Market Minutes for the week of March 6th:
“It took me seventeen years to get three thousand hits in baseball. I did it in one afternoon on the golf course.” – Hank Aaron (Hall of Famer and long-time home run king)
Is the Trump rally over? Is it time to run for cover? These two questions are at the forefront of investors’ minds right now. While is seems clear that some of the Trump euphoria has evaporated, it is probably accurate to say that U.S. stocks are fully valued based on 4th quarter earnings. First quarter economic data so far has been mostly positive and supportive of these valuations. While I don’t foresee a nasty correction at this point, it appears more likely that the markets will move sideways for a while as the new administration gets used to Washington and the process of governing. For stocks to move meaningfully higher, it will require reasonably swift action on the promises of tax cuts and Dodd-Frank reform. For stocks to move lower, anything from Trump or others that threatens the cohesiveness of the Republican majority, slowing the process and putting tax reform in jeopardy, will likely trigger a decline in stock prices. This is especially true when you consider the Dow and the S&P 500 have now gone 102 straight days without a decline of 1% (the longest run for this statistic in 21 years.)
According to the ISM’s February survey, 33 of 36 major U.S. industries expanded in the month, the most in nearly three years.
ADP reports that private payrolls rose by an astounding 298,000 in February well above the 187,000 jobs forecasted. The notable gain was in the goods producing sector which saw a bump in construction jobs by 66,000 and in manufacturing jobs by 32,000. The mild winter definitely contributed to getting things done outdoors.
The Labor Department reports that the U.S. economy generated 235,000 non-farm jobs in February. Construction added 58,000 jobs and manufacturing jobs grew by 28,000. The labor participation rate rose 0.10% to 63%. The average hourly wage increased by 0.2%.
Productivity for the 4th quarter was higher by 1.3% and unit labor costs rose 1.7%.
The Commerce Department reported whole inventories declined by 0.2 in January, marking the biggest fall since February of 2016. This could be a reason that the Atlanta Fed tracker has reduced its forecast for 1st quarter GDP growth.
New orders for U.S.-made goods increased by 1.2% in January, the second straight month of gains. Year over year, factory orders have increased 5.5% thanks to higher oil prices, a lower dollar and the elimination of inventory overhang. Manufacturing accounts for 12% U.S. economic activity.
The Commerce Department reported that the January U.S. trade deficit jumped to its highest level in almost five years. The 9.6% increase was driven by a 2.3% surge in imports led by mobile phones, oil and foreign-made cars.
The Atlanta Fed tracker is now seeing 1st quarter GDP growth of 1.3%. There are a number of factors that go into the calculation but I don’t subscribe to a reading this low.
The U.S. Energy Information Administration has raised its forecast for U.S. crude oil production. The EIA says that production for 2017 will average 9.2 million bbl/day up from a previously forecast level of 8.9 million bbl/per day. For 2018 the agency sees production of 9.7 million bbl/day vs an earlier estimate of 9.5 million bbl/day.
The EIA said that U.S. crude oil inventories rose to a new record weekly level of 528.4 million barrels for the ninth straight weekly increase.
BP CEO Bob Dudley: “We are not planning on an uptick in the prices [of oil]. We’re going to plan on $55 to $60 … for the next five years, and we’re going to live within a strict capital diet.”
Brazil’s economy has tumbled further into its worst recession in the country’s history, contracting by 3.6% in 2016. The country’s economy is now 8% smaller than it was in December of 2014 and the unemployment rate is 12.6%.
The Fed reported that U.S. consumer debt shrunk in January and produced the smallest increase in borrowing in more than four years. Consumers borrowing climbed $8.8 billion in the month vs $14.8 billion in December. Credit card debt fell by $3.8 billion in January and marks the first time since February 2016 that credit card debt has declined.
According to Fitch Ratings, HELOC (home equity line of credit) volume is up 21% over the past two years to its highest level since 2008. But this is far from the levels reached right before the housing market crash when homeowners thought of their homes as cash machines.
U.S. banks have paid $321 billion in fines since the 2008-2009 financial crisis according to the Boston Consulting Group. Don’t feel too sorry for them though because they have also earned nearly $1 trillion in profits over the same period. The FDIC reports that banks in the 3rd quarter alone earned a best-ever $45.6 billion in profit and 2016s earnings surged to a record $171.3 billion. Dodd-Frank reform remains on the table.
According to Goldman Sachs, best-case Dodd-Frank reforms could produce $218 billion in excess capital for the banks which, “could either be returned to shareholders or reinvested in the business.” Goldman believes the reforms will center around stress test requirements, rolling back the way banks have to count risk assets and bringing capital requirements imposed by the Fed more in line with other organizations such as the Financial Stability Board.
Fitch Ratings’ “Bonds of Concern” list is loaded with retailers. The space is expected to see the default rate jump from 1% last year to 9% in 2017 according to the agency. Last week, Eastern Outfitters, whose chain includes Eastern Mountain Sports and Bob’s Stores, filed for Chapter 11 protection. Last month The Limited filed and they closed all of their stores as the result. Wet Seal, American Apparel, Aeropostale and Sports Authority are among the other companies that have filed for Chapter 11 or have completely liquidated.
Singer-songwriter Jimmy Buffet has partnered with real estate developer Minto Communities to build Latitude Margaritaville, a 55 and over community in Daytona, Florida. The development will have 7,000 two-or-three-bedroom homes costing between $200,000 and $350,000. The community is expected to have its first residents by late summer of 2018 for this “immersive brand experience,” that features a “no worries, tropical vibe.”
The Kauai Island Utility Cooperative has a new way of providing electricity at night. By drawing energy from 272 Tesla power packs, the Hawaiian island company solved the problem it had with solar and other renewables that couldn’t store the sun’s power once it set. The move is expected to save 1.6 million gallons of diesel annually which had previously gone to powering generators.
Would you pay $300,000 for a parking spot? There’s one on the market for just that amount in Brooklyn’s classy Park Slope neighborhood. Another spot in the area recently went for $280,000, so the garage owners aren’t out of their minds asking for this six-figure sum, according to NBC News.
What do Michael Dell, Paul Tudor Jones and 125 other wealthy individuals have in common? They all got taken in by a Ponzi scheme involving marked-up tickets to the Broadway smash “Hamilton,” according to Bloomberg. The scam centered around people pooling their money together to purchase blocks of tickets and then resell them for a profit of at least 10%. The racket went on for two years before one of the conmen turned informant and admitted to the shell game.
The solution for the perfect selfie may be just around the corner, or hovering just in front of your face. More than 7,000 people have contributed more than $880,000 through a Kickstarter campaign to develop “The Selfly”, a proposed smartphone case that transforms into a self-taking drone. The Selfly will be able to circle a person or fixed object to get that perfect shot.
According to new data from research firm NPD Group, the number of restaurant takeout orders received over the phone or through an app jumped by 18% in 2016 to 1.9 billion. Around 50% of the orders came in around the dinner time. Millennials and the more affluent were among the above average users of apps like Grubhub and Seamless.
According to a source close to the company, Airbnb is worth approximately $31 billion after just closing a more than $1 billion round of funding. The source also says that the company turned profitable in the 2nd quarter of 2016.
Deutsche Bank plans to raise €8 billion ($8.5 billion) in new capital and will restructure into four new units in an effort to cut costs and generate synergy.
KKR & Co. has collected $13.9 billion for its newest private equity fund. This marks the most ever raised in a buyout pool concentrated on North America. This new fund will focus on traditional buyouts as well as growth investments, minority stakes and toe-hold positions in public companies.
CNBC reports that ESPN (owned by Disney), will lay off a “small percentage” of the nearly 1,000 “forward-facing” employees which will include on-air anchors, reporters, and radio/podcast hosts.
France’s Peugeot has agreed to buy the Opel brand from General Motors for €2.2 billion ($2.3 billion) as they attempt to challenge European market leader Volkswagen.
Emirates Airlines said that the original travel ban imposed by President Trump caused the pace of bookings to fall by 35%. The president of the giant Middle East airline Tim Clark said, “The effect it had was instantaneous.”
Neiman Marcus, the high-end department store chain, has hired the investment bank Lazard to help them find ways to strengthen their balance sheet and get relief from the $4.9 billion in debt.
Barry Eggers, a parent at Saint Francis High School in Mountain View, California and a partner at Lightspeed, invited the school’s board to invest $15,000 in Snapcat’s seed round along with his private equity firm. That investment really paid off! The school sold most of its 2.1 million shares at $17 per share, the IPO price and netted roughly $24 million.
“Exxon Mobil is expanding its manufacturing capacity along the U.S. Gulf Coast through planned investments of $20 billion per year through 2022 to “take advantage of the American energy revolution.” … [The projects will include] 11 chemical, refining, lubricant and liquefied natural gas projects at proposed new and existing facilities to generate thousands of new high-paying jobs and $200 billion in increased economic activity in Texas and Louisiana”, reports Seeking Alpha’s Carl Surran.
Salesforce.com has announced an artificial intelligence partnership with IBM. Customers of Salesforce will have access to data from IBM’s Watson as part of the agreement. IBM’s system will integrate the cloud technology for internal use.
More from Carl Surran of Seeking Alpha, “Caterpillar is accused in a report commissioned by the U.S. government of carrying out tax and accounting fraud … CAT’s tax practices have been a focus of government investigators since 2014, and the company has since disclosed that the IRS is seeking more than $2 billion in income taxes and penalties on profits earned by a Swiss subsidiary.”
Boeing has announced that it is working on a new airliner called the 797. It will have a twin-aisle design with a seating capacity of more than 200 that is designed to fit between its workhorse 737 and the 787 Dreamliner. The new airplane is not scheduled to enter service before 2024.
Ulta Beauty reports 4th quarter earnings of $2.24 per share on revenue of $1.58 billion, an increase of 24.4% year over year.
Vail Resorts reports fiscal 2nd quarter earnings of $3.63 per share on revenue of $725.2 million, an increase of 21.0% year over year.
Next week: Earnings from: Oracle, Williams-Sonoma, Adobe, Dollar General and Tiffany. Economic reports: Producer Price Index for February, Consumer Price Index for February, Retail Sales for February, Industrial Production, Philly FED Manufacturing Index and Building Permits.
WTI crude oil: $48.88 per barrel. 10-year Treasury note: 2.60%. 30-year mortgage: 4.21%.
Sources: Blomberg, Reuters, The Wall Street Journal, CNBC, Real Money Pro, 361 Capital, Seeking Alpha, MarketWatch and Estimize.com
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.