Market Minutes for the week of November 12th:
“I’ve learned…That the best classroom in the world is at the feet of an elderly person.” – Andy Rooney
Here’s what I’m hearing and thinking: *1.) We seem to be caught in an endless “sell program.” Why, when economic fundamentals are solid? Growth is not slowing as fast as oil and the stock market thinks it is. I have a client who is currently driving his motor home from Indianapolis to Palm Desert. He called me Wednesday afternoon outside of Flagstaff, Arizona to report that there seems to be 5 tractor-trailer rigs on the road for every one car. He declared the economy sound and I agree with him. We need to be patient and ready to hit the fat pitch of mispriced shares created by the sell programs. *2.) I think the rapid decline in oil prices has the market spooked about the sustainability of global growth. When it comes to interest rates, the dollar or oil prices, it’s not the actual level of rates or prices, it’s more about the velocity (or rate) of the change of prices. The faster the change, the spookier it gets. *3.) Do we think investing in hedge funds are a good idea? I’ll let you decide. According to data from Hedge Fund Research, the industry is on track to post its worst performance since the year Lehman Brothers went bankrupt (2008). Through October, the HFRI is -1.7% for the year versus +5% for the S&P 500. In 2017 the HFRI index gained 8% versus a gain of 21.8% for the S&P 500. *4.) From the front lines of the trade war: Danish shipping giant Maersk said that the effect of trade tensions could reduce the global container trade between 0.5% and 2% in 2019 and 2020. The Baltic Freight index, a great barometer of Chinese commerce, fell by 5.42% in the last week and is down 17% year to date. Bloomberg reports that the White House will hold off on auto tariffs while it weighs a report on the national security implications of imported vehicles. *5.) In an interview with Dallas Fed President Robert Kaplan, Fed Chairman Jay Powell seemed for the first time, to begin walking back his early October comments about over-tightening monetary policy (his comments touched off the October rout). He also said that, “now is a good time to take stock of how we formulate, conduct, and communicate monetary policy.” What that means, I don’t really know, but maybe it’s time to review and eliminate some economic indicators that are no longer useful in formulating policy.
The Consumer Price Index (CPI) rose by 0.3% in October for an annual rate of increase of 2.5% and the CPI is still below the highest print of 2.9% set three months ago. The core rate, a figure closely watched by the Fed, actually fell to 2.1%.
The Commerce Department said that U.S. retail sales rebounded sharply in last month as purchases of motor vehicles and building materials rose. The 0.8% increase was likely driven by rebuilding efforts from Hurricane Florence.
The National Federation of Independent Business (NFIB) reported that small-business optimism dropped by 0.5% to a seasonally adjusted 107.4 in October, a four-month low. “The biggest declines of the 10 components that make up the index came from questions on expansion and earnings trends…”, according to MarketWatch.
The Fed has announced that it wants to further loosen regulations for community banks that will allow them relief from the post-financial crisis capital requirements.
The Fed said that industrial production rose by 0.1% in October. Compared to a year ago industrial production rose by 4.1%. The increase came from manufacturing, mining and utility output.
Fed Vice Chairman Richard Clarida stated in an interview with CNBC that he felt that the Fed’s benchmark lending rate is getting closer to neutral and should be more “data dependent” before considering more rate hikes.
Democratic Senator Bernie Sanders of Vermont introduced a bill on Thursday that would prevent large companies from buying back their stock unless their employees are paid at least $15 per hour. The bill is named “The Stop WALMART Act” and is unlikely to make its way through the Republican-controlled Senate.
According to the Fed, in 2018, Americans over the age of 50 owed more than $260 billion in student loan debt, up from $36 billion fourteen years ago. Over the age of 60, there are 2.8 million people with outstanding student debt.
Baker Hughes reports that the total active drilling rig count jumped by 14 rigs to 1,081 last week. Oil rigs rose by 12 to 886, the biggest increase since May. Natural gas rigs increased by 2.
According to Dow Jones Market Data, the 12-day decline for crude oil prices (from October 30th through November 13th) has been the longest losing streak for oil since WTI crude started trading in 1983.
Why have WTI oil prices gone from $77.00 per barrel at the start of October to a current $55.69 per barrel? First: The U.S. is pumping oil at a rate of 11 million barrels per day. Russia is producing at a similar daily rate and Saudi Arabia is pumping at 10.6 million barrels per day. Second: Demand appears to be weakening from China (due to a slowing economy) and demand from India, Turkey and Indonesia has fallen off because of a stronger dollar (crude oil trades in dollars). Third: At the last minute, the Trump administration softened its stance with regard to Iran by allowing 8 countries to continue to buy oil from Iran therefore the anticipated drop in exports from Iran didn’t occur, so even more supply. Fourth: One of the more profitable trades for hedge funds over the last couple of years has been – long crude oil – short natural gas. Well…natural gas has spiked higher, up 11% on Wednesday, up 53% year to date and that kind of move has forced traders to sell oil to cover their losses in natural gas, which contributed to the velocity of the price decline for oil.
The dramatic decline in oil prices has the Saudi’s attention. The Kingdom said that it will slash its exports unilaterally next month, not waiting for the rest of OPEC to come up with an agreement to do so.
Germany’s economy slowed in the 3rd quarter as car makers struggled to adjust to a new emissions testing protocol and uncertainty over trade issues undermined exports. German GDP shrank at a quarterly clip of -0.2% and annualized at -0.8%. Last year, Germany’s economy grew at a 2.2% rate and is forecast grow at 1.6% in 2018.
Here is one statistic that reveals the absurdity of the San Francisco housing market according to Trulia. A whopping 81% of the homes in the metro San Fran area cost $1 million or more compared with a U.S. average of just 4%. That is an increase of 13.7% since October 2017. In San Jose 70% of the housing stock is valued at $1 million or more, and in Oakland, 31% of the homes are worth a $1 million or more.
According to U.S. News and World Report, the #1 cruise line for your money is Celebrity Cruises. While Celebrity isn’t the overall cheapest, it offers the best bang for the buck because it “has exceptional cuisine, great service and amenities, [and] a 2-to-1 crew to passenger ratio” among other perks. Rounding out the top three according U.S. News are Royal Caribbean International and Norwegian Cruise Lines.
California utility PG&E said that if its equipment is responsible for the “Camp Fire” which incinerated the town of Paradise, the cost of the damage would exceed its insurance coverage and harm its financial health. The shares of PG&E have lost nearly 50% of their value this week.
Morale at Facebook is getting a thumbs-down. According to Seeking Alpha, “An internal ‘pulse’ survey taken by nearly 29,000 employees shows that just over half of them were optimistic about the company’s future — a drop of 32% from a year earlier.” 53% of the respondents said that Facebook is making the world a better place compared to 72% last year.
Amazon has decided on two locations for its second headquarters, Long Island City, New York and National Landing in Arlington, Virginia. The company also announced a new Operations Center of Excellence in Nashville, Tennessee. Amazon will get up to $2.2 billion in performance-based incentives for locating to the three cities.
Alibaba (the Chinese Amazon) announced that it racked up a record $30.8 billion on Singles Day with customers snapping up bargains despite China’s slowing economy.
Meredith Corp. said that it has agreed to sell Fortune magazine to Fortune Media Group Ltd. For $150 million.
Athenahealth is being acquired by Veritas Capital and Evergreen Coast Capital for $5.7 billion in cash, a 12% premium over its current market value.
Tech-focused private equity firm Vista Equity Partners has entered a deal to take software company Apptio private for $1.94 billion. “Apptio provides tools to help corporate tech buyers keep track of the software and services they use to better manage their costs”, reports MarketWatch.
SAP SE has agreed to purchase Qualtrics International for $8 billion in cash. Qualtrics, a Utah-based software firm, had filed for an IPO in October seeking to raise $200 million in cash.
According to Seeking Alpha, “Uniti Group has acquired Information Transport Services for $54 million in cash. ITS provides managed IT and telecommunications services to enterprises and educational organizations.”
“Procter & Gamble is simplifying its business, organizing the majority of its operations around 6 ‘small business units’ with their own leaders…Each business will have a unit ‘CEO’ responsible for running all major decisions…”, reports CNBC.
Microsoft said that it has signed a 5-year deal with Gap to use Microsoft Azure as the apparel company’s primary cloud provider. Earlier in the year Microsoft signed another big cloud deal with Walmart and Google has picked up business from retailers like Best Buy and Home Depot. Amazon’s cloud has retail customers including Under Armour and Brooks Brothers.
Warren Buffett’s Berkshire Hathaway has revealed that it has purchased more than 35 million shares of J.P. Morgan Chase according to the firm’s latest filing with the SEC. The “Oracle of Omaha” has taken a substantial position in the U.S. banking system with previously large purchases of Bank of America, Wells Fargo, Goldman Sachs, Bank of New York Mellon and U.S. Bancorp. He added to his stake in Apple by purchasing another 522,902 shares and sold completely out of Walmart in the 3rd quarter.
Levi Strauss is planning an IPO in the first quarter of 2019 that could value the company at up to $5 billion. The jeans maker went public once before in 1971 before descendants of Levi Strauss took the company private in 1984.
The Department of Defense said that Lockheed Martin has been awarded a $22.7 billion Navy contract to build and deliver 255 F-35 fighter jets. The company also won a $382 million contract to deliver 8 MH-60R helicopters to the Navy.
Uber Technologies reports a widening 3rd quarter loss due to its growth in its food delivery service Uber Eats. Third quarter losses came in at $1.07 billion while revenue jumped 38% to $2.95 billion.
Home Depot reports 3rd quarter earnings of $2.51 per share on revenue of $26.3 billion, an increase of 5.1% year over year.
Macy’s reports 3rd quarter earnings of $0.27 per share on revenue of $5.4 billion, an increase of 2.3% year over year.
Canopy Growth reports fiscal 2nd quarter earnings of -C$1.52 per share on revenue of C$23.3 million, an increase of 32.8% year over year.
Cisco Systems reports fiscal 2nd quarter earnings of $0.75 per share on revenue of $13.1 billion, an increase of 7.9% year over year.
Walmart reports 3rd quarter earnings of $1.08 per share on revenue of $124.9 billion, an increase of 1.4% year over year.
Nvidia reports 3rd quarter earnings of $1.84 per share on revenue of $3.18 billion, an increase of 20.5% year over year.
Next week: Earnings from: Intuit, Best Buy, Target and Deere. Economic reports: Durable Goods Orders for October, Existing Single-Family Home Sales for October, Housing Starts for October and NAHB Sentiment Index for November.
WTI crude oil: $57.70 per barrel. 10-year U.S. Treasury note: 3.08%. Gold: $1,212 per ounce.
Sources: CNBC, Real Money Pro, Estimize.com, Morningstar Analytics, 361 Capital, First Trust Economics, Seeking Alpha, MarketWatch, Bloomberg, The Wall Street Journal, The Calafia Beach Pundit.
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.
At the time of publishing Cascade Investment Group and/or its clients are invested in CSCO, BRK, JPM, HD, CGC, MSFT, AMZN, PG, MER, LMT, WMT, UNIT, NVDA and SAP.
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.
Finally, here is one from a University of Alabama professor who has been pushed to the limit by his students