Market Minutes for the week of May 13th:
“A setback is a setup for a comeback” — Willie Jolley
Here’s what I am thinking and hearing: *1.) Warren Buffett’s partner Charlie Munger on how much time he spends reading in a typical day: “Oh, it’s huge. I read myself to sleep every night. I read enormously. I like doing it. Not only that, what I found very early in life was that once I learned to read and handle elementary math, I really didn’t need professors or anything. I could figure out almost anything I wanted better from the written material than having some professor tell it to me, because he’d be going too fast or too slow or telling me something I already knew or didn’t want to know. And so of course I like doing it by reading.” *2.) From the front lines of the trade war: China retaliates and imposes $60 billion of tariffs on imported U.S. goods and when you look at the list, you realize how little ammo they have. Here’s what they will tax: beans, beers, Brussel sprouts, cabbage, carrots, cauliflower, broccoli, cucumbers, potatoes, rabbit meat, frog legs, eels, trout, chickens, turkeys, almonds, cashews, hazelnuts, macadamia nuts, dates, figs, apples, DVRs, televisions and cameras. You get the idea. President Trump will delay auto tariffs for up to 6 months and at least temporarily delays starting another war on a new front. The Chinese have canceled orders for 3,247 metric tons of U.S. pork. Prior to the trade war, China and Hong Kong were the 2nd largest export market for U.S. pork. Atlanta Fed President Raphael Bostic said that higher tariffs could result in interest rate cuts if consumer spending suffers. Bostic says: “The consumer has not really seen the full effect of any of the tariffs to date…The first round of tariffs….most businesses that we talked to, said ‘we did not pass through most of that elevated costs through to the final customer’…I actually think we’re almost at the cusp where we’re going to see prices move.” Blaine Rollins, founder of 361 Capital: “This new round of tariffs is going to cost consumer households anywhere from $500 to $750 annually as their basket of Walmart, Target and Amazon goods rise in price to reflect the trade tax increases.” Brian Westbury, chief economist for First Trust: “It’s true tariff increases will not help the U.S. economy. But $100 billion of tariffs spread over $14 trillion of consumer spending is not a recession inducing drag. It’s true some business, like soybean farmers, are hurt. But the status quo means accepting hundreds of billions in theft from companies that are the leading edge of future growth. Either way, if tariffs nick our economy, China gets hammered. Last year we exported $180 billion of goods and services to China, which is 0.9% of our GDP. Meanwhile, China exported $559 billion to the U.S., which is 4.6% of their economy. We have enormous economic leverage that they simply can’t match.” *3.) The stock market isn’t necessarily buying Brian’s argument as the S&P 500 has lost $1.2 trillion (10 times the tariff impact) in value since the “Trump tweets” weekend before last and the 10-year U.S. Treasury bond yield has traded down to 2.39%. *4.) Some thoughts from Jim Cramer: “We are seeing far more of a united front on tariffs than I thought possible even a few weeks ago. Lloyd Blankfein, the former CEO of Goldman Sachs tweeted this morning that they might be a necessary evil. Tom Friedman [New York Times] and Steve Bannon found themselves in a lovefest about tariffs being the only real way to get China to change. Yeah, Friedman the Timesman and Bannon the Wildman, turned statesman/economist. To me these are tectonic shifts that show Trump’s move is picking up steam.” *5.) More market calming “Fed Speak.” From Minneapolis Fed President Neel Kashkari: “In my view, these rate increases [last fall] were not called for by our systematic framework…With inflation somewhat too low and the job market still showing capacity after 10 years, the only reasonable conclusion I can draw is that monetary policy has been too tight in this recovery…I believe that we misread the labor market, thinking we were at maximum employment when, in fact, millions of Americans still wanted to work, and fearing that if we hit maximum employment, inflation might suddenly accelerate, and we would then have to raise rates quickly to contain it.” MarketWatch reports, “Federal Reserve Gov. Lael Brainard made the case…that the “new normal” of low interest rates requires the central bank to let inflation run hotter than usual as well as to employ tools like increased capital requirements to check financial market exuberance”. *6.) According to The Workforce Institute at Kronos, of an estimated 27.2 million of Americans who plan to watch the feature-length series finale of the HBO juggernaut “Game of Thrones” airing on Sunday night, 10.7 million will skip work the Monday morning after the show. They will either call in sick, take a last-minute personal or vacation day, or make some other kind of arrangement. That number is almost as high as the estimated 17 million Americans who were sidelined after the last Super Bowl in February. *7.) Speaking of football, I believe there are now enough Democrats who have jumped into the 2020 presidential race, to field an NFL team on both the offensive and defensive side of the football. They still need an All-Pro quarterback, I think. *8.) Why, after Monday’s 670-point beatdown on tariff worries, has the market recovered and yet the news hasn’t changed? Four things. One, as mentioned earlier, the selloff had produced losses of $1.2 trillion in market cap – ten times the cost of our tariffs. Overdone to the downside. Two, as Cramer said, lots of new influential support for the President’s hardcore stance against China. Three, looking at the list of Chinese imposed tariffs mentioned earlier, they simply don’t have the leverage to retaliate in a meaningful way. Four, the ongoing and increasing magnitude of the trade war with China makes it even more likely that the Fed may cut rates in 2019.
The Commerce Department said that U.S. retail sales fell by 0.2% in April, excluding autos and gasoline. Online sales fell 0.2% month over month, sales of electronics fell by 1.3%, department store sales were up by 1% and sales at restaurants and bars were also up by 0.2%. Bottom line, core retail sales are up just 2.9% year over year versus the 5-year average of 3.7%.
The Fed’s Empire State manufacturing index rose to 17.8 for May from 10.1 in April and was the best reading since November. New Orders rose 2.2 points, Backlogs increased to 2.2 from -0.7 in March and Shipments for new orders already placed, jumped to a 4-month high.
The Fed’s Philly manufacturing index rebounded to a four-month high in May to 16.6 from 8.5 in April. New Orders fell 4.7 points but Shipments rose by 10 points and Employment rose 3.5 points.
The Fed said that U.S. industrial production fell by 0.5% in April dragged down by a big drop in factory output of autos and auto parts.
The Atlanta Fed’s GDPNow tracker is pointing to a 1.1% increase for the 2nd quarter with disappointing April retail sales fueling the move lower. According the Chicago Mercantile Exchange’s (CME) FedWatch tool, futures are indicating an 80% chance that the Fed cuts rates by January 2020.
The Labor Department said that U.S. import prices increased by 0.2% in April as increases in the cost of petroleum and food were tempered by the largest decrease in the price of capital goods in 10 years.
The National Association of Homebuilders (NAHB) said that builder confidence for new single-family homes rose by 3 points to 66 in May. That is the highest reading since last October.
The Commerce Department reported housing starts climbed by almost 6% in April to an annual rate of 1.24 million units. Single-family starts rose at a 6.2% rate while multi-family starts climbed 2.3%.
According to the National Association of Realtors (NAR) home prices climbed at a slower rate in the 1st quarter as more properties were listed for sale. The median price for a previously owned single-family home rose by 3.9% to $254,800 from the previous year. Prices increased in 153 of the 178 metropolitan areas measured. 13 of those had price increases of 10% or greater, down from 14 in the 4th quarter.
What is productivity? Scott Grannis of the Calafia Beach Pundit gives a good explanation: “Productivity is essential to economic growth and progress, so it’s great news that productivity has picked up in the past two years. Productivity happens when an economy produces more from a given level of input, and that in turn usually means that businesses have invested in productivity-enhancing things such as machinery, tools, and computers, all which allow workers to produce more with a given amount of effort or time. Productivity is also likely to result from a reduction in the costs of running a business, and that in turn usually means less red-tape, and reduced tax and regulatory burdens. Rising confidence can also help, since that helps give people the courage to work harder and take risk. Rising confidence can also make entrepreneurs more inclined to start new businesses and expand existing ones.”
The “Misery Index” was invented in the early 1960’s by LBJ administration economist Arthur Okum (see the chart below) and it originally consisted of the CPI inflation rate plus the unemployment rate and more recently has been modified to include the Fed’s favorite indicator the PCEI or Personal Consumption Expenditures Index. A low reading in the Misery Index means that both inflation and unemployment are low, which brings a measure of stability to the life of the average working person. Today, the Misery Index is at its lowest reading since 1960.
Economist Dr. Edward Yardeni presents a very convincing argument against the nagging and ongoing claim by numerous presidential candidates – that the U.S. has suffered from 30 years of income stagnation. Here is the link to the article: http://blog.yardeni.com/2019/05/income-stagnation-is-progressive-myth.html#links
The Chicago Board of Trade (CBOT) says that soybeans have hit the lowest price (below $8.00 per bushel) since the 2008-2009 financial crisis. Not only have soybeans been one of China’s tariff targets but a major outbreak of swine fever in Asia has meant smaller herds and less demand for soybean feed.
Bloomberg First World reports that U.S. junk bond issuers rushed into the market last week, pricing $3 billion in bonds bringing the week’s total to $12 billion, the biggest week of issuance since September 2017.
According to a survey of 1,000 Americans from Charles Schwab, nearly one half of millennials (49%) say photos and experiences their friends have shared on social media have influenced their own spending habits. Only about one-third of Americans in general have found this to be true. Other surveys have uncovered similar trends. According to a survey of more than 2,000 millennials from Fidelity, nearly two in three believe that social media has had a negative impact on their financial well-being. Finally from a survey by Allianz Life, 57% of millennials say they’ve spent money they hadn’t planned to spend because of something they saw on social media, compared to 28% of Gen Xers and 7% of Boomers.
The Centers for Disease Control and Prevention’s National Center for Health Statistics said there were 3.7 million estimated births in 2018, down 2% from the year before. That is the lowest level since the 1980s. MarketWatch reports, “Typically, the birth rate rises with an improving economy, but there are other factors at play. Younger and unmarried women are having fewer babies, more women are delaying marriage as they start their careers after college, and dual income families are finding it increasingly expensive to have children, especially with the rising cost of child care.”
According to Bloomberg, “Trump Tower, once the crown jewel in Donald Trump’s property empire, now ranks as one of the least desirable luxury properties in Manhattan. The 36-year old building has been turned into a fortress since Trump won the presidency, ringed with concrete barriers and the two main entrances partially blocked off. It hasn’t been substantially updated in years…Trump Tower’s occupancy rate has plunged over the last seven years to 83% from 99%, giving it a vacancy rate that’s about twice Manhattan’s average…For anyone who owns a unit in the tower, the past two years have been brutal…Several sold at more than a 20% loss. By contrast, across Manhattan, just 0.23% of homes over the past two years sold at a loss…”
According to CNBC, “One of the few paintings in Claude Monet’s celebrated “Haystack” series that still remains in private hands sold at auction Tuesday for $110.7 million, setting a record for an Impressionist work.” Sotheby’s handled the sale of the painting, “Meules”.
Also according to CNBC, “Among top schools, Facebook’s acceptance rate for full-time positions offered to new graduates has fallen from an average of 85% for the 2017-2018 school year to between 35% and 55% as of December. The company has seen a decline in its offer acceptance rates…from nearly 90% in late 2016 to almost 50% in early 2019.” The Cambridge Analytica scandal of more than a year ago continues to take a toll on attracting top talent.
The College Board is planning on assigning an “adversity score” to test takers according to the Wall Street Journal. The score aims to measure the taker’s socioeconomic background that includes neighborhood, family income level and high school environment. The theory is that the more affluent are more likely to have access to test prep and other resources that can help them score better on the standardized tests. Can you say Felicity Huffman and Lori Loughlin.
AllianceBernstein is the latest financial service firm to pack up and leave New York City. The Asset manager will take its 1,050 jobs to Nashville, Tennessee citing affordable housing, cost of living, education and weather. Last year, financial firms’ relocations led to the first decline in New York City’s securities workforce since 2013. According to the state’s comptroller’s office, that left the industry with 176,900 people in town, or 6% fewer than before the 2008-2009 financial crisis.
“The Boston Beer Company, the maker of Sam Adams-branded beers, has agreed to acquire craft-beer maker Dogfish Head Brewery for about $300 million…Dogfish Head will receive 406,000 shares of Boston Beer…and $173 million in cash…”, reports MarketWatch.
Buckeye Partners has agreed to be acquired by IFM Global Infrastructure Partners for $41.50 per unit in cash and the deal has a $10.3 billion enterprise value. The transaction is expected to close in the 4th quarter of this year.
According to Dealogic, the IPO of Uber Technologies had the fifth weakest one-day return of a company with a value of at least $10 billion in the past 24 years. The company came public at $45.00 per share last Friday and closed the trading day at $41.57 for a loss of 7.6%.
“In the year through April 30, Boeing is reporting net new orders of -119, with 737 net new orders -171…Backlogs of 5,582 were down 119 jets in April”, reports Seeking Alpha.
A California jury has awarded a California couple $2.055 billion in a settlement against German company Bayer AG. The suit claimed that the company’s product, Roundup weed killer, caused the couple’s cancer.
Cisco Systems reports fiscal 3rd quarter earnings of $0.78 per share on revenue of $12.96 billion, an increase of 4.0% year over year.
Walmart reports 1st quarter earnings of $1.13 per share on revenue of $123.9 billion, an increase of 1.0% year over year.
Next week: Earnings from: Home Depot, Nordstrom, JC Penney, Kohl’s, Cracker Barrel, Target, Lowe’s and Best Buy. Economic Reports: Existing Home Sales for April, Single-Family Home Sales for April and U.S Durable Goods Orders for April.
WTI crude oil: $63.00 per barrel. 10-year U.S. Treasury note: 2.39%. Gold: $1,286 per ounce.
Sources: CNBC, MSN Money, Real Money Pro, First Trust Economics, 361 Capital, Seeking Alpha, MarketWatch, Estimize.com, Bloomberg, The Calafia Beach Pundit, Yardeni Research, The Wall Street Journal, John A.F. Smith Blog, Reuters and Zero Hedge.
At the time of publication Cascade Investment Group and /or its clients owned shares of WMT, TGT, AMZN, GS, FB, BPL, UBER, BA, CSCO, HD, JWN, CBRL and LOW.
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.
RIP: Tim Conway and Doris Day