Market Minutes for the week of September 10th:
“Everywhere is walking distance if you have the time.” – Steven Wright
Here is what I am thinking and hearing: 1.) According to the Federal Reserve, companies during the 1st quarter of 2018 brought home $300 billion of the $1 trillion in cash they had been holding overseas. A good chunk of that cash went to share repurchases. 2.) Brian Wesbury on tax cuts and wage growth: “Nonetheless, many still argue that the 2018 corporate tax cut didn’t help workers. Nothing could be further from the truth. In December 2017, figures on average weekly earnings as well as private payrolls suggested private-sector workers were earning wages at a $6.0 trillion annual rate. In August, those total wages had increased to a $6.2 trillion annual rate – a boost of $200 billion per year. By contrast, corporate profits – which have also grown rapidly – were up by just $100 billion annualized from the end of 2017 through the second quarter. Workers have taken home two times more than companies!…The anti-tax cutters argue that this increase in wages has been concentrated at the top of the pay-scale. The rich are getting richer and the tax cuts haven’t helped lower to middle income workers. Guess what? This isn’t true either. Usual earnings for the median full-time wage & salary worker grew 2.0% in the year ending in the second quarter this year. But these earnings grew 3.9% for workers at the bottom 10th percentile, while workers at the top 10th percentile had their usual earnings grow only 1.2%. Usual earnings for people who never finished high school are up 7.6% in the past year, faster growth than for any other educational category.” 3.) Tom Graff, fixed income strategist at Brown Advisory Group on faster wage growth and what the Fed will do about it: “Regardless, the Fed won’t step up the pace of rate hikes solely because wages seem to be growing a bit faster. Particularly since pre-crisis, wage growth was routinely higher than this anyway. What it will do is make it harder for them to pause anytime soon. Their working theory of the economy is this: we’re at full employment but there isn’t obvious inflation pressure. Hence we’ll hike slowly to make sure we don’t let inflation pressure build but not so fast that we choke off the expansion. Seeing wages grow a bit faster is merely evidence that their theory is correct, therefore they are more confident in their plan. And it should remove any lingering doubt that continued rate hikes are justified.” 4.) More from the front lines of the trade war: Goldman Sachs says that worst case in a full-blown trade war GDP would fall by 0.3% and the PCE (personal consumption expenditures index) would rise by 0.3%. Few in Beijing anticipate much improvement in negotiations ahead of the U.S. midterm elections. Yu Yongding, a member of the Chinese Economists 50 Forum, a think tank that advises Chinese policy makers: “Mr. Trump is too busy right now with domestic politics…China has the patience and can afford to let the bullets fly for a while.” Honeywell CEO Darius Adamczyk said last week that he’s not really worried about his gigantic business in China because the products made in China, stay in China, so the company shouldn’t be hit by tariffs from either side. Bloomberg News is reporting that “trade associations representing farmers, retailers and manufacturers are joining forces in a new multi-million dollar campaign to oppose President Trump’s tariffs, in the latest attempt by U.S. business to stop an escalating trade war…a new coalition called Americans for Free Trade is joining Farmers for Free Trade to change the direction in Washington.” 5.) I am getting lots of questions about the midterm elections and what does the outcome mean for the markets and economy. The Wells Fargo Investment Institute reports that the S&P 500 has an average pullback of almost 19% in midterm-election years, based on data going back to 1962 (or 14 midterm cycles). However, the S&P 500 climbs more than 31% on average in the year following the midterm elections. “It does not matter which party is in charge before or after the midterm election. The removal of uncertainty and of constant media attention allows markets to resume focusing on fundamentals,” says Craig Holke, an investment strategist at the institute. 6.) According to the Wall Street Journal, “The president’s party has lost House seats in 18 of the last 20 midterm elections, with an average loss of 29 seats. The last time a president’s approval rating was as low as Mr. Trump’s 40%, Republicans lost 30 seats as George W. Bush’s popularity sagged during the Iraq war in 2006. Democrats must flip at least 23 seats to take a House majority. Privately, officials from both parties have estimated a range of Democratic gains from 15 to 50 seats.” 7.) Warren Buffett on financial bubbles: “Well there will be one sometime. People start being interested in something because it’s going up, not because they understand it or anything else. But the guy next door, who they know is dumber than they are, is getting rich and they aren’t. And their spouse is saying can’t you figure it out too? It is so contagious. So that’s a permanent part of the system.” 8.) We are getting a load of questions about investing in the marijuana industry. All I can say is that the road to riches is filled with potholes (pun intended). While still illegal at the Federal level in the U.S., complete legalization in Canada occurs on October 17th and that has given birth to a number of marijuana companies headquartered in Canada, the biggest of which is Canopy Growth with a worldwide footprint. Investors in these companies need to be aware of two things: one – inflated valuations caused by fast, speculative and short-term oriented money. And two – headline risk. On Thursday Politico reported that the U.S. Customs and Border Protection Agency said that Canadians who smoke marijuana, work in the industry or invest in marijuana industry related companies could be permanently banned from the U.S. Geez, harsh dude! As you can imagine, pot stocks sold off by 10% to 15% on the news. 9.) Why do the technology stocks continue to attract capital? Jim Cramer: “Revolutionary innovation can trump business cycles, presidential tweets, employment reports, you name it. You revolutionize something, you change peoples’ behavior and you create demand where it didn’t exist. But tech? The changes can move the needle. They can alter behavior. They can be new and improved to the point that what you have is now outmoded and just not good enough.” 10.) Maybe it’s just me, but the industrials and tariff-affected companies are trading like China is going to blink first.
The Federal Reserve announced that total consumer credit rose by $16.6 billion in July to a seasonally adjusted $3.91 trillion for an annual growth rate of 5.1%. Borrowing on credit cards rose by 1.5% while nonrevolving credit, typically auto and student loans, rose by 6.4%, the largest increase in 8 months.
The National Federation of Independent Business (NFIB) small business index surged to a record level in August as the tax cuts and deregulation efforts of the administration and Congress led to more hiring and investment. The index jumped to 108.8 last month, the highest level ever recorded in the survey’s 45-year history. The previous record of 108 was back in 1983 during Ronald Reagan’s presidency.
The Labor Department said that producer prices (PPI) for August fell for the first time since February 2017 as the PPI dropped by 0.1%. The core rate of wholesale inflation (ex. food, trade and energy), actually rose by 0.1%.
The Labor Department also said that consumer prices (CPI) for August rose by 0.2% and 0.1% at the core level putting the year over year gain at 2.7%. Medical and apparel costs declined which contributed to a muted inflation rate in the month.
The Commerce Department reported that retail sales for August rose by the smallest amount in six months. Retail sales rose by 0.1% in the month and only an increase in gasoline sales prevented an outright decline. Sales at auto dealers and department stores showed the biggest decline.
The University of Michigan Consumer Sentiment Index jumped to 100.8 from 96.2 in August. The 100.8 is the strongest reading since 2004.
The Commerce Department announced that U.S. business inventories rose by 0.6% in August boosted by increased motor vehicle production. Inventories are a key component in the GDP calculation and the August increase bodes well for a good 3rd quarter GDP number.
The Federal Reserve said that U.S. industrial production rose by 0.2% in August, powered by a 4.0% increase in automobile production.
The U.S. Census Bureau said that U.S. median household income rose by 1.8% in 2017 to a new high of $61,372 from $60,309 in 2016. The number of people who did not have health insurance in 2017, 28.5 million or 8.8%, did not change significantly from 2016.
The Fed’s August Beige Book found that three of the Fed’s 12 districts – St. Louis, Kansas City and Philadelphia – reported weaker growth in August. “While the overall economy expanded at a ‘moderate pace,’ trade concerns and a lack of workers delayed projects. There was also ‘some signs of a deceleration’ in prices of final goods and services”, according to MarketWatch.
More from MarketWatch, “House Republicans have introduced legislation to lock in tax cuts to individual tax rates beyond 2025… Besides permanently lowering individual rates, the measure would also lock in the new standard deduction, which increased to $12,000 per individual and $24,000 for a married couple, and the special deduction for owners of pass-through businesses, in which business revenues flow through to the tax returns of the individual owners.”
Goldman Sachs chief economist Jan Hatzius said that after last Friday’s nonfarm payrolls report and recent ISM statistics the underlying growth rate for the U.S. economy is at 3.5%, “twice our estimate of the economy’s potential and consistent with a rapid pace of labor market tightening…Although it is certainly possible that trade policy and emerging market spillbacks will result in a shallower path, on net we think the risks are tilted to the upside of our baseline forecast given the impressive growth momentum, the upward trends in wage and price inflation, and the very limited impact of the hikes on financial conditions so far.”
Ray Dalio, CEO of Bridgewater Capital says the bull market is in the seventh to eighth inning. Jeff Saut, Senior Investment Strategist at Raymond James sees it differently and says that historically, secular bull trends tend to last 16 to 18 years, so the current run could go on for 7 to 8 more years.
Citigroup has a less buoyant forecast for the global economy. Citigroup economist Mark Schofield: “We would characterize global growth as riding on the back of fading tailwinds, while facing increasingly strong headwinds. This raises the risk of an inflexion point some time in 2019 or early 2020…We fear that the investment backdrop is becoming more likely to support extended down-trades.”
According to the Federal Reserve, the black unemployment rate fell in August to the second-lowest on record. The rate of black unemployment fell to 6.3%, continuing its speedy decline from its 16.8% peak, shortly after the 2008-2009 Great Recession. The Hispanic unemployment rate stands at 4.7%, also the second-lowest on record. For whites the current unemployment rate is 3.4% and 3.0% for Asian-Americans.
The U.S. Census Bureau said in a new report that there were 3.6 million college graduates living in poverty in 2017, up from 3.3 million in 2016. The statistic adds another data point to the increasingly complex picture of the value of a college degree in today’s labor market.
While manufacturing is firing on all cylinders, the Manufacturing Institute projects that by the year 2025 nearly 2 million manufacturing jobs will go unfilled as a result of economic expansion, the lack of skilled workers and baby boomer retirements.
Elkhart, Indiana (100 miles east of Chicago) has been a popular destination with politicians, journalists and economists because of the small city’s reputation as an economic bellwether. Dan Holtz is the owner of Troyer Products, a small manufacturing company that makes accessories for recreational vehicles. When recently asked how business was, Holtz replied that it was robust but, “I almost welcome a slowdown, I can’t find enough workers.” Elkhart’s unemployment rate is currently 2.3% but Holtz should be careful about what he wishes for since during the Great Recession Elkhart’s jobless rate hit 22%.
China’s trade surplus with the United States hit a record $31.05 billion in August, up from $28.09 billion in July while China’s imports from the U.S. grew only 2.7% in August, down from 11.1% in July. Over the past 8 months of the year China’s surplus with the U.S. has risen by 15%, further increasing the trade tensions between Washington and Beijing.
Real estate data firm CoreLogic has estimated that 750,000 homes are in the path of Hurricane Florence as it heads towards the Carolina’s and Virginia. If its full impact is felt, property damage could exceed $170 billion.
Tesla shareholders had a rough week last week. First, CEO Elon Musk was seen on a podcast smoking pot and drinking whiskey. Next, his Chief Accounting Officer Dave Morgan resigned after just one month on the job saying, “The level of public attention placed on the company, as well as the pace within the company, have exceeded my expectations. As a result, this caused me to reconsider my future.” Then Tesla’s head of human resources, Gaby Toledano said that she was quitting after announcing a leave of absence last month. Finally, this week Vice President of Worldwide Finance, Justin McAnear announced he will resign effective October 7th.
Ford said its China sales dropped by 36% year over year in August to 62,683 vehicles. Year to date Ford China sales are down 27% to 520,788 vehicles.
Costco reports that August sales increased by 12.2% to $11 billion. Comparable store sales in the U.S. rose by 11.3% (ex-gasoline). E-commerce sales rose by 23.8% during the month.
Walmart said it is being pinched by the nationwide shortage of truck drivers and plans to double its spending on attracting and retaining drivers by the end of this year. “The retailer, whose private fleet of 6,500 trucks is one of the largest in the nation, will offer referral bonuses of up to $1,500, shorten the on-boarding process for new hires by more than a month and broadcast its first national TV ad focused on its 7,500 truckers”, according to Bloomberg News.
Intel has purchased system-on-a-chip design tool company NetSpeed Systems for an undisclosed amount. NetSpeed’s last venture capital Series C funding round in 2016 raised $10 million putting the company’s value at that time at $60 million.
United Rentals has said it will acquire BlueLine from Platinum Equity for $2.1 billion in cash and the combination is expected to generate about $45 million of cost synergies.
Amazon has said that its online business market place is on pace to generate $10 billion in sales this year, just three years after hitting the $1 billion mark. That is faster growth than its consumer retail and cloud business units.
Amazon said that founder and CEO Jeff Bezos will start and commit an initial $2 billion to the Bezos Day One Fund. The money will go toward funding nonprofits currently in existence that help homeless people and “creating a network of new, nonprofit, tier-one preschools in low-income communities” Bezos said in a tweet.
In a new study by Adobe Analytics, currently one-third of homes in America have voice activated assistants otherwise known as smart speakers. By the end of the year, Adobe expects that number to reach 50%.
At its September launch event, Apple has announced 3 new iPhones and updates to the Apple Watch line. “[They] unveiled two new OLED models, dubbed the iPhone XS [$999] and the iPhone XS Max [$1,099]. The first is a slightly upgraded version of the current 5.8-inch iPhone X, while the XS Max is similar, except with a 6.5-inch screen size.” Both phones will come with a 512 GB storage configuration. “The third phone is the iPhone XR ($749), an LCD model that has the same look as the other two”, according to a report from MarketWatch.
Macy’s says that it plans to hire 80,000 holiday workers, on pace with last season as the retailer sees a “strong and successful” holiday shopping season.
Target said that it plans on hiring 120,000 seasonal workers for the holiday season, which is a 20% increase from last season. The company anticipates doubling the number of temporary roles dedicated to fulfilling online orders.
Federal bank regulators have rejected Wells Fargo’s plan to repay customers who were pushed into unnecessary auto insurance. The Office of the Comptroller of the Currency told the bank that they needed more assurances that the bank would locate and repay everyone who was overcharged.
Boeing has received another order for 18 KC-46 tankers from the Air Force in a contract worth $2.86 billion.
Sonos reports fiscal 3rd quarter earnings of -$0.45 per share on revenue of $208.39 million, a decrease of 6.6% year over year.
Adobe Systems reports fiscal 3rd quarter earnings of $1.73 per share on revenue of $2.29 billion, an increase of 24.5% year over year.
Next week: Earnings from: FedEx, Cracker Barrel, Thor Industries and Lennar Homes. Economic reports: U.S. Housing Starts for August, U.S. Building Permits for August and The Philly FED Manufacturing Index for September.
WTI crude oil: $68.65 per barrel. 10-year U.S. Treasury note: 2.99%. Gold: $1,202 per ounce.
PS: This from Peter Bernstein (author, historian and economist): “After 28 years at this post and 22 years before this in money management, I can sum up whatever wisdom I have accumulated this way: the trick is not to be the hottest stock-picker, the winning forecaster, or the developer of the neatest model; such victories are transient. The trick is to survive. Performing that trick requires a strong stomach for being wrong, because we are all going to be wrong more often than we expect. The future is not ours to know. But, it helps to know that being wrong is inevitable and normal, not some terrible tragedy, not some awful failing in reasoning, not even bad luck in most circumstances. Being wrong comes with the franchise of an activity whose outcome depends on an unknown future. Maybe the real trick is persuading clients of that inexorable truth.”
Corporate cash that has been repatriated since corporate tax reform:
White line: S&P 500 Orange line: MSCI Asia Pacific Stock Index (Japan, China, Australia, South Korea and Taiwan)
Sources: CNBC, Real Money, Estimize.com, First Trust Economics, Seeking Alpha, MarketWatch, Bloomberg, The Wall Street Journal, 361 Capital and Raymond James’s Jeff Saut.
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.