Market Minutes for the week of April 3rd:
“The Doomsayers have always had their uses, since they trigger the coping mechanism that often prevents the events they forecast.” – Walter Wriston
James DePorre (from March 31st): “The first quarter of 2017 comes to an end today much in the same way it started. Back in January, many bears were anticipating that the inauguration of President Trump would produce a “sell the news” response. When that didn’t occur, they started to predict a “sell the news” response to a Fed interest rate hike and when that didn’t play out, the expectation was that there would be a selloff on the inability of Congress to pass fiscal policy. The story of the quarter has been a constant flow of bearish narratives that are never realized. While the arguments are very compelling and the media adds a dose of hysteria about President Trump, the market has simply shrugged. The political headlines have been meaningless. The market has stayed optimistic about fiscal reform and economic growth, and that is all that has mattered.”
Byron Wien, Vice Chairman of Blackstone Advisory Partners; “One question that has to be raised by the failure to pass the health care bill is whether there is too much anarchy in Congress for any major legislation to get through in spite of the Republican majority. This has to make one a little apprehensive about how quickly the economy will improve to the 3% growth level. This could put my estimate of earnings for the Standard & Poor’s 500 in jeopardy and mean that the stock market is ahead of itself and vulnerable to a correction. I still think higher highs are ahead of us, but they may occur later than I originally thought. It will also be important to see how Donald Trump deals with legislative adversity, disagreements with foreign leaders over trade and defense, and geopolitical confrontation (North Korea). These factors will play a critical role in investor attitudes and market performance.”
Scott Grannis (the Calafia Beach Pundit): “Q4/16 GDP was revised slightly upwards to an annualized rate of 2.1%, which happens to be exactly the same as the annualized rate of growth of the economy since the current recovery began in mid-2009. It’s been the slowest recovery on record … If the economy had instead regained its long-term average growth rate of 3.1% per year, the economy today would be roughly $3 trillion dollars bigger. I’ve called that the Obama Gap … It should be clear that despite this being a very weak recovery, corporate profits have been unusually strong. For years I’ve explained the shortfall in growth as being the result of very weak investment on the part of corporations; without investment there can be no productivity gains, and without productivity there can be no improvement in living standards. Both corporations and consumers have been generally risk-averse for the past 8 years, due to increased regulatory and tax burdens, and a general, anti-business sentiment emanating from Washington. Consumers have deleveraged significantly, while government has borrowed heavily, absorbing every penny of the profits generated by corporations since the recovery began. Corporations might have invested that money more efficiently, but instead the government spent most of it on transfer payments.”
Payroll services firm ADP, said that the private sector of the economy added a whopping 263,000 jobs in the month of March. In addition to the blowout number, the month also saw a continuing trend away from job creation in the service sector and towards job creation in the manufacturing sector. Goods-producing firms added 82,000 workers and construction added 49,000 new jobs.
The Labor Department has reported that the U.S. economy added 98,000 new non-farm jobs in the month of March.
According to the Institute for Supply Management, the ISM manufacturing index hit 57.2 for March down a bit from the 57.7 it hit February. Embedded in the report was a strong reading for export orders and optimistic plans for new hiring.
The Commerce Department said that construction spending rose 0.8% in February, its highest level since April of 2006.
They also reported that factory orders for February rose by 1.0%, the seventh monthly increase in eight months. Excluding transportation – nondefense aircraft and parts orders jumped by 47.5%.
And lastly, that the U.S. trade deficit fell by nearly 10%. An increase in exports to a 26-month high and a dive in imports of consumer goods, cellphones and autos contributed to the decrease.
The ISM services index for March weakened to 55.2 from 57.6 in February. It is now at the lowest level since October when it was at 54.6 just before the election.
Markit, a global financial information and services firm, announced that its services index for the Eurozone held steady at 56 last month. Both the services index and the composite index, which includes manufacturing, are close to 6-year highs. Germany and France led the gains in output while Italy, Spain and Ireland all saw declines. Employment was a highlight with gains maintaining a 9.5-year high.
Richmond Fed president Jeffrey Lacker announced his resignation, effective immediately. Lacker admitted to discussing sensitive information regarding the Fed’s plans for economic stimulus with an analyst back in 2012. Jeffrey Lacker was a non-voting Fed governor but was a member of the policy-setting Federal Open Market Committee.
JPMorgan Chase CEO Jamie Dimon said in his annual letter to shareholders that the “too-big-to-fail” label placed on the major banks during the 2008 financial crisis, has essentially been solved. Dimon gives several reasons why he thinks the “too-big-to-fail” phenomenon no longer exists, including higher capital requirements and liquidity levels, more transparency and disclosure and an overall regulatory environment that has made the system more secure. Under today’s capital rules, he claims, even Lehman probably would not have failed. Their capital would now be around $45 billion instead of the $23 billion in 2007.
Ford Motor reported that new car sales fell by 24.2% in March with SUVs down by 3% and truck sales up by 2.5%. Overall sales fell by 7.3%
General Motors said that overall sales rose by 1.9% in March, boosted by crossover and SUV sales.
Honda said that March sales were down by 0.7%, bogged down by the underperforming luxury division Acura. Take out Acura and total sales were up 1.8%.
Tesla Motors said that they sold 10,400 cars in the first quarter of 2017. This compares to 13,150 sold in the fourth quarter of 2016 and 14,939 sold in the third quarter of last year.
Nissan Group reported a 3.2% gain in overall sales, with the luxury division Infiniti leading the growth with a 32.6% gain in sales.
According to the Investment Company Institute and Trim Tabs, in the first quarter investors put around $75 billion that was sitting in money market accounts with a low yield into the markets. Those funds contributed to the overall $162 billion that poured into stock and bonds in the quarter. Fixed income ETFs received more than $100 billion of the inflows (the highest level in four years) while global stock funds took in $39.8 billion (the most since the second quarter of 2015.)
New York Stock Exchange data illustrates that margin debt, or borrowed cash to buy securities, reached a new record in February at $528.2 billion. The prior high was in January with $513.3 billion borrowed.
On the other side of the coin, corporate insiders have been selling at the fastest rate since 2011 according to Trim Tabs. $9.9 billion in stock was unloaded by insiders in February with $9.7 billion more taken off the table in March, the highest monthly volumes since February 2011. Who is right here, the margin buyers or the inside sellers?
Homeowners gained a total equity of $570 billion in 2016, equating the number of homeowners with liquid equity to 39.5 million according to Black Knight Financial Services. 68% of the liquid equity is owned by borrowers with mortgage rates below today’s current levels. A three-quarters majority of those borrowers have FICO scores well above average.
Visa restrictions continue to take their toll on Hawaii’s economy, as roughly 2,000 Chinese travelers planning to visit the island chain next month had their visa applications rejected. The Honolulu Star Advertiser reports that Nu Skin’s top distributors were awarded the trip, but around 40% won’t be able to go because they could not get the approval to travel to Hawaii. Tighter visa restrictions…?
Could there be unintended consequences due to the legalization of marijuana? Take a look at what is happening in Denver, Colorado. The pot industry is having a negative effect on liquor sales and the availability of local restaurant workers. Bobbie Stuckey, the James Beard award winning co-owner of Frasca Food and Wine (Boulder, CO) and the soon-to-be-opened Tavernetta (Denver, CO) says, “No one is talking about it.” Young workers that would have seen opportunities in the food industry are now turning to grow facilities and dispensaries. Bryan Dayton, who co-owns 3 popular restaurants in the Denver/Boulder area – Oak at Fourteenth, Acorn, and Brider, is direct in his belief that, “Our workforce is being drained by the pot industry.” He goes on to say that workers in the industry can earn $22 per hour with full benefits. Working in a hot kitchen for 8 hours a day is a stressful life. Sorting weed in a climate-controlled greenhouse seems to be an obvious choice for those younger workers. Even pastry chefs are in high demand in the marijuana industry. A Wolfgang Puck alum, executive chef, and co-owner of many acclaimed Denver-based restaurants, Stoic and Genuine, Euclid Hall, Rioja, and Bistro Vendrome, Jennifer Jasinski says, “Cooks take trimming jobs and make $20 an hour, but it’s not just that. Pastry chefs are in high demand in the pot world. Laced candies and gummy bears are sought-after treats when they are made well, so pastry chefs and cooks can make them for three to four times the money a restaurant can pay. All this just exacerbates an already tight work force in Denver.”
Taxi medallions, which once sold for $1.3 million in 2013, set a new low by selling for $241K last week. New York City has 13,600 yellow-taxi medallions, and more than 50,000 Uber and Lyft cars all competing for the same business.
Zunum Aero is a Kirkland, Washington-based company that is working with Boeing HorizonX and Jet Blue Technology Ventures to develop electric aircraft to handle regional commercial flights of up to 1,000 miles. Flights for the 10-50 seat aircraft could begin in the early 2020’s with the goal to return flights to local communities that lost business in the past 30 years as regional airlines combined routes aboard larger aircraft.
Sequential Brands Group Inc. has partnered with wine delivery marketplace Drinks to launch Martha Stewart Wine Co. The online wine shop will feature wines selected by an expert panel including Stewart herself.
Amazon’s market capitalization is now over $430 billion according to FactSet data, nearly twice that of Wal-Mart’s market cap which sits below $220 billion.
Next season, Amazon Prime members around the world will be able to watch Thursday night football games for free. The retail giant has purchased the rights to the National Football League’s streaming package.
Apple is working on a new premium TV bundle for its customers that combines HBO, Starz and Showtime. All three are offered individually, but Apple has approached them about creating a single package deal.
Cloudera has filed for an initial public offering hoping to raise $200 million. Underwriters will include Morgan Stanley, JPMorgan and Allen & Company.
Last week, the first successful test flight was made by Boeing’s newest and largest Dreamliner model, the 787-10. The plane is being assembled exclusively at its factory in North Charleston, South Carolina, Boeing’s only factory outside of the state of Washington. After spending this year in testing, the 330-seat airliner is expected to enter service in 2018.
Caterpillar has reported it will close its assembly plant in Aurora, Illinois, which will result in the loss of 800 jobs. Large wheel loaders and compactors will transition to its Decatur, Illinois facility while medium wheel loaders will go to their North Little Rock, Arkansas plant.
Payless ShoeSource filed for Chapter 11 bankruptcy. They will close around 400 stores as part of the filing in an effort to improve its balance sheet and restructure its debt load.
Panera Bread has agreed be acquired by the Luxembourg based conglomerate JAB for $7.5 billion. The company currently owns Krispy Kreme Doughnuts, Peet’s Coffee and Keurig Green Mountain.
Monsanto reports fiscal 2nd quarter earnings of $3.19 per share on revenue of $5.07 billion, an increase of 11.9% year over year.
Next week: Earnings from: JPMorgan, Wells Fargo, Citigroup and Delta Air Lines. Economic reports: Producer Price Index for March, Consumer Price for March and Retail Sales for March.
WTI crude oil: $51.26 per barrel. 10-year Treasury note: 2.35%. 30-year mortgage: 4.16%.
Sources: Calafia Beach Pundit, 361 Capital, Real Money Pro, CNBC, MarketWatch, Seeking Alpha, The Wall Street Journal and Bloomberg.
Note: There will be no Market Minutes for the week of April 10th as the author will be out of town.
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.