Market Minutes for the week of September 17th:
“Life’s a fragile thing, Har. One minute you’re chewing on a burger, the next minute you’re dead meat.” – Lloyd, “Dumb and Dumber”
Here’s what I am thinking and hearing: 1.) According to a Bank of America Merrill Lynch Fund Manager Survey for September, pessimism on the global economy reached its highest point since December 2011. A net 24% expect global growth to slow down over the next 12 months, a sharp rise from a net 7% last month. 2.) The same survey found cash allocations at 5.1%, the highest level in 18 months, while allocations to the U.S. market rose 2% to a 21% overweight, the biggest reading since the start of 2015. 3.) The same survey also found that 43% of the managers polled said that the growing trade war with China is their biggest fear. A net 69% of the respondents said that the U.S. is the most favorable region with regards to earnings expectations, a new high in the 17-year history of the survey. 4.) Meanwhile, here’s more news from the front lines of the trade war: Peter Boockvar, Chief Investment Advisor at Bleakley Adviory Group: “At least for now, instead of getting us closer to the bargaining table with China, we’ve only pushed them further away as they are likely canceling their trip to the U.S. and are ready to retaliate. The Chinese commerce ministry said, ‘China will adopt countermeasures to safeguard its legitimate rights and interests and the global free trade order.’ The American Chamber of Commerce in China said, ‘The downward spiral that we have previously warned about now seems certain to materialize…Contrary to views in Washington, China can, and will, dig its heels in.’ We’ve threatened to add more tariffs if China does respond with more of their own and it certainly does seem that we’re approaching spiral stage.” Jim Cramer: “More to lose. Who has more to lose? We keep hearing that question again and again. So far, the answer is so clear…The Chinese have more to lose in this now-hyperactive trade war…We have the leverage; they don’t. We just never used it because so many of our companies, our banks, our manufacturers, pretty much owned Washington. Like it or not, they don’t anymore. So, go fret about us losing the trade war. Most companies aren’t going to risk the wrath of the president. They are the ones who would have caused us to lose. They are silent. That’s the real reason why we are winning. Washington is no longer captured by our companies that want to feast off of China. It’s a big change. Get used to it, because it is the key to Trump’s strategy. And its working.” Elkhart, Indiana calls itself the “RV Capital of the World” and according to the RV Industry Association, more than 80% of the RVs sold in the U.S. are made in Elkhart and the surrounding area. Mr. Trump’s tariffs on imported steel and aluminum are increasing costs and diminishing demand. Since those tariffs were implemented, the RV Industry Association says that shipments of motor homes were lower by 18.7% in June compared to 2017 and shipments of smaller campers and trailers were down 10.5%. 5.) The action in marijuana stocks has gotten out of control. The price of Canadian-based Tilray, which is a global leader in medical cannabis research, cultivation, production and distribution, came public in July at $25 per share and is up 800% since its debut. At one point on Wednesday, the stock was up another 94% in the first several hours of trading. The company has a market value of about $20 billion which is greater than Western Digital ($17.5 billion), Hartford Financial ($18 billion) and close to Kellogg ($25 billion). FactSet says that the company trades at nearly 500 times 2018 sales vs the S&P 500s 2.2 times 2018 sales. “This is just stupid time. I can’t believe the valuations at this stage” says Investitute founder Jon Najarian. 6.) This from Downtown Josh Brown: “The only thing that could stop [Tilray] is if the CEO goes on Joe Rogan’s podcast and starts building a car.” 7.) The problem with these pot stocks is that the float (the number of shares that are publicly traded), is small and demand to buy or sell short, can overwhelm markets causing gigantic price swings. 8.) The key market-based financial indicators still look healthy according to Scott Grannis of the Calafia Beach Pundit: “I like to begin with the 2-year swap spreads, since they have proven to be excellent leading and coincident indicators of the health of the financial markets and of generic or systemic risk…Currently, swap spreads are almost exactly where one would expect them to be if markets were healthy and the economy were growing comfortably [15 to 35 bps is normal considering during the 2008-2009 crisis when the spread was an alarming 150 bps]. The current level of swap spreads also tells me that liquidity is abundant; i.e., the Fed has not squeezed credit conditions nor tightened enough to disturb underlying fundamentals…5-year CDS spreads (credit default spreads)…utilized widely by institutional investors, and are considered to be a highly liquid proxy for generic credit risk”, today are rather low (today at 50 to 75 bps vs 475 bps during 2008-2009). 9.) According to a recent McKinsey report, almost 40% of all non-financial corporate bonds are now rated BBB vs. 22% back in 1990 and 31% in 2000. Pimco says that the net leverage ratio for BBB issuers rose from 1.7 in 2000 to 2.9 in 2017. In the last cycle, household debt was the problem, this time it’s on the corporate side. This bear’s watching. 10.) Congratulations to the Cleveland Browns for winning their first regular season football game in 635 days. The Browns last win came on December 24th, 2016. Their record now stands at 1-35-1 over the last 37 games.
The Fed said that its Empire State manufacturing index dropped to 19 in September from 25.6 in August as factories turned goods at a slower pace.
The Philly Fed manufacturing index for September rebounded to a 2-month high of 22.9 from 11.9 in August. The rise was powered by a big increase in new orders and shipments.
The Conference Board said that its Leading Economic Indicators (LEI) index climbed by 0.4% in August following strong gains in June and July thus signaling +3.0% GDP growth in the 3rd quarter. Ataman Ozyildirim of the Conference board said, “It doesn’t get much better than this.”
Goldman Sachs says it sees little sign (36% chance) of a recession over the next 3 years. Goldman economists: “Our model paints a more benign picture in which robust growth – coupled with receding concerns that financial conditions were unsustainably easy – have so far put a lid on U.S. recession risk… Historical experience suggests that recessions in the U.S. have gone hand in hand with recessions elsewhere. Looking at the past four decades, the average chance of a recessionary quarter in the next year in another DM economy is just over 20% if the U.S is not currently in a recession, but nearly 70% if it is.”
Here are some other comments from the Fed in its latest Beige Book report: “The economy expanded at a moderate pace…Consumer spending continued to grow at a modest pace…Transportation activity expanded, with a few Districts characterizing growth as robust…Home construction activity was mixed but up modestly on balance…Commercial real estate construction was also mixed, while both sales and leasing activity expanded modestly…Labor markets continued to be characterized as tight throughout the country, with most Districts reporting widespread shortages… Wage growth was mostly characterized as modest or moderate, though a number of Districts cited steep wage hikes for construction workers.”
According to a report from Deutsche Bank, even a decade after the housing bubble and the Great Recession, with the unemployment rate at 20-year lows, U.S. households are still impaired by the financial crisis. The bank economists say there’s still a large detachment between household saving and wealth. Considering the average wealth-to-income ratio, the household savings rate should be closer to 1%, but it has remained stubbornly high at 6%. Recent revisions to the last GDP report showed a big upward revision to savings but not to spending. Another point comes from the Federal Reserve’s survey of consumer finances, which finds that precautionary factors have become the most important reasons for a household to save rather than fund retirement.
Europe’s manufacturing and services composite index for September weakened to 54.2 from 54.6 in August as new export orders failed to grow for the first time since June of 2013. Markit said that, “Trade wars, Brexit, waning global demand (notably in the auto industry), growing risk aversion, destocking and rising political uncertainty both within the Eurozone and further afield all fueled a slowdown in business activity.””
The Commerce Department said that U.S. housing starts for August rose by 9.2% for an annual rate of 1.282 million units. Building permits however fell by 5.7%.
The National Association of Realtors (NAR) reported that existing home sales held steady in August at a seasonally adjusted rate 5.34 million units. The leveling out follows 4 straight months of decline.
According to a MarketWatch report, “‘tappable equity’– that amount of home equity that can be withdrawn and still leave homeowners with at least 20% equity in their homes – topped $6 trillion for the first time ever in the second quarter…That’s 21% higher than in the pre-crisis peak from 2006. And it means 44 million households have equity available to them”, but rising interest rates and caution resulting from the housing crisis of a decade ago are now limiting how much of that equity is being tapped.
“A new report from the Department of Energy predicts production in the Permian Basin will continue to grow more than any other U.S. shale oil field…The report predicts the Permian will add 31,000 barrels of production per day in October, bringing the play’s overall output near 3.5 million barrels per day”, according to a report from Seeking Alpha.
Moody’s Analytics says that preliminary estimates are for between $17 billion and $22 billion in property damage from Hurricane Florence. “Economists so far see a minimal impact to growth from the hurricane, which Moody’s sees shaving 0.3% from 3rd quarter GDP”, reports CNBC.
Sanderson Farms said that nearly 1.7 million chickens drowned as flooding from Hurricane Florence swamped 60 buildings where the birds were being raised for market. Other affected crops include tobacco which was only about 50% out of the field (50% of all U.S. tobacco comes from North Carolina). North Carolina also is the largest producer of sweet potatoes and that crop was only one-fourth harvested. In South Carolina, high winds and torrential rains knocked much of the cotton crop to the ground because a late harvest was yet to come. South Carolina’s annual cotton crop is valued at $150 million.
“Starbucks says it’s committed to expanding its “Greener Stores” concept to 10,000 stores before 2025. The company says the eco-friendly program for sustainable operations will lead to a $550 million reduction in utilities expenses over the next 10 years.”, reports Seeking Alpha.
Research firm Gordon Haskett found that pricing at Whole Foods is on average only about 0.8% lower than before Amazon acquired the company.
Amazon said that it plans to release at least 8 new Alexa powered devices before the end of the year. The new devices include a microwave oven, amplifier, receiver, subwoofer and an in-car gadget. By being Alexa enabled, these new devices will easily connect to the voice assistant.
Amazon launched “Amazon Storefronts”, a collection of small and medium sized businesses. It says that the subset of its website will push goods from nearly 20,000 businesses.
Amazon CEO Jeff Bezos: “At almost every all-hands meeting I say – look, when the stock is up 30% in a month, don’t feel 30% smarter. Because, when the stock is down 30% in a month, it’s not going to feel so good to feel 30% dumber.”
Amazon says it’s testing a shopping site called “Scout.” “The new service asks shoppers to like or dislike a product (thumbs up or thumbs down) and automatically responds by showing other products based on their choices”, writes CNBC. While only currently available for home furniture, kitchen and dining products, women’s shoes, home décor, patio furniture, lighting and bedding, more categories with be added to expand the “Scout” experience throughout the online site.
Bloomberg is reporting that by 2021, Amazon is planning to introduce 3,000 cashierless stores.
Amazon is offering to manufacturers of electronics a small Alexa-enabled chip that would immediately enable voice activation for common household times such as, microwave ovens and coffee makers to room fans and guitar amplifiers. If makers of electrons and consumers embrace Amazon’s plan, it would give Amazon an advantage over Google and Microsoft in the race to offer voice-controlled assistants to every gadget known to man.
SurveyMonkey is planning on an IPO soon. The company plans on offering 13.5 million shares in a price range of $9 to $11. The company has made survey software since 1999. About 80% of their 600,000 paying customers use various survey products for business purposes. “Venture capital firm Tiger Global is the largest shareholder prior to the IPO with 29.3% of the total shares outstanding. Facebook COO Sheryl Sandberg’s trust owns the next biggest stake with 9.9% who acquired her shares as the widow of David Sandberg who ran SurveyMonkey for six years until his death in 2015.”, according to MarketWatch.
Dubai’s Gulf News says that Spotify is preparing to launch its music streaming service in the Middle East and North Africa. The company is looking for six advertisers that will commit to spending $200,000 each ahead of the rollout.
Coca Colas has confirmed that it is considering opportunities in CBD-infused beverages, drinks that contain the non-psychoactive ingredient in marijuana, cannabidiol.
Salesforce.com CEO Marc Benioff and his wife have agreed to buy Time magazine from Meredith Corp. for $190 million.
Thor Industries has struck a deal to acquire German family-owned RV maker Erwin Hymer Group for €2.1 billion.
“Adobe Systems has agreed to acquire software maker Marketo from private equity firm Vista Equity for $4.75 billion,” according to MarketWatch, with plans to add the service to Adobe’s“Experience Cloud.”
Volkswagen of America says it will end Beetle production in 2019 and shift its focus to e-cars. The company said it will spend €6 billion ($7 billion U.S.) to build 10 million e-cars in the first wave of production.
Ride sharing service Lyft says that it has now delivered its 1 billionth ride. The milestone comes 6 years after Lyft launched in June of 2012. Rival Uber, hit 1 billion rides in December 2015 and 10 billion rides this past July.
Audi announced that it will unveil an all-electric vehicle that will come to market next spring. The SUV boasts a base price of $74,800 and kicks off a wave of new luxury utility vehicles that will challenge Tesla.
Ferrari announced that it will launch a series of special-edition models and a larger car to rival other luxury sport-utility vehicles. The company also unveiled a new model of super-car, claiming it has the most powerful ever. The V12 810 horse power engine SP1 and SP2 have only one seat and will go from zero to 62 mph in 2.9 seconds. This car is a limited edition and only 500 will be built.
TJX Companies (T.J. Maxx) has approved a 2-for-1 stock split payable December 6th to holders of record November 15th.
FedEx reports fiscal 1st quarter earnings of $3.46 per share on revenue of $17.1 billion, an increase of 11.8% year over year.
Oracle reports fiscal 1st quarter earnings of $0.71 per share on revenue of $9.19 billion, an increase of 1.0% year over year.
Next week: Earnings from: Nike, Carnival Cruise Lines, KB Home, Accenture, Conagra and Vail Resorts. Economic reports: Core Personal Consumption Expenditures Index (PCE) for August. Case-Shiller Home Price Index/Composite 20 for July, U.S. Single Family Home Sales for August and U.S. Durable Goods Orders for August.
WTI crude oil: $70.80 per barrel. 10-year U.S. Treasury note: 3.06%. Gold: $1,2018 per ounce.
P.S. I will not be writing Market Minutes for the next two weeks as I will be out of the country. See you again for the week of October 8th.
Sources: CNBC, Real Money, 361 Capital, First Trust Economics, Seeking Alpha, MarketWatch, Estimize.com, Bloomberg, The Wall Street Journal, ZeroHedge, The Calafia Beach Pundit and The Business Insider.
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.