“Be not afraid of growing slowly” – Chinese Proverb
Here’s what I am thinking and hearing: *1.) The 3rd quarter is in the books and the DJIA and S&P 500 posted gains for the third straight quarter. For the month of September, the DJIA was +2.0%, the S&P 500 was +1.7% and the NASDAQ was +0.5%. For the third quarter the DJIA and S&P 500 rose by +1.2% and the NASDAQ was down by -0.1%. *2.) That was then and…this is now. The start of the 4th quarter and the flip of the calendar to October has given way to an all too familiar pattern of October volatility. Right now, the decline is being driven by a bad manufacturing report, weaker payroll numbers and the new political chaos in D.C. That said, Bespoke Investment Group says that, “…a weak start to October doesn’t necessarily mean that all is lost for the remainder of the month and year…[Going back to 1931] there have been 14 trading days in which the S&P 500 has fallen by at least 1% in the first trading day of October. But, the S&P 500 has gained an average of 3.75% for the rest of October when it has had such a start and has finished positive in the remaining three months…boasting an average gain of 7.2% for the quarter” (see the chart at the end of this week’s Market Minutes). *3.) Goldman Sachs says that 2019 is shaping up to be the worst year for IPOs (initial public offerings) in history. According to GS’s David Kostin, “the median IPO in 2019 is now drastically underperforming the Russell 3000 relative to history; in fact the roughly 3% underperformance is the worst on record, and surpasses the negative returns observed at the peak of the financial crisis in 2009 and in the aftermath of the bursting of the first dot com bubble [in 2000]”. In the past several months, a number of unprofitable IPOs have failed miserably as they began trading publicly. In Scott Galloway’s quirky wisdom, the markets are finally “emerging from a psychotic break with reality.” *4.) California Governor Gavin Newsom signed a bill on Monday (The Fair Pay to Play Act), which would allow student athletes to get paid for the use of their name, image and likeness. The bill would also allow student athletes to hire sports agents. The National Collegiate Athletic Association (NCAA) currently bans students from earning any kind of compensation through college sports. The organization said in a statement that it agrees changes are needed but that improvement needs to happen on a national level. The bill, if it becomes law, will take effect on January 1, 2023. If they can get paid, what would be the most effective way to do it? Former NFL player Patrick Kerney believes that student athletes deserve to be paid and he may have answered the above question when he says universities could: “maybe contribute to a 401(k) for them, get them to understand the time value of money.” *5.) From the front lines of the trade/cold war: Beijing has agreed to once again begin buying American soybeans and pork as a goodwill gesture in front of the October trade talks. China says it will send its top trade negotiator Vice Premier Liu He, to the 13th round of talks aimed at resolving the trade war. The China Caixin manufacturing PMI jumped to 51.4 in September from 50.4 in August for the second straight monthly increase. After a victorious ruling from the World Trade Organization (WTO), the U.S. will impose 10% tariffs on European aircraft and a 25% duty on European agricultural products. The tariffs will apply to about $7.5 billion of goods. *6.) From 361 Capital’s unbelievable fact of the week: According to SuperData of Oakland, California, the amount spent globally on virtual goods within video games last year was $93,000,000,000! *7) UPS Chairman and CEO David Abney told CNBC that the U.S. consumer is “still holding up,” despite warning signs in other areas of the economy and trade war. Abney said: “It’s still consumer driven, and we are seeing that it’s still holding up. It may not be as strong an increase as last year, but we still feel pretty good about what we are seeing. Of course, we’d like to see industrial production and manufacturing increase, but consumer is holding on right now.” *8.) Jim Cramer on the ugly September PMI manufacturing number: “Are things that bad? I remain a non-believer in the recession thesis…I think the single biggest prop behind the recession thesis is the president’s trade policies. By limiting imports from China, that gigantic economy is faltering and taking the rest of its trading partners with it, especially Europe. That, plus worries about Brexit and a lack of fiscal stimulus out of Germany, are contributing to a worldwide slowdown, one that we are no longer immune from. It’s a decent thesis, one that would make sense, if we were a manufacturing export-driven economy. We aren’t. We are a service-driven economy – two-thirds of our commerce is non-industrial domestic. Much of our industrial base was decimated by the very country we are now tugging against, China…Therefore, I want to keep this manufacturing index in perspective: we are not going back to a 2009 economy, which was the worst since the Great Depression. I don’t think our exports can take us down like that. It’s too small to do that kind of damage.” *9.) Right now, the markets are pricing in a 70% chance that the Fed cuts rates again in October and a 50% chance that they do it again in December. Odds have increased in the wake of a bad PMI reading and a weaker private payrolls number. *10.) New York Fed President John Williams downplayed recession fears during a talk at UC San Diego. He said that the baseline economic forecast remains “a positive one.” “Right now, the outlook is actually very favorable with a very strong labor market and inflation near a 2% rate…I think there are definitely a lot of uncertainties and risks out there that we need to be navigating.” Regarding the trade wars, Williams says the Fed is grappling with how to model trade uncertainty. “We don’t have as much experience with this.” Williams noted that economists have been notoriously unable to predict recessions. “Economists are really good at saying we just had a recession. They are not so good at expecting a recession.”
The Labor Department said that the U.S. economy generated 136,000 new nonfarm jobs in September. Both July and August job creation were revised higher. The unemployment rate drops to 3.5%, the lowest reading since December 1969. Wage growth was unchanged in the month and for the year to date, are up 2.9%.
ADP/Moody’s reported on Wednesday that the U.S. economy created 135,000 private payrolls in September. The increase brought the monthly average for 2019 down to 145,000 from 214,000 a year ago. Education and health services saw the biggest growth with 42,000 positions added. Trade, transportation and utilities was next with 28,000 new jobs.
The Institute for Supply Management’s (ISM) Chicago purchasing manager’s index (PMI) for September fell 3.3 points to 47.1. Business confidence dropped below the 50-mark, leaving the index at the lowest level since the 3rd quarter of 2009. Supplier Deliveries and Employment were the only Business Activity components higher on the month. Production saw the largest decline, dropping by 15.8%.
The September ISM manufacturing index fell to a disappointing 47.8, the lowest reading since June of 2009. Evidence that the ongoing trade war is taking its toll can be found in the “New Export Orders” reading that fell to 41.0 from 43.3 in August. Peter Boockvar, chief investment analyst at Bleakley Advisory Group: “We have now tariffed our way into a manufacturing recession in the U.S. and globally.”
The September ISM non-manufacturing (services) index fell to 52.6 from 56.4 in August. That’s 2.4 points below the forecasted number and the lowest print since August of 2016. New Orders fell by 6.6 points and Employment softened by almost 3 points. Of the 18 industries surveyed, 13 saw growth vs 16 in August. 4 are now are reporting a contraction vs only 1 in the prior month. ISM bottom lined the report by saying “The respondents are mostly concerned about tariffs, labor resources and the direction of the economy.”
The Commerce Department said that new orders for durable capital goods (goods meant to last 3 years or longer) fell unexpectedly in August by 0.2% amid weak demand for electrical equipment, appliances, computers and components. On a year over year basis, durable goods orders are up 1.1%.
The Commerce Department said that U.S. factory orders fell by 0.1% in August. Orders for nondurable goods fell by 0.3% and core factory orders, excluding defense goods and civilian aircraft, fell a revised 0.4% in August.
The Fed said that its Personal Consumptions Expenditures Index (PCEI) was unchanged in August as food prices declined for the third straight month. In the 12 months through August, the PCEI has risen by 1.4%, well below the Fed’s annual target of 2.0%.
The Commerce Department said that U.S. consumer spending rose by 0.1% in August, after increasing by 0.3% in July. Consumer spending has surged by a 4.6% annual rate in the second quarter, the fastest pace in 4.5 years. Spending in August was driven by outlays on recreational equipment and autos. Spending on services rose by 0.2%.
The National Retail Federation anticipates holiday retail sales for November and December to climb between 3.8% and 4.2% this year. On average holiday retail sales have increased an average of 3.7% over the past five years. Online and other non-store sales are expected to climb between 11% and 14% this holiday season.
Dr. Ed Yardeni on Germany’s rapidly sinking economy: “I’ve previously observed that there is something wrong with Germany’s economy. Trump’s trade wars may be some part of the problem, but Germany – along with most of the rest of the world – has a serious homegrown problem: not enough babies and too many seniors. Babies tend to stimulate consumption as they grow older, while old people don’t stimulate much of anything. It’s hard to stimulate people who are already old to do much of anything.”
I have no doubt that our climate is changing. It’s not all made-up science. We humans are very much a part of the problem but pending doomsday scenarios are off the mark. Scott Grannis of the Calafia Beach Pundit: “I strongly recommend reading Mark Perry’s recent blog post which documents how climate alarmists have repeatedly and disastrously failed to predict the future eco-apocalypses. He provides links to 50 failed predictions of gloom and doom going back as far as 1967. Here are just a few examples: 1966 – Oil Gone in Ten Years. 1970 – Ice Age By 2000. 1976 – Scientists Consensus Planet Cooling, Famines Imminent. 1977 – Department of Energy Says Oil Will Peak in 1990s. 1988 – Maldive Islands Will Be Underwater by 2018. 1988 – World’s Leading Climate Expert Predicts Lower Manhattan Underwater by 2018. 1989 – Rising Sea Levels Will Obliterate Nations if Nothing Done by 2000. 2004 – Britain Will Be In Siberia By 2024. 2005 – Fifty Million Climate Refugees by 2020. When it comes to climate, beware of those who say it’s “settled science.” If your predictions end up consistently wide of their mark, you are not dealing with science.”
According to Nielsen data, last Saturday night’s premiere of Saturday Night Live (SNL) saw a 15% drop in overall viewership from last season’s premiere. There was a 30% drop in the advertiser-coveted age, 18 to 49 demographic. Hmmm. Maybe more and more people are beginning to tire of the ongoing political battles, even if they are wrapped in parody and comedy. (Daily Mail)
Walgreens has joined CVS in suspending the sales of heartburn medication Zantac after online pharmacy company Valisure alerted the FDA earlier in the month that Zantac includes an impurity that could cause cancer. Zantac is manufactured by Sanofi.
Microsoft announced new products on Wednesday. The company unveiled the Surface Pro 7, the Surface Laptop 3, the Surface Earbuds and the Surface Pro X. They also announced the Surface Neo, a two-screened laptop and the Surface Duo phone, a two-screened phone which runs Android.
Private equity firm Blackstone Group confirmed that its Blackstone Real Estate Partners IX has entered into a deal to buy Colony Industrial for $5.9 billion. Colony’s real estate assets total about 60 million square feet across 465 industrial building in 26 markets.
NextEra Energy Partners announced that it has entered into a deal to buy Meade Pipeline Co. LLC for $1.37 billion. The deal includes about $90 million in future capital contributions through 2022.
Energy Transfer has agreed to acquire SemGroup for $5 billion. ET says the acquisition will strengthen its crude oil transportation, terminalling and export capabilities.
Mall retailer, Forever 21 has filed for bankruptcy protection and announced that it will close nearly 200 of its 549 U.S. store locations.
Deere said that it will indefinitely lay off 163 employees in the Quad Cities area of Illinois and Iowa citing decreased customer demand. The Illinois facility makes large agriculture equipment while the Iowa plant manufactures construction equipment.
United Airlines is unveiling initiatives to increase pilot hiring as it faces a surge in retirements. The company wants and needs to hire 10,000 new pilots over the next decade as half of its aviators approach retirement during the same time frame. Boeing estimates that airlines will need 645,000 pilots from 2019 through 2038, with 212,000 in North America alone. The cost of becoming a pilot outside of the military can exceed $80,000 and strict laws in the U.S. require that pilots have 1,500 hours of flight time to work at a commercial airline.
Square says that it will open up an early access program for U.S. CBD merchants selling products that are hemp-derived and contain less than 0.3% THC. The company will charge 3.90% plus 10 cents per tap, swipe or dip for in-person transactions. For online payments, the charge will be 4.20%.
Stitch Fix has reported fiscal 4th quarter earnings of $0.07 per share on revenue of $432.15 million, an increase of 35.8% year over year.
Home builder Lennar reports 3rd quarter earnings of $1.59 per share on revenue of $5.86 billion, an increase of 3.4% year over year.
PepsiCo reports 3rd quarter earnings of $1.56 per share on revenue of $17.19 billion, an increase of 4.2% year over year.
Costco reports fiscal 4th quarter earnings of $2.69 per share on revenue of $47.5 billion, an increase of 7.0% year over year.
Next week: Earnings from: Domino’s Pizza and Delta Air Lines. The following week of October 14th begins in full, the 3rd quarter earnings reporting season. Economic reports: U.S Producer Price Index (PPI) for September and U.S. Consumer Price Index for September.
WTI crude oil: $52.89 per barrel. 10-year U.S. Treasury note: 1.52%. Gold: $1,514 per ounce.
Sources: CNBC, Real Money Pro, 361 Capital, First Trust Economics, The Calafia Beach Pundit, MNI Market News, Seeking Alpha, MarketWatch, The Wall Street Journal, Bloomberg, Zero Hedge, Daily Mail, Estimize.com, Morningstar, Yardeni Research and Alger Management.
At the time of publication Cascade Investment Group and /or its clients owned shares of: GS, UPS, WBA, SNY, CVS, MSFT, BX, NEP, ET, DE, UAL, SQ, SFIX, PEP, COST, DPZ.
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.
ISM Non-Manufacturing Index: