Market Minutes for the week of May 7th:
“You do not want to give Jeff Bezos a seven-year head start.” – Warren Buffett
Here’s what I am hearing and thinking: 1.) S&P Dow Jones Indices said that total dividend distributions for U.S. common stocks increased by a net $18.8 billion in the 1st quarter of 2018, up from the $10.9 billion increase in Q1 of 2017. During the 12-month period that ended 3/29/2018, net dividend increases totaled $45.1 billion, up from the $33.0 billion increase for the same period last year. 2.) The Investment Company Institute said that in the February panic, outflows from U.S. mutual funds and exchange traded funds (ETFs) totaled $41.3 billion. By a dollar amount, that’s the most since a $42.8 billion outflow in January of 2008. In the 1st quarter of this year outflows have totaled $53 billion. All of this in the face of historically strong corporate profits and rising dividends? That simply doesn’t make any sense. 3.) Back in February, a 3% yield on the 10-year Treasury was the triggering event for a wicked decline. Today, the 10-year has touched 3% again with oil prices simultaneously trading above $70 per barrel, and the markets have put together an impressive 3.5% rally over 5 days. Someone explain that one to me please. 4.) A 3% yield is not a problem and should be embraced in a growing economy and that‘s what we have now and had back in February. Jim Cramer is accurate when he says: “…The problem is that so many portfolio managers only know low rates because of how young they are that they simply don’t get that a 3% 10-year Treasury’s pretty darned low. I am not saying it’s a side show. There was too much money triggered [(programmed)] to sell if rates went to 3%, that we had to endure the torture.” 5.) Goldman Sachs says that the “strategic case for owning commodities has rarely been stronger” than it is now. The best performing asset class in 2018 has been commodities, setting multi-year highs and having returned 7% year to date, a full 8% better than equities. Why? A late-cycle period of strong global growth and demand is depleting supply chains of commodities. 6.) Here are a few lessons of investing that Dr. Ed Yardeni shares with readers in his new book “’Predicting the Markets:’ One – Be an investor, not a preacher. Investing isn’t a moral pursuit. It’s not about right or wrong, good or evil…Two – Be an empiricist, not a dogmatist. Get to know the data before you come up with your theory…Three – Be a policy wonk, not a [policy] critic. Don’t second-guess policymakers and expect them to change course just because you are convinced they are on the wrong one…Four – Be a lender, not a borrower…Let the dividend-yielding companies work their magic of compounding your return…Five – Be revolutionary, not evolutionary…The revolutionary impact of technological innovation on our lives seems to be moving at a faster and faster pace. Six – Be an optimist, not a pessimist. History shows that optimistic investment strategies tend to work better over time than pessimistic ones. Doomsdays occur from time to time, but they don’t last as long as the good times.” 7.) From Bloomberg: “The world’s biggest oilseed processor just confirmed one of the soybean market’s biggest fears – China has essentially stopped buying U.S. supplies amid the brewing trade war. ‘Whatever they’re buying is non-U.S. They’re buying beans in Canada, in Brazil, mostly Brazil, but very deliberately not buying anything from the U.S.'”, said Bunge Ltd. CEO Soren Schroder. 8.) The math is compellingly bad for Argentina; since mid-2009, the country’s monetary base has expanded 10-fold, and the peso has lost 83% of its value vs the dollar (see further comments below). 9.) If Israeli and the Iranian forces in Syria decide to turn the heat up further, what happens to oil prices? If they spike higher on expanded fighting, that could be a bad bit of news for the global economy. 10.) From the New York Times: “Her name was Sylvia Bloom and even her closest friends and relatives had no idea she had amassed a fortune over the decades. [As a legal secretary,] she did this by shrewdly observing the investments made by the lawyers she served. [According to her niece Jane Lockshin,] ‘She was a secretary in an era where they ran their boss’s lives, including their personal investments. So when the boss would buy a stock, she would make the purchase for him, and then buy the same stock for herself, but in a smaller amount because she was on a secretary’s salary.’” Over the years, Ms. Bloom would never talk about this and in the end, she had carefully cultivated more than $9 million among three brokerage houses and 11 banks.
The Fed says that capacity utilization hit 78% in April, just below 80%, “…a point at which economists believe that companies are running so hot with their existing capital equipment that they finally need to invest more”, reports MarketWatch’s Andrea Riquier. Aggregate hours worked surged by 0.7% in April and pay increased by 3% year over year for manufacturing production and non-supervisory workers.
The Bureau of Economic Affairs within the Commerce Department reports that business investment rose by 6% in the last year. Credit, no doubt, has to go to tax reform and surging business confidence.
The National Federation of Independent Business (NFIB) small business optimism index for April was essentially unchanged at 104.8. The fact that hiring is now limited due to the difficulty of finding workers remains noteworthy. In the survey for April, “Positions Not Able to Fill” remained at the highest level since November of 2000.
According to the Labor Department, the number of job openings for March hit an all-time record of 6.55 million in a survey that dates back to the year 2000. The number is up from 6.08 million in February and over 400,000 higher than forecast.
More from the Labor Department: U.S. producer prices (PPI) rose by 0.1% in April and inflation was contained by a moderation in the costs of both goods and services.
The Labor Department also reported that U.S. consumer prices (CPI) rose by 0.2% in April. Rising costs for gas and rentals were counterbalanced by a moderation in health-care prices.
Redbook said that its Redbook Chain Store Sales survey found that sales were 4.2% higher year to date. April sales were up 3.6% year over year and up 1.1% month over month.
The Census Bureau said that wholesale inventories rose by 0.3% in March, following significant gains in both January and February. March inventories totaled $627 billion and the ratio of inventories to sales was 1.26, meaning that it would take wholesalers 1.26 months to clear their shelves.
Baker Hughes said that the U.S. drilling rig count jumped by 11 rigs in the last week for a total of 1,032. Oil rigs were up by 9 to 834 and gas rigs rose by 1 to 196. Two other rigs were categorized as miscellaneous.
China’s April imports jumped 21.5% and its exports grew by 12.9%. China’s trade balance (surplus) was a positive $28.78 billion. The country’s trade surplus with the U.S. grew to $22.19 billion in April – versus a $15.43 billion surplus in March. For the first 4 months of this year, China’s trade surplus with the U.S. was $80.4 billion.
Don’t Cry For Me Argentina? Argentina is finding it difficult to transition away from an economy of “handouts” and serial money printing. Inflation is running at 25% to 30% annually as too much money is chasing too few domestically produced goods. “Recently, and in the short span of 4 trading days, Argentina’s peso suffered a 10% drop, leaving it down 30% vis a vis the dollar over the past year. The Central Bank spent some $5.5 billion of its reserves trying to stem the latest decline, which was arrested only after the central bank hiked short-term [interest] rates to a punishing 40% and the government promised to cut spending”, writes Scott Grannis, the Calafia Beach Pundit.
According to GasBuddy.com, the national average for a gallon of gas reached $2.82 last week, the highest level since summer of 2015. Californians are paying the most at $3.61 per gallon while Oklahomans are paying the least at $2.50 per gallon.
A new report from Beacon Economics and Next 10 says that between 2006 and 2016 over one million more people moved out of California than moved in. The reason: The high cost of housing that hits the lower-income group the hardest. According to the research, the higher prices are a result of a lack of new construction. From 2008 to 2017, an average of 24.7 new housing permits were filed for every 100 new California residents and well below the national average of 43.1 permits per 100 people. The researchers said that if the current trend continues, the state will be 3 million homes short by 2026. Californians spend an average of 21.9% of their incomes on housing costs, the 49th worst in the nation, while renters spend 32.8%, the 48th worst.
According to the California Department of Finance, the state’s GDP grew by $127 billion from 2016 to 2017, surpassing $2.7 trillion. The state, home to 40 million people, is the now the 5th largest economy in the world, just passing the U.K, whose economy shrunk slightly over that same time frame.
The California Energy Commission said new energy efficiency standards will require nearly all new homes built in California after Jan. 1, 2020, to have solar energy panels installed.
A recent Gallup survey found that a majority of U.S. adults (64%) continue to believe that housing prices in their local areas will continue to increase over the next 12 months. That’s up 9% since 2016. It is the highest percentage since before the housing market crash and Great Recession of 2008-2009.
Two buyers have reached a deal to aquire a majority share of the historic Plaza Hotel for $600 million. The investors are Shahal Khari, founder of the Dubai-based family office White City Ventures, and Kamran Hakim of the Hakim Organization, a major New York City landlord. Interestingly enough, the 1907 landmark was once owned by Donald J. Trump who lost it in a bankruptcy in the early 2000s.
The U.S. Department of Transportation said that travelers paid U.S. commercial air carriers a record $4.6 billion for checked baggage in 2017. That’s an astounding figure but it is less-than half the amount paid by travelers in 2015-2016.
Bloomberg said that airline fares fell by 2.7% in April following two straight months of 0.6% gains. The April drop was the biggest monthly decline in four years and the average fare was 6.9% lower than the level a year ago at this time.
United Airlines has quietly announced that it is “streamlining” its food service on all flights under 4 hours, which basically includes almost every flight United operates domestically. The reduced food offerings in the first-class and business-class cabins in many instances are not insignificant. Hot breakfasts on some routes are being replaced with fruit and muffins, and more substantial lunches are being swapped out for wraps and chocolate slabs. Passengers dragged off flights, suffocated and lost dogs and now even crummier food! What’s next in the “Friendly Skies?”
The year to date take at U.S. box offices was up to $4.12 billion through May 6th. That tally is 5.5% higher than the same date a year ago and is up 10.7% from 2016.
Walt Disney Studios estimates that “Avengers: Infinity Wars” earned $1.16 billion at the box office through May 6th. The film did that in just 11 days from release, marking the fastest sprint to the $1 billion milestone in history. Previously, “Star Wars: The Force Awakens” did it in 12 days. So far this year, Disney films has grossed over $3 billion in box office receipts.
In Disney’s fiscal 2nd quarter earnings release, the company said free cash flow increased by a whopping 48%. Revenue by segment: Media Networks – $6.13 billion (+3%). Parks and Resorts – $4.88 billion (+13%). Studio Entertainment – $2.45 billion (+21%). Consumer Products and Interactive Media – $1.08 billion (+2%).
Walmart has said that it will restrict initial acute opioid prescriptions to no more than a 7-day supply as part of the retailer’s effort to help fight the opioid epidemic. In January, the company said that it would begin filling opioid prescriptions with a packet of powder to help dispose of leftover medication.
Sears reports that its Sears Auto Centers will now be installing car tires ordered on Amazon. Any services booked through Amazon will have include a “standard installation fee” paid to Sears. Earlier this year Sears said it was beginning to sell its Kenmore and DieHard brands on Amazon.
Google announces that its Assistant can now control more than 5,000 smart home devices, up from 1,500 devices in January. The company said it is collaborating with “every major device brand” in the U.S. to cover a wide range of products.
Google also announced that soon its Assistant will be capable of placing calls for its owner with a voice so authentic that the person on the other end will think its real. In a pre-recorded demo at Google’s headquarters, the voice was so convincing that it was able to make a reservation at a restaurant.
More from Google: It has announced plans to acquire Israel-based cloud migration company Velostrata for an undisclosed sum.
Gannett has entered into a deal to acquire digital marketing firm WordStream for $130 million in cash. By adding WordStream to its ReachLocal and SweetIQ offerings, Gannett plans to provide a full range of digital marketing services.
Job-hunting site Glassdoor has been sold to Japanese human resources company Recruit Holdings for $1.2 billion, in what has been one of the largest technology acquisitions of 2018.
Amazon said in its quarterly report that AWS (Amazon Web Services) has at least $12.4 billion in backlog revenue. AWS said that those contracts have a weighted average remaining life of 3.2 years, meaning that they will turn into revenue over that time period.
Vodafone will purchase operations in four European countries – Germany, Czech Republic, Hungary and Romania – from Liberty Global for €19 billion ($23 billion). This represents the latest in a global trend toward “quad-play” packages: cable, internet, wireless and phone service on one bill.
Boeing said that it had deals in place for about $20 billion in jet sales to Iran, but Treasury Secretary Steve Mnuchin has revoked the license after Trump announced the U.S. exit from the Iran nuclear deal.
Ford has said that it will temporarily halt all production of its F-150 pickup truck due to a fire at one of its major suppliers Meridian Technologies. The halt will idle 4,000 workers at the Dearborn, Michigan truck plant and 3,600 workers at the Kansas City operation.
The Wall Street Journal reports that Wells Fargo has admitted to collecting fee rebates that should have been given back to the Chattanooga, Tennessee Fire and Police Pension Fund. The bank said the problem was the result of a system set-up error and the fees were in fact returned. The CTFPPF subsequently fired Wells Fargo as the trustee.
Activision Blizzard reports 1st quarter earnings of $0.65 per share on revenue of $1.38 billion, an increase of 15.0% year over year.
Fortinet reports 1stquarter earnings of $0.33 per share on revenue of $399 million, an increase of 17.2% year over year.
Expedia reports 1st quarter earnings of -$0.46 per share on revenue of $2.51 billion, an increase of 14.6% year over year.
Priceline (Booking Holdings) reports 1st quarter earnings of $12.00 per share on revenue of $2.93 billion, an increase of 21.1% year over year.
Grubhub reports 1st quarter earnings of $0.52 per share on revenue of $232.6 million, an increase of 49.0% year over year.
Las Vegas Sands reports 1st quarter earnings of $1.04 per share on revenue of $3.58 billion, an increase of 16.6% year over year.
UPS reports 1st quarter earnings of $1.55 per share on revenue of $17.11 billion, an increase of 10.3% year over year.
TE Connectivity reports fiscal 2nd quarter earnings of $1.42 per share on revenue of $3.75 billion, an increase of 16.1% year over year.
PetMed Express reports fiscal 4th quarter earnings of $0.50 per share on revenue of $67.32 million, an increase of 6.8% year over year.
Disney reports fiscal 2nd quarter earnings of $1.84 per share on revenue of $14.6 billion, an increase of 9.4% year over year.
Uniti Group reports 1st quarter earnings of $0.62 per share on revenue of $246.9 million, an increase of 16.8% year over year.
Centennial Resource reports 1st quarter earnings of $0.25 per share on revenue of $215.9 million, an increase of 253.4% year over year.
Energy Transfer Partners reports1st quarter earnings of $0.24 per share on revenue of $8.3 billion, an increase of 20.5% year over year.
Next week: Earnings from: Agilent Technologies, Cisco Systems, Deere, Take-Two Interactive, Home Depot, Dick’s Sporting Goods, Macy’s, Walmart, J.C. Penny and Nordstrom. Economic reports: U.S. Retail Sales for April, U.S. Industrial Production for April, U.S. Housing Starts for April and Philly FED Manufacturing Index for May.
WTI crude oil: $71.35 per barrel. U.S. Treasury note: 2.97%. Gold: $1,319 per ounce.
Sources: Real Money Pro, CNBC, MarketWatch, Seeking Alpha, The Wall Street Journal, 361 Capital, Estimize.com, Yardeni Research, The Calafia Beach Pundit, Reuters, Bloomberg, The New York Times and First Trust Economics.
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.