Market Minutes for the week of May 6th:
“Use what talents you possess; the woods would be very silent if no birds sang there except those who sang the best.” – Henry Van Dyke
Here’s what I am thinking and hearing: *1.) From the front lines of the trade war: The heavy artillery has come out. President Trump, frustrated with the pace of the trade talks, and “reneging” on commitments made earlier in the talks, has now said that tariffs on $200 billion of Chinese goods will go from 10% to 25% on Friday. After 10 rounds of talks, a deal could be in jeopardy. Beijing is willing to change industrial plans that provoke foreign opposition but at the same time wants to preserve the ruling Communist Party’s dominant role in directing economic development. Willy Lam, politics specialist at the Chinese University of Hong Kong says: “[President Xi Jinping is] adamant about party-state control over major sectors of the economy…If they give this up, then China in effect ceases to be a socialist country…Trump wants a certain amount of tariffs to remain in place just in case the Chinese don’t honor their promises…The Chinese refuse to give the Americans the right to penalize them…Trump believes he can bully the Chinese…Trump realizes the Chinese economy is facing a rough patch, and Xi Jinping is under pressure from his own people.” From Bloomberg: “Based on calculations by Bloomberg Economics, tariffs at the current level add up to a 0.5% drag on China’s gross domestic product growth this year. An increase to 25% tariffs on $200 billion in Chinese exports from 10% would raise the drag to 0.9%. Tariffs on all of China’s exports to the U.S. would increase the burden to 1.5%.” Chinese exports for April fell by 2.7% versus a forecast of a 3.0% rise. Jim Cramer says there are the two numbers that gave Trump confidence to hit China with a new tariff threat: “My people I talk to said two numbers determine everything, 3.2% GDP and 3.6% unemployment.” *2.) Markets do not like surprises and the announcement over last weekend that tariffs could be going to 25% and that the trade talks could be sunk, caught the markets by surprise. Not more than days ago, everyone from Treasury Secretary Mnuchin to economic advisor Larry Kudlow had been saying that we could have an agreement by the end of this week, but suddenly now its increased tariffs. Big surprise, big reversal, big declines in all global markets. *3.) Bob Lang, technical analyst and separate accounts manager for Aztec Capital stares this latest battle in the trade war head on and says: “The recent talk of extending tariffs against China this coming week is serving as a huge distraction and annoyance to everyone, even those not involved in the markets. It is all noise. I would ask how the tariffs in the first quarter affected GDP, and the answer was nil. Oh, I’m sure there could be some damage down the road, and the psychological effects are notwithstanding.” *4.) Brian Wesbury, Chief Economist for First Trust Economics observes about last week’s jobs report that the labor participation rate is up 1.4 million workers from 1 year ago. “The unemployment rate for those with less than a high school degree has averaged 5.6% in the past 12 months, the lowest on record…Hispanic unemployment has averaged 4.6% in the past year, while the Black unemployment rate has averaged 6.4%, both also record lows…Average hourly earnings are up 3.2% from a year ago…[and up] 2.5% in the year ending in April 2017. Among full-time workers age 25+, usual weekly earnings are up 3.5% for those in the middle of the income spectrum. But wages are up 4.9% for workers at the bottom 10% of earners, while up 1.7% for those at the top 10% of income earners.” *5.) Warren Buffett, CEO of Berkshire Hathaway at last weekend’s “Woodstock for Capitalists” otherwise known as the Berkshire Hathaway annual shareholder’s meeting: “I think stocks are ridiculously cheap if you believe … that 3% on the 30-year bonds makes sense…We are sitting very, very little inflation with the Federal Reserve putting a target at 2% not that long ago.” *6.) Members of the Fed are out in force talking about the current level of interest rates. Fed Vice Chairman Richard Clarida: “The U.S. economy is in a very good place…The unemployment rate is at a 50-year low, real wages are rising in line with productivity, inflationary pressures are muted, and expected inflation is stable.” St Louis Fed President James Bullard: “I think we’re a little tight on the funds rate, not too much but a little tight…I think the global safe real rate in the short term is zero…We get advice from all kinds of people, including you [CNBC’s Steve Liesman] and other politicians…We get a lot of input from a lot of different angles.” Cleveland Fed President Loretta Mester: “Our interest rate policy, I think, is exactly appropriate for now and we’ll just see how the economy evolves…I would be concerned if inflation expectations were falling, if aggregate demand was falling, if the signal of low inflation was that growth was going down, but there’s no evidence of that.” *6.) Jim Cramer on Occidental, Tesla and the science of borrowing money: “Borrowing money isn’t an art, it’s a science. If you can get money at 2% with a weak balance sheet versus 8% with a decent balance sheet you take that money regardless of who is offering it. I know that sounds pretty stupid. Of course, you grab the lower rate. But in the real world this week we saw something utterly amazing happen: Vicki Hollub, the CEO of Occidental [Petroleum] is borrowing $10 billion from Warren Buffet with an 8% coupon as part of the financing needed to purchase Anadarko for $38 billion. That’s staggeringly expensive money. On the other hand, Elon Musk is helping to fund Tesla’s needs by borrowing $1.6 billion at 2% in the form of a convertible bond offered by Goldman Sachs…Hollub apparently loves the imprimatur of Buffett. If you are a shareholder [of Occidental] you should hate this deal.” *7.) In last week’s Market Minutes, I mentioned the record short position in the VIX (Volatility Index) futures and what could happen if something caused the VIX to spike. Well, President Trump lit that match when earlier this week he announced the coming 25% tariffs on $200 billion of Chinese exports. The VIX jumped by 6.45 points over the first two days of this week on that news, the biggest move since the two-day rise just before Dec. 24th of last year (which BTW, led to the now infamous “Mnuchin Christmas Eve Massacre”). This week’s spiked move in the VIX has shaved 3% off the value of the DJIA, S&P 500 and NASDAQ and pushed the indexes to “oversold” levels. If there is no resolution to the trade agreement over the weekend, we could see more of the same action next week.
The Labor Department said that U.S. producer prices (PPI) rose by 0.2% in April, settling back down after a rise of 0.6% in March. April’s increase annualizes at 2.2%.
The Labor Department also said that U.S. consumer prices (CPI) rose by 0.3% in April. Lifted by increasing gasoline, rents and healthcare costs. Year over year, consumer prices increased at a 2.0% annual rate.
The Commerce Department announced that the U.S trade deficit rose slightly in March by 1.5% to $50 billion while the trade deficit with China fell to the lowest level in 3 years ($13 billion less than last year at this time). The U.S. imported fewer cell phones, consumer electronics and other household goods from China. Imports from Germany however, hit a record high in March.
The Institute for Supply Management (ISM) reported that its services index for April fell to 55.5 from 56.1 in March and matches the lowest print since July 2017. New orders fell to a 3-month low and backlogs declined to a 3-month low as well. Of the industries surveyed, 15 saw growth versus 16 in March.
According to CoreLogic as reported by CNBC, “about 40% of the nation’s top 50 housing markets, based on the number of homes, were overvalued in March…16% were undervalued and 44% were at value…On a national level, home prices rose by 3.7% in March vs 4% in February.
Other Purchasing Managers’ Indexes (PMIs’) from around the world (anything above 50 is expansionary): China 54.5, Hong Kong 48.4, Singapore 53.3, South Korea 50.0, Taiwan 48.2, Thailand 51.0, Indonesia 50.4, Malaysia 49.4, Viet Nam 52.5, the Philippines 50.1 , India 50.2, Germany 44.4, France 50.0, Spain 50, Switzerland 48.5, Sweden 50.9 and Italy 49.8.
The Eurozone’s business confidence index, the Sentix Sentiment Index, jumped in May to 5.3 versus the April reading if -0.3 as the German component has “stabilized noticeably.”
MarketWatch reports, “Redfin, the national real estate brokerage, is introducing a new venture that enables house hunters to buy properties without representation, saving commission fees for both buyer and seller. The company launched Redfin Direct as a pilot program in Boston in March. [It] works like this: homes listed by Redfin in a market where the program is available get a banner ad on the online listing explaining that the home can be bought “online without an agent.” The listing agent, or person representing the seller, will be paid the standard Redfin commission, which is either 1% or 1.5% of the sale price of the home. Redfin Direct calculates 2% of the asking price of the home, which is the average of what a buyer’s agent might expect to be paid. That amount is split between the buyer and seller.”
More from MarketWatch, for families looking at a private college, a recent survey by the “National Association of College and University Business Officers, which represents college chief business and financial officers across the country. During the 2017-2018 academic year, nearly 90% of first-time, full-time freshmen received an institutional grant – scholarships or other monetary aid given by the school… For first-time, full-time freshman, the average discount rate — or the amount of grant aid colleges offer as a percentage of their tuition and fee revenue — is expected to reach 52.2% during the 2018-2019 academic year, an all-time high. For undergraduates overall, the discount rate is expected to reach 46.3%, another record.”
According to CNBC, “Of the 2,604 billionaires in the world, 105 of them live in New York City. That puts New York ahead of any other city around the globe and even ahead of almost every county, with the exception of China and Germany…Hong Kong has the second-highest total of billionaires, with 87, and San Francisco comes third with 75…The tech hub has one billionaire for approximately every 11,600 residents, while NYC has one for every 81,000 inhabitants.”
Jean-Jacques Savin is a 71-year old Frenchman who just floated across the Atlantic Ocean in an orange-colored, handmade barrel-shaped capsule. He set off from the Canary Islands on December 26th and landed on the tiny Dutch island St. Eustatius shortly after midnight last week. Savin made the 2,930 mile-journey in a vessel which measures 10 feet long and 7 feet high and equipped with a small kitchen, a bed and space for storage. In addition to living off fish caught along the trip, he packed a bottle of Sauternes white wine and foie gras for New Year’s Eve and a bottle of Saint E’milion red for his birthday in January.
Disney’s “Avengers: Endgame” blew past $2 billion at the box office last weekend. It took “Endgame” 11 days to get to the $2 billion mark while it took “Avatar” 47 days to hit that mark. Avatar’s $2.8 billion take still holds the record for total box office gross but “Endgame” has a real chance over the summer to set a new record.
General Motors says it will invest $700 million in Ohio as it negotiates the sale of its, Lordstown, Ohio factory to electric truck maker Workhorse Group. The deal, when finalized, will create 450 new jobs.
According to RBC Capital Markets, Amazon is already capable of offering same-day and one-day delivery to over 72% of the U.S. population. RBC: “The faster you ship, the more people buy.”
According to Starbucks, the company is speeding up innovation at its Seattle-based research hub, the Tryer Center. Starbucks has tested 133 unique products since launching six months ago, and some 40 projects are already in stores in some form. The research facility which is designed to have a product go from idea to action within 100 days, started as a vision from former CEO Howard Schultz and has become a reality under current CEO Kevin Johnson.
According to Apple CEO Tim Cook, the company refrains from announcing small acquisitions but tries to buy a smaller company every two to three weeks on average. In “…looking for talent and intellectual property,” Apple has purchased 20 to 25 businesses in the last six months.
Occidental Petroleum has raised the cash side of its offer for Anadarko Petroleum. OXY will still buy APC for $76 per share but will now offer to pay 78% in cash and 22% in stock after an initial offer of a 50-50 cash and stock deal.
Chevron said it will walk away from the Anadarko deal and collect a $1 billion breakup fee for backing out of the deal and intends to raise its share buyback program to $5 billion per year.
Edgewell Personal Care (owners of the Schick and Wilkinson brands) plans to buy U.S.- based shaving startup Harry’s for $1.37 billion in a stock and cash deal.
Uber’s IPO has been priced at $45 per share, the lower end of the pricing range. At $45 per share, Uber has an implied market valuation of $82.4 billion on a fully diluted basis. It is one of the largest IPOs of all time.
Expedia reports 1st quarter earnings of $0.09 per share on revenue of $2.61 billion, an increase of 4.4% year over year.
B&G Foods reports 1st quarter earnings of $0.44 per share on revenue of $412.73 million, a decrease of 4.4% year over year.
Fortinet reports 1st quarter earnings of $0.46 per share on revenue of $472.6 million, an increase of 18.4% year over year.
Lyft reports 1st quarter earnings of -$9.02 on revenue of $776 million, an increase of 95.4% year over year.
GW Pharmaceuticals reports 1st quarter earnings of -$0.14 per share on revenue of $39.25 million, an increase of 1,191% year over year.
Cognizant Technologies reports 1st quarter earnings of $0.91 per share on revenue of $4.11 billion, an increase of 5.1% year over year.
PetMed Express reports fiscal 4th quarter earnings of $0.32 per share on revenue of $64.57 million, a decrease of 4.1% year over year.
Walt Disney reports fiscal 2nd quarter earnings of $1.61 per share on revenue of $14.92 billion, an increase of 2.5% year over year.
Energy Transfer reports 1st quarter earnings of $0.33 per share on revenue of $13.12 billion, an increase of 10.4% year over year.
Next week: Earnings from: Take Two, Walmart, Cisco Systems, Deere, NVIDIA and Jack in the Box. Economic reports: U.S. Retail Sales for April, U.S. Industrial Production for April, Philly Fed Manufacturing Index for May and U.S. Housing Starts for April.
WTI crude oil: $61.49 per barrel. 10-year U.S. Treasury note: 2.44%. Gold: $1,283 per ounce.
Sources: CNBC, Real Money Pro, 361 Capital, Yardeni Research, The Calafia Beach Pundit, Seeking Alpha, First Trust Economics, The Wall Street Journal, Bloomberg, MSN Money, Estimize.com, and Morningstar.
At the time of publication Cascade Investment Group and /or its clients owned shares of PETS, CTSH, GWPH, LYFT, FTNT, BGS, EXPE, AAPL, DIS, AMZN, SBUX, ET, OXY, CVX, TSLA, GS, TTWO, WMT, CSCO and DE.
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.