasonally adjusted rate of 1.162 million units. Bad weather was primarily to blame for the weakness.
The S&P CoreLogic/Case-Shiller Home Price Index/Composite 20-city for January saw a 3.6% year over year increase in prices, the slowest rate of growth since September of 2012. The average rate of increase over the last 3 years was 5.6%. Again Las Vegas and Phoenix saw the largest gains while San Francisco, Los Angeles, San Diego and New York City saw the slowest rate of growth in prices.
The Bureau of Labor Statistics said that the February Consumer Price Index (CPI) rose 0.2% month over month. The core rate of inflation is up by 2.1% year over year, for the 12th straight month above 2%.
“The National Federation of Independent Business (NFIB) small business optimism index for February increased by 0.5% month over month to 101.7 and ends a five-month losing streak, the longest since 1998. Internally, “Plans to Hire” dropped 2 points to match the least since June of 2017.
New orders for U.S. factory made goods climbed by 0.1% in January and shipments dropped for a fourth straight month, held back by decreased orders for computers and electronics.
The Treasury Department reported that the federal government ran a budget deficit of $234 billion last month, the biggest monthly deficit on record. Spending rose by 8% while receipts climbed by 7%.
The Commerce Department said that the U.S. trade deficit narrowed to $51.15 billion in January. The drop of 14.6% represented the sharpest decline since March of 2018. Exports rose to $207.3 billion while imports fell to $258.5 billion. The deficit with China decreased by $5.5 billion to $33.2 billion as imports from China fell by 12.1%.
The Commerce Department also said that U.S. companies brought back to the United States $85.9 billion in the 4th quarter and a total of $664.9 billion for the full year 2018 as tax rates fell from 35% to 15.5% on cash and 8% on other assets. In 2017, companies brought back to the U.S. a total of $155.1 billion.
The National Association of Realtors (NAR) said that sales of existing homes skyrocketed 11.8% in February, the largest monthly jump ever. Existing home sales at the entry level remained depressed, down 11% at homes priced below $100,000. Sales of homes at the $100,000 to $250,000 were essentially flat. First time buyers made up 32% of the purchases and prices moderated to a 3.6% increase year over year.
Mortgage rates have slid to a 13-month low. The 30-year rate averaged 4.06% during the week of March 28. The 15-year adjustable rate averaged 3.71%. The average mortgage application size hit a new high for the third month in a row as the supply of entry level homes continued to dwindle.
The Federal Reserve said last Wednesday that it anticipates the benchmark rate to stay near 2.4% by the end of 2019 with no more rate increases for the rest of the year. In the long run, the Fed said its benchmark rate will approach 2.6% in 2020 and 2.8% in 2021. The central bank also said that it will begin to taper in May the amount of money it expects to allow to roll off each month, finally ending the program in September. The total amount of Treasuries and MBS (mortgage backed securities) once totalling $4.2 trillion and has been reduced by about $450 billion since the taper began in October of 2017.
Last Friday, the yield curve (3-month to the 10-year Treasury) inverted, triggering some nasty selling by the algorithms. The inversion didn’t occur because the Fed got too tight, it happened because the market thinks the Fed may now cut rates this year. According to Brian Wesbury at First Trust Economics, since the late 1960s, prior recessions have only occured when the 10-year Note yield has been at least 50 basis points below the fed funds rate and that point remains far off.
Chicago Fed President Charles Evans said during a recent speech that inflation would have to reach 2.5% on its PCE index before the Fed would consider another rate increase. Most recently, the headline PCE reading has remained near 1.7%.
Tom Graff, Head of Fixed Income Trading for Brown Advisory Group said; “The Fed is quietly making a major shift in their approach to monetary policy…The short version is that the Fed is going from a preemptive approach to fighting inflation to a reactionary approach. In short, they used to tighten monetary policy in response to the mere possibility of accelerating inflation. Things like faster wage growth, often viewed as a precursor to inflation, would be met with rate hikes. Now, they are going to wait to actually see inflation pick up before changing their rate target. They believe this change may risk somewhat higher inflation, but that will make fighting future recessions easier. This is truly a historic change in the Fed’s strategy, and is one that will reverberate for years to come.”
The Business Roundtable, a lobbying organization of major companies’ chief executives, said their economic outlook for the 1st quarter had weakened but still remains above its historical average. The group’s economic outlook index for the January-March quarter slid to 95.2, down from 104.4 in the 4th quarter of 2018. The new survey showed that companies’ plans for capital investment in the next six months fell 6.9 points and sales expectations fell 9.6 points and hiring plans fell 11.3 points.
According to a new survey by J.D. Power and LMC Automotive, 1st quarter car sales are expected to drop by 2.5% from a year earlier to 4 million units. While sales volumes are weakening, especially for cheaper cars, customers are still paying high prices for transportation. The average price of a new vehicle is expected to hit a record $33,319 for the first three months of 2019.
FedEx CEO Fred Smith said that he is “seeing a few green sprouts now as we go into spring” but that appeared to be with business over the “last few days.” Smith went on to say, “we are seeing some pick up across the Pacific. Our package business in Europe is now growing again. So, we’re feeling a little better about things.”
According to a research study by Bank of America Merrill Lynch, Permian Basin oil output should double to 8 million barrels per day over the next four years as transportation bottlenecks disappear due to a new pipeline creation.
The Baker Hughes total rig count for the last week fell by 10 rigs to 1,016, the fifth consecutive week of decline. Oil rigs fell by 9 to 824 while natural gas rigs declined by 1 to 192.
Around the world, Japan’s March manufacturing PMI (Purchasing Managers Index) held steady at 48.9 and remains below 50 for the 2nd month and first time since mid-2016. Australia’s March PMI fell to 52 from 52.9, the lowest reading since July 2016. Europe’s March Eurozone PMI fell to 47.6 from 49.3 last month. Germany’s March PMI declined to 44.7 while France’s slipped below 50 to 49.8. Italy’s PMI fell to 100.8 from 101.6. The German 10-year bond now yields -0.6% and the U.K. 10-year Gilt has fallen below 1.0%.
Purdue Pharma, maker of OxyContin, has settled the first of many lawsuits filed against it for understating the risks of addiction associated with the painkiller. An award of $270 million will go to the state of Oklahoma and calls for about $200 million to fund the establishment of the National Center for Addiction Studies at Oklahoma State University in Tulsa. Local governments will receive $12.5 million to combat the opioid crisis and $60 million to cover litigation costs and fees. According to state officials, since 2009, more Oklahoma residents have died from opioid-related overdoses than have died in automobile accidents. What about the families who repeatedly mortgaged their homes or went bankrupt desperately attempting to get their loved ones treatment for opioid addiction? Where is some of that settlement for them??
BMW Manufacturing announced last week that it exported 272,346 BMW X models from the Spartanburg, South Carolina plant during 2017. “Nearly 87% of these Sports Activity Vehicles and Coupes were exported through the Port of Charleston with an export value of approximately $8.76 billion, according to data from the U.S. Department of Commerce. This confirms that the South Carolina factory is the leading U.S. automotive exporter by value.
The horror hit film “Us” logs a box office smash over its opening weekend. The film from director Jordan Peele drew in $71.1 million, the biggest opening for a live-action original film since Avatar in 2009. The run puts Disney’s “Captain Marvel” into second place this week with another $34.3 million taken in over its third week. Since its opening, “Captain Marvel” has taken in $911 million at the global box office.
Goldman Sachs has said that it is acquiring Standard & Poor’s model portfolio business. The unit Goldman is purchasing also manages equity portfolios that use a rules-based process. The company also announced a group of five new ETFs with a tech driven theme.
Walgreens has said that it will start selling CBD (cannabis-based) creams, patches and sprays in nearly 1,500 stores in select states such as Colorado, Oregon, New Mexico, Kentucky, Tennessee, Vermont, South Carolina, Illinois and Indiana. Rival drug store chain CVS started selling CBD topicals this March.
Medtronic has authorized the buyback of an additional $6 billion of its common stock.
Boeing has said that it has been awarded a $4 billion contract for production and delivery of 78 F/A 18 aircraft used by the U.S. Navy. The majority of the work will be performed in El Segundo, California.
Amazon has launched a private skin care label named “Belei.” The label will carry moisturizers, eye creams and spot treatments with prices ranging from $9 to $40. According to TJI Research data, Amazon already has 138 private labels.
Levi Strauss opened at $22.22 per share in its return to becoming a publicly traded company. The IPO was priced at $17 per share with a market value of $6.6 billion. Levi Strauss & Co. began as a dry goods business in 1853 in San Francisco and invented blue jeans 20 years later. Levi first went public in 1971 and was taken private in 1985.
General Motors has announced plans to invest $300 million in its Detroit Orion plant that builds electric and self-driving vehicles for Chevrolet. GM is expected to announce plans to build a new electric compact vehicle based on the same architecture as the Chevy Bolt.
Apple has purchased machine learning startup Laserlike which is planned to strengthen the tech giant’s AI efforts. The terms of the deal were not disclosed.
Apple announced on Monday it has deepened its push into media services including a credit card partnership with Goldman Sachs. Also planned are new streaming services centered around its Apple TV which will include news bundling, original content video and game streaming.
UPS said it is partnering with autonomous drone company Matternet and the hospital WakeMed in Raleigh, North Carolina to transport medical supplies and samples between hospitals. The drone delivery service aims to replace a fleet of courier cars which currently transports most of the hospital’s medical samples.
Dominion Energy says that it plans to retire and permanently shutter 10 of its older and less-efficient coal burning units in Virginia.
Nike reports fiscal 3rd quarter earnings of $0.68 per share on revenue of $9.61 billion, an increase of 7.0% year over year.
FedEx reports fiscal 3rd quarter earnings of $3.03 per share on revenue of $17 billion, an increase of 3.0% year over year.
Uniti Group reports 4th quarter earnings of $0.05 per share on revenue of $270 million, an increase of 9.9% year over year.
KB Home reports fiscal 1st quarter earnings of $0.31 per share on revenue of $811.5 million, decrease of 6.9% year over year.
Lululemon Athletica reports 4th quarter earnings of $1.85 per share on revenue of $1.17 billion, an increase of 26.0% year over year.
Accenture reports fiscal 2nd quarter earnings of $1.73 per share on revenue of $10.45 billion, an increase of 5.4% year over year.
Next week: Earnings from: LYFT and Walgreens. Economic reports: U.S Retail Sales for February, U.S. Purchasing Manager’s Index for March, U.S. Durable Goods Orders for February, ADP Private Payrolls for March, U.S. Non-Farm Payrolls for March, ISM Non-Manufacturing Index for March and U.S. Manufacturing New Orders for February.
WTI crude oil: $59.25 per barrel. 10-year U.S. Treasury note: 2.38%. Gold: $1,295 per ounce.
Sources: Real Money Pro, CNBC, 361 Capital, First Trust Economics, Zero Hedge, MarketWatch, Seeking Alpha, The Calaifa Beach Pundit, The Wall Street Journal, Business Insider, Bloomberg, Estimize.com, Morningstar and Charlie Bilello.
At the time of publication Cascade Investment Group and /or its clients owned shares of FDX, BHGE, DIS, GS, WBA, CVS, BA, AMZN, AAPL, UPS, D, NKE, UNIT, CAN.
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.
Rest in Peace my son — SKB