Market Minutes for the week of March 4th:
“You’ll come to learn a great deal if you study the insignificant in depth.” – Odysseus Elytis
Here’s what I’m thinking and hearing: Big picture thinking from U.S. Trust: “The world is undergoing profound macro changes – in demographics, longevity, climate change, middle class expansion, global healthcare, to name just a few areas…As these macro themes evolve, we believe equity investors should consider adding exposure in certain industries…”. The top five themes for 2019 according to U.S. Trust are: “1. Big Data and AI. The explosive growth of digital data and information collected and catalogued about and around the world in just the last two years is more than in the entire previous history of the human race…The ubiquitous connectivity of almost 20 billion connected devices is leading to the digitization and datafication of most activities with the application of Artificial Intelligence (AI). AI could be a greatly disruptive factor in creating much greater efficiency against the big data backdrop in all matters of supply chain, inventory and labor management. Implications range from voice-powered personal assistants, facial recognition, and vehicle autonomy, to…behavioral algorithms boasting powerful predictive capabilities…2. Electric Vehicles…Whether connected, autonomous, electric, on-demand shared services, etc. the changing trend away from car ownership to alternative usages has created new business opportunities for traditional car producers…The rise of new mobility services will allow overall global car sales to grow…A key future driver of growth in global car sales is the rise of the global middle class consumer. Growth will depend on the developing nations, particularly China and India. To note, in 2018, more electric cars were sold in China than the rest of the world combined…For example, while modern cars have 100 sensors that monitor items such as fuel level and tire pressure, a fully autonomous car will need an exponential amount of sensors[, semiconductors and software in order to operate]…3. Demographics—Long Longevity…the number of people aged 65 and over is expected to top 1 billion by 2030. In the United States alone, ten thousand Americans turn 65 years old every day. In the emerging markets, meanwhile, access to quality healthcare has become a top priority for governments confronting more affluent and larger number of middle class consumers…Improving demographics and an increasingly well-educated workforce of a massive rising middle class, specifically in urban areas…, should propel strong consumption growth [as incomes rise]…Key beneficiaries of this potential trend include internet retail and digital payment systems [from mobile devices]…Globally, the world will be forced to cater to newfound longevity rates, manage the care of the “silver economy” in providing pharmaceuticals and aged-healthcare solutions utilizing tech-enabled care in both developed and developing nations. 4. Climate Change—Clean Revolution. The world is on a trajectory to not only become warmer, but hungrier and dirtier. Climate change and extreme weather have taken a toll on the planet…As an example, owing to the frequency and severity of heat waves, hurricanes, floods and droughts, the price tag was $91 billion in 14 separate billion dollar events in 2018. [The byproduct of rising global affluence is waste], products like cardboard, plastics, glass, industrial waste, scrap metals, food waste and eWaste. The level of solid waste produced each year is expected to reach 6.1 million tons per day by 2025, according to estimates from the World Bank…Investment implications for this theme pivot around pure waste management and recycling plays, water utilities and water treatment companies, infrastructure materials and industrial companies, green energy management and smart cities. 5. Privacy and Cybersecurity. Against a backdrop of billions of connected devices (34 billion by 2025), 4 billion internet users, 3 billion social media accounts, the increasing global connectedness poses material cyber and privacy risks/opportunities across all sectors. The U.S. is the largest market for security solutions followed by the United Kingdom at $6.5 billion, China ($6.0 billion), Japan ($5.1 billion), and Germany ($4.6 billion). In 2017 alone, the amount of data exchanged over the internet increased by 17%, with the total expected to double by the end of the decade, according to IBM…The cost of cybercrime is set to grow to $6 trillion by 2021…This stark reality will generate opportunities in protecting the global digital economy in anti-virus software used against malware (the largest sector of attacks), IoT (Internet of Things) protection, payment processing and user/data fraud verification.
The Labor Department reports that the U.S. economy generated just 20,000 nonfarm payrolls for the month of February, the smallest gain in 17 months. Average hourly earnings rose by $0.11 to $27.66 per hour putting the annual rate of increase at 3.4%. The biggest drop off in jobs came from construction where hiring declined by 31,000. “Economists were quick to point to the fact that the government data has been inconsistent since the government shutdown and may have been affected by both the 35-day shutdown and a temporary work furlough for government employees and private sector contractors,” according to CNBC.
ADP and Moody’s Analytics said that 183,000 new private payrolls were generated in February, down sharply from 213,000 in January. Broadly speaking, service industries accounted for 139,000 jobs while goods producers (manufacturing) added 44,000.
The Labor Department reported that U.S. productivity rose by 1.9% in the 4th quarter. Labor costs increased by 2.0%, the strongest move since the beginning of 2018. Productivity is measured as the amount of output per hour of work. “Since 2007, productivity growth has averaged 1.3% per year, less than half the 2.7% gain during the period from 2000 to 2007 and also below the average 2.7% per year since 1947”, reports CNBC.
The Institute for Supply Management (ISM) said that its manufacturing index for February fell to 54.2 from 56.6 in January, the lowest reading since November 2016. A decrease in new orders, production, employment and prices all contributed a broad decline in the index.
The Institute for Supply Management (ISM) also said that its non-manufacturing services index (bankers, retailers and restaurants), rose by 3 points in February to 59.7, a 3-month high. All 18 industries surveyed saw growth vs just 11 in January and 16 in December.
The University of Michigan Consumer Sentiment Index declined in February to 93.8 from 95.5 in January. The index of consumer expectations fell to 84.4 from 86.2.
The Commerce Department announced that U.S. personal incomes for January fell 0.1% for the first time in 3 years as dividends and interest payments dropped. The Commerce Department said that consumer spending fell by 0.5% in December which follows a dramatic decline in December retail sales. The Commerce Department said that it has not posted consumer spending numbers for January because the collection and processing data were delayed by the partial government shutdown.
The Census Bureau and the U.S. Department of Economic Analysis said that December trade deficit hit a 10-year high as it jumped 19% to a seasonally adjusted figure of $59.8 billion. The increase pushed the total for the full year to $621 billion. The trade deficit with China totaled $419 billion for 2018. For the year, the U.S. imported a record $3.1 trillion of goods and exported a record $2.5 trillion of mostly commercial aircraft, crude oil and industrial supplies.
The Fed’s favorite inflation measure the Personal Consumption Expenditures Index (PCE) rose a scant 0.1% in December with the core rate rising 0.2%. The 12-month rate of inflation according to the index was 1.7% in December.
The Fed’s Beige Book reported that 10 out of the 12 Districts saw slight-to-moderate growth in the late January and February time period. The only Districts reporting weaker growth were St. Louis and Philadelphia.
New York Fed President John Williams said in a speech to the Economic Club of New York that the U.S. economy is headed into a “new normal” of slower economic growth that will probably keep monetary policy restrained. Williams cited an ongoing global slowdown, geopolitical uncertainty and tighter financial conditions as factors contributing to the reformed outlook.
The Federal Reserve announced that consumer credit increased by $17 billion in January to a seasonally adjusted total of $4.03 trillion, an annual growth rate of 5.1%. Revolving credit (credit cards) rose by 2.9% and nonrevolving credit (auto and student loans) increased by 5.9% in the month.
The Commerce Department said that the homeownership rate climbed to 64% in the fourth quarter, up 0.2% from the third quarter. That’s the highest percentage since the third quarter of 2014. The ownership rate for those between 35 and 44 years old, was the highest in more than 5 years at 61.1%.
The Commerce Department also said that construction spending declined by 0.6% in December as investment in both public and private projects dropped. The forecast was for an increase of 0.2%.
The Commerce Department went on to say that sales of new homes rose by 3.7% in December at a seasonally adjusted annual rate of 621,000. The median sales price was $318,600, 7% lower than a year ago.
The Commerce Department added that housing starts jumped by 18.6% in January to a seasonally adjusted rate of 1.230 million units. Single-family starts surged 25.1%, the highest rate since May of 2018.
The Federal Reserve reported that U.S. households saw the biggest decline in net worth in the 4th quarter of 2018 since the Great Recession. Household net worth dropped to $104.3 trillion, a decline of $3.73 trillion or 3.4%. Thanks to computerized algorithmic trading gone haywire, households saw a stunning $4.6 trillion of equity value deteriorate by the end of December (hey SEC, what do you think about that? Hard to look the other way with those numbers). The quarterly decline was somewhat offset by a $300 billion increase in real estate values.
European Central Bank President Mario Draghi announced that the ECB has slashed its 2019 economic growth forecast to 1.1% from 1.7%. The ECB also is enticing European banks to borrow from the ECB at a discounted rate, making it easier for them to lend money to customers, which in turn will hopefully stimulate European consumption.
ECB President Mario Draghi’s 8-year term ends at the end of October and it’s looking increasingly likely that he will have completed his term without ever delivering an interest rate hike. His ECB term began in 2011 during the Eurozone financial crisis when he aggressively cut rates and in 2015, he launched an ECB bond-buying program similar to the Fed’s QE in an effort to stimulate Europe’s economy.
The weekly Baker Hughes rig count fell by 9 rigs last week to a total of 1,038 for a second straight weekly decline. Active oil rigs fell by 10 to 843 while natural gas rigs rose by 1 to 195.
From the front lines of the trade war: Sources have told CNBC that President Trump wants a strong stock market rally ahead of the 2020 elections and he is counting on a favorable resolution to the U.S.-China trade war to make that happen. According to CNBC sources, the trade negotiations are in the “final stages” and the two sides plan a summit for the end of March at Mar-a-Lago. Chief trade negotiator Lighthizer is pushing for stronger concessions out of China but Trump is said to be anxious to get a deal done sooner rather than later. Not so fast Donald. According to the New York Times, apparently Beijing is wary that the final terms may be less favorable than agreed upon given Mr. Trump’s propensity for last-minute changes. It’s a tough position for the Chinese, who want to avoid embarrassment. China says it needs to be reassured that Trump won’t change his mind when the two sides meet face to face. China’s exports fell sharply in February, down by 20.7% as the trade war and Lunar New Year hit hard. Imports fell by 5.2% reflecting weakening demand with the country.
According to the Wisconsin Department of Agriculture, the state lost 700 dairy farms in 2018, an unprecedented rate of almost 2 per day. “Most were small operations unable to survive farm milk prices that, adjusted for inflation, were among the lowest in a half-century. As of February 1, 2019, Wisconsin had 8,046 dairy herds, down 40% from 10 years earlier”, according to the Milwaukee Journal Sentinel.
Amazon, please come back! Bloomberg reports that the New York transit system needs $40 billion in repairs and upgrades according to Governor Cuomo’s budget director, Robert Mujica. To help fund the fix, the state is considering a “pied-à-terre tax” on non-resident owner of luxury apartments. “Such a tax would raise about $655 million annually, requiring part-time New Yorkers to pay surcharges on dwellings valued at more than $5 million”. The revenue would be used to pay interest on, and pay off, billions of dollars of bonds issued to fund the repairs. Mayor Bill de Blasio: “We need to tax the wealthy more.” Amazon, please come back!
According to Autodata Corp., February car sales slowed to an annual rate of 16.6 million, the worst reading in 18 months. Ford sales were down by -4.4%. Fiat Chrysler -2.3%. Toyota -5.2%. Honda -0.4%. Nissan -12%.
Northern Michigan University is now offering a 4-year degree in “weed.” The new offering is really a degree in Medicinal Plant Chemistry and has drawn 300 students from 48 states into the program. “A similar program is being launched at Minot State University in North Dakota this spring. The college said that students will learn lab skills applicable to medical marijuana, hops, botanical supplements and food science industries”, reports MarketWatch.
This from CNBC: “‘How are you?’ These are the three most useless words in the world of communication. The person asking doesn’t really want to know, and the person responding doesn’t tell the truth. What follows is a lost opportunity and meaningless exchange with zero communication.” But according to Harvard researchers, the key to making the most out of small talk, is to simply ask the other person follow-up questions. “In a series of experiments, researchers analyzed more than 300 online conversations and found that those who were asked more meaningful follow-up questions,…found the other person much more likeable. The researchers wrote: “When people are instructed to ask more questions, they are perceived as higher in responsiveness, an interpersonal construct that captures listening, understanding, validation and care.”
According to the Wall Street Journal, Purdue Pharma, manufacturer of the painkiller OxyContin, is considering Chapter 11 bankruptcy in order to protect itself from the liability of over 1,000 lawsuits from cities, counties and states across the country. The lawsuits accuse the company owners and executives of deceiving patients and doctors about the risks of opioids. Go get them and put a fork in Purdue!
According to the Wall Street Journal, Amazon is planning on coming in big with a new grocery store concept. The stores will not be Whole Foods related, but will average 35,000 square feet and sell food, beauty products and health items.
Ride sharing service Lyft has filed for an IPO to list under the ticker “LYFT.” There will be two classes of common stock. In 2018, the company had $2.16 billion in revenue and a loss of $911.3 million and had 1.9 million drivers.
“Dollar Tree plans to close 390 Family Dollar stores this year while renovating another 1,100 other locations. About 400 stores will get expanded freezer and cooler sections, and it will also rebrand about 200 Family Dollar stores to the Dollar Tree”, according to CNBC.
The FDA has approved Johnson & Johnson’s esketamine (SPRAVATO) nasal spray for depression. The drug will be tightly controlled and, “is not priced cheaply – $4,720 to $6,785 in the first month and then reduced to $2,360 to $3,540 on a monthly basis – but it is the first new mental health drug since Prozac which was introduced 31 years ago”, reports Real Money.
Microsoft says that it now has Windows 10 running on more than 800 million devices and is getting closer to its goal of 1 billion devices, three years after launch.
“Airbnb is acquiring hotel booking site HotelTonight as it builds an expansion narrative ahead of an eventual IPO…HotelTonight was last valued at $463 million in the private market”, according to CNBC.
Apple is adding 1,200 new jobs in San Diego over the next three years at a campus that will serve as an engineering hub.
According to IDC Data, the global wearables market grew 31% in the 4th quarter to 59.3 million units. Shipments of devices were up 28% in 2018. Smartwatches made up 34% of the market and Apple led the way with over 16.2 million devices sold.
Salesforce.com reports 4th quarter earnings of $0.70 per share on revenue of $3.6 billion, an increase of 26.3% year over year.
Costco reports fiscal 2nd quarter earnings of $2.01 per share on revenue of $35.4 billion, an increase of 7.3% year over year.
Next week: Earnings from: Adobe, Broadcom, DocuSign and Ulta Beauty. Economic reports: U.S. Industrial Production for February, U.S. Consumer Price Index for February, U.S. Producer Price Index for February, Retail Sales for January and Single-Family Home Sales for February.
WTI crude oil: $55.09 per barrel. 10-year U.S. Treasury note: 2.63%. Gold: $1,296 per ounce.
Sources: CNBC, Real Money, MarketWatch, Seeking Alpha, 361 Capital, First Trust Economics, The Calafia Beach Pundit, The Wall Street Journal, Yardeni Research, Bloomberg, U.S. Trust and the Milwaukee Journal Sentinel.
At the time of publication Cascade Investment Group and /or its clients owned shares of BHGE, AMZN, F, HMC, DLTR, JNJ, MSFT, AAPL, CRM, COST, ADBE, AVGO, DOCU and ULTA.
We also own shares in the following sectors: Energy, Biotechnology, Health Care, Industrials/Capital Goods, Information Technology, Telecom Services, Transportation and Utilities. A complete list is available upon request.
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.