Market Minutes for the week of October 29th:
“Normal fear protects us; abnormal fear paralyses us. Normal fear motivates us to improve our individual and collective welfare; abnormal fear constantly poisons and distorts our inner lives. Our problem is to not be rid of that fear but, rather to harness and master it. But we must remember that abnormal fears are emotionally ruinous and psychologically destructive. Sigmund Freud spoke of a person who was quite properly afraid of snakes in the heart of the African jungle and of another person who neurotically feared that snakes were under the carpet in his city apartment. Most of our acquired fears are snakes under the carpet.” – Martin Luther King
Here’s what I am thinking and hearing: *1.) October, one ugly month to be sure. The DJIA has its worst month (-5.1%) since January of 2016. The S&P 500 turns in its worst month (-6.9%) since February of 2011 (the 10% decline over 20 days was a 2 standard deviation event). The NASDAQ puts in its worst monthly performance (-9.2%) since November 2008. On paper, the U.S. markets lost more than $2.5 trillion in October. Have I mentioned that I don’t like what computers and trading algorithms have done to the integrity of the stock market. Have I mentioned that these machines have been at the top of my worry list? *2.) Hedge fund manager extraordinaire Doug Kass: “If you believe the market’s volatility is a function of earnings reports, trade wars or interest rate concerns – I believe you are mistaken. Rather, this is the cruel cocktail consisting of the proliferation of ETFs and other quant strategies. But, it’s not our ‘fathers’ market.’ These factors used to be an important determinant to stock prices – they still are, but markets are now too frequently punctuated by the influence of ETF flows and risk parity leveraging or deleveraging.” *3.) One of the all-time greatest investors Stan Druckenmiller: “These algos have taken all of the rhythm out of the market and have become extremely confusing to me.” *4.) Machines, or no machines, a hawkish Fed and a tariff-happy President determined to crush the Chinese at every end continue to produce major headwinds to global economic growth. *5.) Normal fear or abnormal fear? I think at this point, it is abnormal fear as I don’t believe the economy is slowing as fast as the stock market thinks it is. Economic fundamentals remain strong. Economist Scott Grannis: “Nine months ago (January 26th) the market was enthusiastic: the P/E ratio of the S&P 500 (using Bloomberg’s measure which counts only profits from ongoing operations) was just over 23[X]. Today, despite the fact that profits have risen almost 16%, that same P/E ratio has fallen over 20% and now stands at 18.5[X]. That’s quite remarkable, considering the market currently expects profits to grow by another 25% over the next 12 months, which would imply a forward P/E ratio of a mere 14.7[X], significantly below the market’s long-term average of just under 17[X]…” Abnormal fear Scott, and the irrational pricing of equities. *6.) The optimists: Wells Fargo Investment Institute’s Darrel Cronk: “We believe that this isn’t the end of the cycle or the bull market, and we favor deploying cash now – or even allocating incrementally over the coming days and weeks. Current conditions have the potential to create some of the best entry points into equity markets since the November 2016 elections.” Goldman Sach’s David Kostin: “The recent sell-off has priced too sharp of a near-term growth slowdown. We expect continued economic and earnings growth will support a rebound in the S&P 500…But not all assets are pointing to an imminent economic downturn. Railroads are one and corporate credit spreads also have not widened to an extent that would suggest a major slowdown.” JP Morgan’s Marco Kolanovic: “With investors positioned defensively, and leverage rapidly coming out of system, there is an elevated risk of market reversion into year-end. Investors should keep this risk in mind – namely that an October ‘rolling bear market’ turns into a ‘rolling squeeze higher’ into year-end.” *7.) Just as quantitative easing (QE) by the world’s central banks fed multiple expansion (higher prices) in the stock market over the past 9 years, could (QT) quantitative tightening now be contributing to multiple contraction (lower prices) going into 2019? I don’t know for sure but Peter Boockvar CIO at Bleakley Advisory Group observes that, “…on October 1st, 2018, the net liquidity injection from combined balance sheets of the Fed, ECB and BoJ went to zero vs the $100 billion per month in for Q4 2017.” Hmmm. *8.) From the front lines of the trade war: President Trump says he will go forward with the additional $257 billion worth of tariffs on Chinese goods if talks with President Xi fail to produce concessions at the G-20 summit. Economist Scott Grannis: “China’s stock market has truly plunged since January of this year, suffering a punishing loss of almost one-third of its value. Worse still, China’s stock market today is trading at close to the same level as it was over 20 years ago, whereas the U.S. market has risen 460% over the same period. Big problem for China. Free market-style reforms could do wonders for China’s wealth. What’s good for China would be very good for the rest of the world.” Yesterday Trump tweets: “Just had a long and very good conversation with President Xi Jinping of China. We talked about many subjects with a heavy emphasis on trade.” *9.) For 2019, workers will be able to contribute more to their retirement accounts. The 401(k), 403(b) and 457 limit is increased to $19,000 from $18,500. The catch-up contribution for those over 50 years of age remains unchanged at $6,000 for a total of $25,000. The overall limit for defined-contribution plans where the employer matches with profit sharing, goes to $56,000 from $55,000 for the employee. Contribution limits to traditional IRA’s go to $6,000 from $5,500. Deductibility for those contributions for taxpayers covered by an existing plan are still subject to phase-out schedules. Income phase-out levels for Roth contributions have also risen for 2019. *10.) An impressive 900 point rally off of the dismal Monday lows! That’s the way it should be with irrational prices that are backed by good fundamentals.
The Chicago Purchasing Manager’s Index (PMI) for October fell to 58.4 from 60.4 in September. While the reading is still well above expansion levels, it is the lowest reading since April. The lower level was attributed to slower order book growth and unfinished orders.
The Institute for Supply Management (ISM) announced that its index of national factory activity dropped 2.1% to 57.7 for October, down from 59.8 in September. Consumption softened, with production and employment continuing to expand, but at lower levels than in September.
The Commerce Department said that U.S. construction spending was essentially unchanged in September. It was the weakest showing since June as an increase in home construction was counterbalanced by weaker spending on government projects.
The Commerce Department also said that factory orders grew by 0.7% in September and increased by 8.4% year over year. There was a softening of spending on equipment but stronger demand for transportation related products.
Moody’s Analytics and ADP reported that private payrolls increased by 227,000 in October, fueled by strong growth in the services sector which created 189,000 new jobs.
The Labor Department said that the U.S. economy generated 250,000 new nonfarm payrolls in October against an estimate of 190,000. Wages increased by $0.05 per hour and $0.83 year over year representing a 3.1% annual gain.
The Labor Department also said that wages and salaries rose by a 3.1% annual rate in the 3rd quarter, the biggest jump in 10 years.
The Labor Department went on to say that U.S. productivity rose at an annual pace of 2.2% in the 3rd quarter, after a strong gain in the spring quarter, marking the best back-to-back performance in four years. A good sign for the economy.
The Commerce Department reported that consumer spending increased by 0.3% in September and personal incomes rose by 0.2%. The Personal Consumption Expenditure index (PCE) fell back by 0.1% in September. Where’s the inflation Mr. Powell?
The University of Michigan’s consumer sentiment index for October slipped to 98.6, down from 100.1 in September. The highest point since 2004 was hit in March of this year at 101.4. Sentiment has held up well all year so far.
The Conference Board said its index of consumer confidence increased to a reading of 137.9 in October, the highest level since September of 2000.
The S&P CoreLogic Case-Shiller 10-City Composite Home Price Index rose by 5.1% in August (down from 5.5% in July) and the 20-City Composite rose by 5.5% (down from 5.9% in July). Overall, home prices nationally, increased 5.8% in the month down from the steady 6% increase so far in 2018. Las Vegas, San Francisco and Seattle still continue to see double-digit price increases. In the same report, CoreLogic said that sales of existing homes in the San Francisco Bay area fell by 19% in September for the biggest year over year drop in 11 years. That said, the median price paid for a Bay Area home in September was $815,000, a 9.3% increase from a year ago.
Bloomberg reports that according to Zillow, “…the median rent for apartments, single-family homes and other residences across the U.S. was $1,440 in September, down 0.2% from a year earlier and the first year-over-year decline since June of 2012…Rents fell in more than half of the 35 largest U.S. markets in September, with biggest declines coming in Portland, Oregon, where they dropped 2.7 % and Seattle, with a 2.2% decrease.”
According to Jim Cramer, German Chancellor Angela Merkel’s decision to not seek a fifth term is “rocket fuel” for the European markets. Cramer says: “I know Merkel is loved by many but she has been a leader of the anti-growth coalition that is more worried about Weimar than about avoiding the next recession.”
Japan’s unemployment rate fell by one tenth of point to 2.3% coming very close to its lowest level of unemployment since 1993. The labor participation rate rose to the best level since 2001 and the jobs to applicant ratio rose to 1.64, a level not seen since 1974.
In the Eurozone the rate of growth for Q3 slowed to 1.7% year over year and the weakest pace of growth since Q4 of 2014. Germany’s economy grew at just 0.2% in the quarter. Italy’s economy grew at 0% (0.8% year over year) and the French economy grew at an annual rate of 1.5% year over year, the slowest rate since Q1 of 2017. The European Economic Confidence index for October fell to 109.8 from 110.9 in September, the lowest reading since May 2017.
China’s PMI for October was unchanged at 50.1. Japan’s PMI for October went to 52.9 from 52.5. The UK’s PMI slipped to 51.1 from 53.6 in September.
U.S. car sales for October continued to favor pickup trucks and SUVs. Ford’s SUV sales for October contributed to about 35% of Ford’s total sales volume for October. Fiat Chrysler saw overall sales rise by 16% in the month driven by higher demand for Jeep and Ram vehicles. Toyota said that U.S. sales rose by 1.4%, due to increased demand for its Highlander SUV and Tacoma trucks.
According to Adobe Analytics, 2018 U.S. online holiday spending is likely to grow by 14.8% this year to $124.1 billion compared with a forecast of 2.7% growth for brick-and-mortar locations.
General Electric has announced that it will slash its quarterly dividend from $0.12 per share to $0.01 per share beginning with the next dividend declaration. The change will allow the company to retain $3.9 billion of cash per year.
Amazon said that 3rd quarter revenue from Amazon Web Services (AWS) grew by 46% to $6.68 billion and accounted for $2.1 billion in profit (a 31% operating margin) and 56% of Amazon’s total operating earnings in the quarter.
Facebook said that there were 278 million active daily users in Europe in the 3rd quarter, down from 279 million last quarter. Daily active users in the U.S. and Canada came in at 185 million, flat for the third quarter in a row. Despite Europe’s decline, the company was able to grow its daily active user base to 1.5 billion in the quarter, up from 1.47 billion in Q2.
Apple said that it sold 46.89 million iPhones in the 3rd quarter with an average selling price of $793, a big jump from $618 per phone in the 3rd quarter of 2017. The increase is due, in large part, to Apple’s introduction of more expensive iPhones. Even though unit growth is slowing, the company is making more profit on each phone sold thanks to the pricey newer models.
The Financial Times is reporting that Apple is considering buying a stake in the bankrupt and largest U.S. radio group, iHeartMedia. According to the FT, talks are in the preliminary stages only.
Yeti Holdings, the maker of popular and durable outdoor coolers and mugs, priced its IPO last week at $18.00 per share. Its coolers don’t come cheap however, the Tundra 110 holds 74 cans of beer or soft drinks and has “rotomolded” construction that makes it “virtually indestructible” and retails for $499.99.
IBM has acquired Red Hat for $190 per share in cash for a total enterprise value of $34 billion. Red Hat will operate as a part of IBM’s Hybrid Cloud Team.
Chesapeake Energy has announced that it will acquire WildHorse Resource Development for $3.977 billion in a cash and stock deal. Chesapeake said that the acquisition will add 420,000 high margin net acres to the oil company’s growth platform.
Illumina said that it is buying Pacific Biosciences for $1.2 billion in cash which will bolster both companies pace of genomic discovery.
Chipotle Mexican Grill reports 3rd quarter earnings of $2.16 per share on revenue of $1.23 billion, an increase of 8.8% year over year.
Intel reports 3rd quarter earnings of $1.40 per share on revenue of $19.16 billion, an increase of 18.6% year over year.
Grubhub reports 3rd quarter earnings of $0.45 per share on revenue of $247 million, an increase of 51.6% year over year.
ServiceNow reports 3rd quarter earnings of $0.68 per share on revenue of $676.2 million, an increase of 37.6% year over year.
Align Technologies reports 3rd quarter earnings of $1.24 per share on revenue of $505.2 million, an increase of 31.2% year over year.
LyondellBasell reports 3rd quarter earnings of $2.85 per share on revenue of $10.16 billion, an increase of 19.2% year over year.
GE reports 3rd quarter earnings of $0.14 per share on revenue of $29.6 billion, a decrease of 3.5% year over year.
Cognizant Technology reports 3rd quarter earnings of $1.19 per share on revenue of $4.08 billion, an increase of 8.5% year over year.
Facebook reports 3rd quarter earnings of $1.76 per share on revenue of $13.73 billion, an increase of 32.9% year over year.
Dine Brands reports 3rd quarter earnings of $1.53 per share on revenue of $194.1 million, an increase of 11.0% year over year.
B&G Foods reports 3rd quarter earnings of $0.57 per share on revenue of $422.6 million, an increase of 4.1% year over year.
eBay reports 3rd quarter earnings of $0.56 per share on revenue of $2.65 billion, an increase of 6.0% year over year.
Yum Brands reports 3rd quarter earnings of $1.04 per share on revenue of $1.39 billion, a decrease of 3.5% year over year.
General Motors reports 3rd quarter earnings of $1.87 per share on revenue of $35.8 billion, an increase of 6.5% year over year.
Starbucks reports fiscal 4th quarter earnings of $0.62 per share on revenue of $6.3 billion, an increase of 10.5% year over year.
Spotify reports 3rd quarter earnings of €0.23 per share on revenue of €1.35 billion, an increase of 31.1% year over year.
Uniti Group reports 3rd quarter earnings of $0.62 per share on revenue of $252.6 million, an increase of 3.0% year over year.
Apple reports fiscal 4th quarter earnings of $2.91 per share on revenue of $62.9 billion, an increase of 19.6% year over year.
Next week: Earnings reports from: Zillow, Qualcom, Square, Trip Advisor, Disney, Activision Blizzard and Yelp. Economic reports: U.S. ISM Non-Manufacturing Index for October and U.S. Producer Price Index (PPI) for October.
WTI crude oil: $65.10 per barrel. 10-year U.S. Treasury note: 3.14%. Gold: $1,234 per ounce.
Sources: Real Money Pro, CNBC, Estimize.com, Bloomberg, 361 Capital, First Trust Economics, Seeking Alpha, MarketWatch, The Wall Street Journal, The Calafia Beach Pundit and Thornburg Investment Management.
My portfolio at the end of September: My portfolio at the end of October:
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.