Market Minutes for the week of March 5th:
“The truest characters of ignorance are vanity, and pride, and arrogance.” – Samuel Butler
Here is what I am thinking: 1.) Trump loses another level-headed cabinet member and great economic mind in Gary Cohn. He was a team player and got the job done. What a shame! 2.) More of the reality on the tariffs from Jim Cramer: “I know you have heard endlessly from the so-called free-traders out there that we do only a small percentage of steel business with China anyway. That’s a false construct. China produces far more steel than it needs in order to keep people working. It then dumps that steel all over the place, Canada, Latin America, Europe. You name it. Then nations that are hurt, dump their own steel into our country, often at prices far below the actual cost of production for many of our steel companies.” 3.) Ronald Reagan on tariffs back in November of 1982 with unemployment at 10.8%: “We’re in the same boat with our trading partners. If one partner shoots a hole in the boat, does it make sense for the other one to shoot another hole in the boat? Some say, yes, and call that getting tough. Well, I call it stupid. We shouldn’t be shooting holes; we should be working together to plug them up.” 4.) European Commission President Jean-Claude Juncker on Trump’s tariffs: “This is basically a stupid process, the fact that we have to do this. But we have to do it…We can also do stupid.” 5.) More holes in the boat: The EU has drawn up a €2.8 billion list of proposed counter-measures comprising roughly one-third steel and aluminum, one third agricultural products and one-third other goods. The list, which had been in the works since President Trump issued his tariff threats last year, ranges from commodities such as maize and orange juice to quintessential Americana, notably Harley-Davidson motorcycles, bourbon whiskey and blue jeans (more holes in the boat). 6.) Scott Grannis of the Calafia Beach Pundit on Trump’s tariffs: “Will he [Trump] really do something so stupid? Stock markets are correct to sell off on the news. We can only hope that a hue and cry and weak stock markets convince Trump to back off. It’s hard to believe he could pull such a stupid, dumb idea out of his hat, just when the economy is about to ramp up as a result of all the good things he has done.” 7.) Scott Lincicome on the steel industry: “In 1980, it took 10 man-hours to produce a ton of U.S. steel. Today, it takes under 2 (according to steel.org). Wanna know where all those Great American steel jobs went? That’s where.” 8.) More on tariffs: According to the Heritage Foundation analysis of Commerce Department data, the mills and smelters that supply the raw material, and would widely benefit from tariffs, have been shrinking for years. Today, those industries employ fewer than 200,000 people. The companies that buy steel and aluminum, to make everything from trucks to chicken coops, employ more than 6.5 million workers. 9.) More on tariffs from a recent article in the New York Times: “We’ve seen this before. In 2002, President George W. Bush implemented his own steel tariffs. As expected, the taxes jacked up the price of domestic steel and temporarily boosted the industry’s profits. Steel-consuming industries, however weren’t so lucky. According to an estimate from the nonpartisan Trade Partnership Worldwide, a staggering 200,000 people lost their jobs in downstream industries by the following year. That’s more workers than the entire steel industry had at the time. 10.) More on tariffs from Dr. Ed Yardeni: “My research led me to conclude that the Great Depression was caused by the Smoot-Hawley Tariff Act of June 1930. During the election of 1928, Republican candidate Herbert Hoover promised U.S. farmers protection from foreign competition to boost depressed farm prices. However, he was appalled by the breadth of the tariff bill that special interest groups had pushed through Congress, denouncing the bill as “vicious, extortionate, and obnoxious.” But he signed it into law under intense political pressure from Congressional Republicans. The tariff triggered a deflationary spiral that had a deadly domino effect. Other countries immediately retaliated by imposing tariffs too. The collapse of world trade pushed commodity prices over a cliff. Exporters and farmers defaulted on their loans, triggering a wave of banking crises. The resulting credit crunch caused industrial production and farm output to plunge and unemployment to soar. In my narrative, the depression caused the stock market to crash, not the other way around as is the popular belief.” 11.) Gary Cohn is a globalist and he does not believe that tariffs are effective. He doesn’t do stupid. No wonder he quit.
Investors in domestic equity funds withdrew a near-record $41.1 billion in February. The total was the third-largest ever, according to Trim Tabs.
The individual investor appears to have packed up the bullish camp. The AAII (American Association of Individual Investors) weekly poll now shows the percentage of bulls down to 26.4%, a decline of 11 points in the prior two weeks combined. That is the lowest reading since the last day of August 2017. Most of those that packed up went to the Neutral side as Bears were up by only 5 points to 28.4%.
The University of Michigan Consumer Sentiment survey found that consumer sentiment improved sharply in February, rising to 99.7 from 95.7 in January.
The February ISM services index slipped to 59.5 from 59.9 in January and just off of the best level since 2005. New orders, exports and backlogs all rose while prices paid fell slightly.
The Commerce Department said that U.S. factory orders fell by 1.4% in February, the biggest decline in six months and followed five-straight monthly increases.
Payroll processor ADP reported that the U.S. private sector produced 235,000 new jobs in February. That is the fourth consecutive month that payrolls have grown at 200,00 or better. Gains were broad across both the service and goods-producing sectors. Leisure and hospitality led the way with 50,000 jobs created, followed by professional and business services with 46,000 and transportation and utilities with 44,000 new jobs.
The Department of Labor (Bureau of Labor Statistics) announced that U.S. Non-Farm payrolls increased by 313,000 for the month of February. As for wages, average hourly earnings were up 0.1% after a 0.3% increase in January. Construction jobs increased by 60,000 and surprisingly government jobs (at the state and local level) increased by 26,000, the most since June of 2016.
The Commerce Department said that the U.S. trade deficit for January surged to its highest level since 2008. Imports exceeded exports by 5% in the month pushing the deficit to $56 billion and could contribute a lower 1st quarter GDP number.
The Fed’s Beige Book for January and February reported that growth remained at a modest to moderate pace while “prices increased in all districts [and] most districts saw employers raise wages and expand benefit packages in response to tight labor market conditions.”
Baker Hughes said that the U.S. rig count climbed by 3 rigs to 981 and followed last week’s gain of 3 rigs as well. Oil rigs rose by 1 to 800 and gas rigs rose by 2 to 181.
The February Eurozone Retail PMI (Purchasing Manager’s Index) advanced to 52.3 from 50.8 last month and 53.0 in December. It’s the 11th consecutive month greater than the breakeven of 50. The reason is low regional inflation.
Chinese exports spiked in February by 44.5% year over year vs an estimate of up 11%. This is an impressive rate of growth and confirms the strength of the global economy. Exports to the U.S. were up 25% in the month, but there is no truth to the rumor however, that most of the exported goods landed on President Trump’s doorstep.
Data consultant PwC says that forced CEO turnover across the globe costs shareholders $112 billion in total returns annually. In the last five years forced CEO departures have occurred at Procter & Gamble, Teva, Avon, Arconic, AIG, Ralph Lauren and at least 50 other companies in the S&P 500. In January 2018 alone, overall CEO turnover reached its highest level in 8 years according to the Conference Board.
From Nellie Bowles of CNBC: “In search of reasonable rent, the middle-class backbone of San Francisco – maître d’s, teachers, bookstore managers, lounge musicians, copywriters and merchandise planners – are engaging in an unusual experiment in communal living: They are moving into dorms. [San Francisco developer] Starcity, has already opened three properties with 36 units. It has nine more in development and a wait list of over 8,000 people.” All of the properties have a shared bathroom down the hall and no individual living rooms or kitchens. Basically, it is a 130 to 220 square foot bedroom that rents for $1,400 to $2,400 per month fully furnished, with utilities and Wi-Fi included.
According to ATTOM Data Solutions, just over 207,000 homes were flipped in 2017, the highest amount in a decade. The number of companies or individuals flipping homes also hit a decade high of 138,410. More flippers (defined as those who buy and sell a property within a 12-month period) used cash (65%) to buy homes as compared to a decade earlier when 63% used leverage. The average gross return on flipping in 2017 was 49.8% vs 51.9% in 2016 as higher purchase prices ate into profit margins.
According to Finder.com, a recent survey of 2,000 adults found that Americans spent an average of $448 per person on “drunk purchases” in 2017, nearly double the amount spent in 2016. The survey uncovered the fact that men are responsible for more drunk shopping ($564) than women ($282). Generation X’ers spent the most on drunk purchases, averaging $738 – more than triple that of millennials ($206). Some 61% of these say they purchase food while intoxicated, followed by clothes and shoes (26%) and gambling (25%). Interestingly, retailers are on to the trend, adding even more sales after 9:00 p.m. to encourage more traffic from drunk shoppers.
United Airlines recently unveiled a new training program entitled “core4.” Some 30,000 employees will be required to undergo an ambitious four-hour training session designed to teach workers to be efficient, ensure operations are safe, and do it with a smile on their faces. Sara Nelson, president of the Association of Flight Attendants (which represents United flight attendants) says that “core4 puts a value on emotional intelligence” by showing they are approachable with “open body language,” “smiling,” “making good eye contact,” “speaking with a positive tone” and “being mindful and compassionate.”
Analysts at Goldman Sachs said that based on the 2017 production mix, the proposed 25% steel tariffs would translate into an additional $1 billion in costs to both Ford and GM.
Toyota U.S. car and truck sales for February were higher by 4.5% to 182,195 units. The Toyota division sales were up by 4.45%, Lexus +5.1%, Camry +12% and RAV4 +13%.
Ford U.S. car and truck sales for February were down by 6.9% to 194,132 units. Passenger car sales -12.1%, SUV sales -12.3% and truck sales +1.2%.
General Motors U.S. car and truck sales for February fell by 6.9% to 220,905 units. Sales by brand: Chevrolet -8.8%, GMC -8.0%, Buick +1.2% and Cadillac +14.0%. Silverado-C/K Pickup trucks were down by -16.0%.
Boeing has said that it has all but ruled out reviving the 767 passenger plane as the company continues to consider options for a favorable position in the middle of the aircraft market.
According to Bank of America/Merrill Lynch, Amazon has narrowed its list of potential HQ2 cities to 5 finalists; Atlanta, Boston, Denver, Raleigh and Washington D.C.
YouTube TV (owned by Google) is expanding its partnership with Major League Baseball. YouTube TV will be the presenting sponsor of the 2018 and 2019 World Series and will partner with MLB on “First Pitch”, a season-long sponsorship that ties advertisements to the first pitch of each game.
Over the past several weeks Amazon Alexa users have reported that their devices have been freaking them out with unsolicited “creepy laughter” coming from them. An Amazon representative said the company is aware of the problem and working to fix it.
Nordstrom Inc. said that a special committee of its board of directors has received and rejected a proposal (from the Nordstrom family) to take the company private. In a separate announcement the company said that it has acquired two digital retail startups, BevyUp which allows customers to share information and browse online with each other and MessageYes, which offers brands the opportunity to text customers.
Google has reached an agreement to sell Zagat to restaurant discovery platform, The Infatuation. Terms of the deal were not disclosed but The Infatuation said it would operate Zagat as a separate brand.
Total Petroleum has closed on its $7.5 billion purchase of Maersk Oil and Gas which will bring an additional 160,000 barrels of oil per day online in the North Sea.
Cigna is close to finalizing a deal to purchase Express Scripts for $67 billion. Back in 2015, Cigna agreed to combine with Anthem but the deal was scuttled by regulators.
Burlington Stores reports 4th quarter earnings of $1.49 per share on revenue of $1.94 billion, an increase of 14.8% year over year.
Kroger reports 4th quarter earnings of $0.63 per share on revenue of $31.03 billion, an increase of 12.4% year over year.
Costco Wholesale reports fiscal 2nd quarter earnings of $1.42 per share on revenue of $33 billion, an increase of 10.8% year over year.
Target reports 4th quarter earnings of $1.37 per share on revenue of $22.7 billion, an increase of 10.1% year over year.
Dollar Tree reports 4th quarter earnings of $1.89 per share on revenue of $6.36 billion, an increase of 12.8% year over year.
Centennial Resources reports 4th quarter earnings of $0.12 per share on revenue of $166.1 million, an increase of 402.7% (yes, that is correct) year over year.
Next week: Earnings from: Williams-Sonoma, Dick’s Sporting Goods, Guess, Oracle, Adobe, Ulta Beauty, Dollar General and Restoration Hardware. Economic reports: Philly FED Manufacturing Index for February, U.S. Industrial Production for February, U.S. Housing Starts for February, U.S. Retail Sales for February, CPI for February and PPI for February.
WTI crude oil: $60.25 per barrel. 10-year U.S. Treasury note: 2.85%. Gold: $1,321 per ounce.
Sources: Real Money Pro, CNBC, Estimize.com, Seeking Alpha, MarketWatch, 361 Capital, First Trust Economics, The New York Times, The Calafia Beach Pundit, Dr. Ed’s (Yardeni) Blog, The Wall Street Journal and Bloomberg.
P.S. We at Cascade Investment Group, Inc. would like to congratulate Rob Wrubel for earning his Accredited Estate Planner (AEP®) designation in 2018. See the official announcement below.
P.P.S. 45 years ago last week, Pink Floyd released what maybe the greatest album of all time “Dark Side of the Moon.”
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.