Market Minutes for the week of December 4th:
“It’s not me who can’t keep a secret. It’s the people I tell that can’t.” – Abraham Lincoln
Here is what I am thinking: 1.) If this Flynn plea and his cooperation with Mueller can’t get legs, then the market should be fine. 2.) Kudos to ABC for suspending investigative reporter Brian Ross for last Friday’s stunning and erroneous report about Flynn, Trump and the Russians. Sloppy journalism and “fake news”. 3.) Former Federal Reserve economist and President of Yardeni Research Dr. Edward Yardeni said that last Friday’s 400 point swing off of the Flynn news was nothing but a “panic attack” and the market should resume its upward trend towards his forecast of 3,100 on the S&P 500 by the end of 2018. From the current level, that would be a gain of 20%. I hope you are right Dr. Ed. 4.) Wharton School of Business finance professor Jeremy Siegel says that a tax reform bill by year end will add 8% to S&P 500 corporate earnings over the next 2 years, and near term will push the DJIA above 25,000 by the end of this year (people thought Siegel was nuts when he predicted 20,000 for the DJIA late last year). 5.) Keith Parker, UBS chief U.S. equity strategist, is forecasting the S&P 500 to close 2018 at 2,900 and with the right mix of “tax juice”, 3,300 is not out of the question according to Parker. He also thinks that tax reform with a 20% tax rate will add 9.5% to S&P earnings next year. 6.) According to FactSet, here are some of the S&P 500 companies with the highest median tax rates (based on 11 years of financial statements): Chevron – 42%. Salesforce.com – 43.9%, CVS Health – 38.9%, Monster Beverage – 37.8%. Some companies with the lowest median tax rates: GE – 8%, Seagate Technology – 2.9%, Wynn Resorts – 2.6%, Carnival Corp. – 0.7, United Continental Holdings – 0.1% and Royal Caribbean Cruises Ltd. – 0.0%. Median tax rates for the 5 largest publicly traded companies: Apple -26.1%, Microsoft – 23.8%, Google – 21.1%, Amazon – 31.5% and Facebook – 40.3%. The current average tax rate for the S&P 500: 26.2%. 7.) The wicked rotation out of tech and into the current high tax payers continues to pound the FANG (Facebook, Amazon, Netflix and Google) names. These companies will no doubt continue to dominate earnings growth going forward, but the industrials, banks, retailers, restaurants, utilities and telecoms stand to see the greatest leverage to earnings from lower tax rates. By the way, this rotation is healthy for the continuation of the bull market. 8.) Steve Schwarzman, the chairman and CEO of Blackstone, said that the tax reform package working its way through Congress is a “whopper” and “actually sort of a game changer” in terms of its scale and impact on the economy. Furthermore, it finally gives President Trump momentum to pursue other fiscal policy initiatives. 9.) This Bitcoin mania has gone parabolic. For whatever reason it has become regarded as an investment not the casino game it actually is. Jim Cramer: “First, no one knows who created it. Second no one knows how much the creator reserved or took. Third there is virtually no transparency into the underlying system. None whatsoever. Fourth, there is no government backing – obviously, there are no underlying assets and there is no military support for the bitcoin system, unlike legitimate currencies. Fifth, despite the allegiance its buyers to swear to blockchain as the secure way to transact, it is software – and the one thing we know about software is that it can be hacked. When, not if, but when, it will be a total loss as there is no insurance and no fiat backing.” 10.) I just don’t like seeing things like bitcoin explode in popularity. When these things occur, I begin to worry about speculative excess and whether investors/speculators have become too comfortable with a lack of risk awareness.
The Atlanta Fed GDPNow tracker has revised 4th quarter GDP back up to 3.5% from 2.7% a week ago. The bounce back is attributed to the recent ISM report.
ADP said that the U.S. economy added 190,000 private jobs in November vs 235,000 in October. Manufacturing had its best month of 2017 with 40,000 new workers. The service sector added 155,000 jobs in the month.
The Department of Labor said that the U.S. economy added 228,000 new non-farm jobs in the month of November. The biggest job gains came from business and professional services (46,000), manufacturing (31,000) and construction jobs (24,000).
The U.S. ISM manufacturing index for November came in at 58.2 with employment stronger, prices paid weaker, new orders stronger and production stronger.
The U.S. ISM non-manufacturing (services) index for November slipped to 57.4. Economists polled by Reuters had expected a reading of 59.
The Commerce Department said that new orders for U.S. made goods dropped less than expected in October, down 0.1%. Orders for non-defense capital goods excluding aircraft actually rose by 0.3%. Business spending on equipment grew at its fastest pace in three years in October.
The Fed said that consumer credit in October, increased to $20.5 billion from $19.2 billion in September.
The Baker Hughes U.S. oil rig count increased by 6 to 929 for a fourth consecutive weekly gain. Oil rigs rose by 2 and natural gas rigs rose by 4.
Goldman Sachs has lifted its 2018 target for Brent crude oil to $62 per barrel and WTI crude to $57.50 per barrel. The revision higher is based on a stronger than expected OPEC-led commitment to extend production cuts according to Goldman.
Macau gaming revenue jumped 22.6% in November according to the Gaming Inspection and Coordination Bureau. The monthly tally is the second highest of 2017 and drove the YTD Macau growth rate to 19.5%.
It appears that last month’s record-breaking $450 million auction sale of Leonardo Da Vinci’s 500-year-old painting, “Salvator Mundi,” was purchased by a little known Saudi prince and may be destined for a new Emirati museum called the Louvre Abu Dhabi.
Jobs and recruitment website Glassdoor said that “vacation guilt” has caused U.S. workers to forfeit more than 200 million vacation days last year costing $66.4 billion in lost benefits. Glassdoor found that American workers on average use only 54% of their eligible vacation time and of those employees who get paid time off, only 23% took all of the time they were entitled to – and nearly 10% took no paid time off at all.
According to the Denver Post, TV stations faced market-wide, double-digit declines in late newscast viewership during the November sweeps. All of Denver’s late newscasts lost viewers: KUSA-Channel 9 (-28%), KDVR-Channel 31 (-16%), KCNC-Channel 4 (-20%) and KMGH-Channel 7 (-22%). It appears that streaming video is just crushing the Denver late news market and “that’s something that’s scary for all of us” according to KMGH news director Holly Gauntt.
More from the Denver Post, “If college football fans learned anything this season, it’s that no dollar amount is too high when breaking a head coach’s contract; even if the financial penalties rests on the shoulders of the university that initiates the split. A collection of seven big-name head coaches dismissed in recent weeks – Nebraska’s Mike Riley [see the picture below], Arizona State’s Todd Graham, UCLA’s Jim Mora, Texas A&M’s Kevin Sumlin, Tennessee’s Butch Jones, Arkansas’s Bret Bielema and McElwain at Florida [who, by the way, jumped ship from Colorado State University for the big dollars with the Gators] — are reportedly owed a combined $69.1 million for the early termination of their contracts. That’s an average of nearly $10 million per coach to simply go away…Today, McElwain and Florida still owe CSU a combined $3,000,001.”, reports Kyle Fredrickson. CSU is my alma mater. Pay up Jim.
According to the Wall Street Journal’s Valerie Bauerlein, supplies of live trees are in short supply this Christmas season with some tree lots closing almost as soon as they open due to a shortage of trees. Some suppliers point the finger at extreme weather this past year. Others blame changes to agriculture. In Oregon, the biggest tree producing state in the country, small farmers have turned to growing grapes and cannabis instead of growing trees. But the main reason for the shortage: The Great Recession of 2008 – 2009. “It takes seven to ten years to grow a tree. Many farmers planted fewer seedlings or went out of business altogether in the years after the housing [and banking] bust, when consumers pulled back spending. At the same time, total acreage in production declined 30% between 2002 and 2012 according to the latest federal data available.” Last year, live-tree buyers spent on average $74.70 for a tree, more than double the average price in 2011. This year prices look to be 10% to 20% higher than in 2016 and the states that are feeling the pinch the most are Florida, Arizona and Illinois.
The parent company of BarkBox, a subscription service for dogs, has said that it is planning to go public within the next six months. For $20 a month, dog owners get a box of predominantly Bark-branded, toys, treats and chews. Bark anticipates revenue to hit $150 million this year and reach $250 million next year. The company has 500,000 subscribers and a 95% retention rate.
United Health Group’s Optum subsidiary has announced that it will acquire DaVita Medical Group for $4.9 billion in cash.
Cineworld Group PLC, a British movie theatre operator, will purchase American counterpart Regal Entertainment Group for $3.6 billion. The deal would create the world’s second-largest cinema operator.
Amazon has added Disney, Expedia, and the NFL to its cloud services platform. It is the latest in a series of big wins for Amazon Web Services (AWS). “Each of the new clients already has long-standing partnerships with Amazon, but Expedia, for its part, is moving ‘several data bases’ off Microsoft and Oracle servers and making an ‘all-in’ commitment to AWS, Amazon said in a statement.”, according to CNBC’s Sara Salinas.
Amazon Web Services (AWS) is launching new tools that can recognize people and other content in videos, convert recorded audio to text and have a profound understanding of the context of the message. They are also introducing a service for translating text into different languages.
Amazon is planning to launch an Alexa for Business Platform that could help businesses connect to teleconferences and add data to enterprise-focused sales programs. It will also offer more personalized features, such as an enterprise security layer that can distinguish different colleagues using the app in the office.
Amazon has announced that its Prime Video app is now available on Apple TV devices.
Microsoft said that it has extended its deal with the NFL that makes the Surface the league’s official tablet. The company has signed an extension to the original five-year deal which will carry the endorsement of the Surface into 2019.
The Sports Business Journal says Facebook is looking to hire an executive to negotiate the rights to streaming sports deals. The lucky hire will get a budget of a “few billion dollars” to spend on global rights deals. It will be tough to crack the nut since DirecTV currently owns the NFL’s “Sunday Ticket Package” for $1.5 billion per year until 2022. ESPN and Turner are paying nearly $2.66 billion a year to the NBA for their current deal. Just recently, Facebook itself bid $600 million – $120 million a year for five years – to stream cricket matches in India but didn’t get the deal. Star shelled out $2.6 billion for the combined digital-TV deal.
Facebook has launched a new app for kids called “Messenger Kids” and it lets parent control who children under 13 can chat with which means kids won’t have to use the full version of Facebook – where they could end up talking to strangers.
Pizza Hut (owned by Yum Brands) has launched a beer and wine delivery service in Phoenix, Arizona. The company calls it a one-stop-shop for customers who would like to enjoy beer and wine with their pizza.
Bank of America/Merrill Lynch has approved an additional $5 billion share buyback program that would allow the bank to buy back about 172,000 shares at $29.06 per share.
Fiat Chrysler said that November sales fell by 3.7%. Brand sales growth: Fiat -28%, Chrysler +14%, Jeep -2%, Dodge -15%, Ram -5% and Alfa Romeo +6161%.
General Motors said that November sales fell by 2.9%. Brand sales growth: Chevrolet -1.1%, GMC -5.8%, Buick -3.0% and Cadillac -12.8%.
Ford said that November sales grew by 6.7%. Passenger car sales +2.0%, SUV sales +13.3% and truck sales +4.1%.
Ford says it will partner with Alibaba (the Chinese Amazon) to test online auto sales in China through Alibaba’s online retail arm called Tmall, as well as via a new “auto vending machine” store concept.
Sears Holdings reports 3rd quarter earnings of -$2.64 per share on revenue of $3.66 billion, a decrease of 27.2% year over year.
Ulta Beauty reports 3rd quarter earnings of $1.70 per share on revenue of $1.34 billion, an increase of 18.6% year over year.
Broadcom reports fiscal 4th quarter earnings of $4.59 per share on revenue of $4.84 billion, an increase of 16.6% year over year.
Next week: Earnings from: Pier 1 Imports, Oracle, Adobe and Costco. Economic reports: November Producer Price Index, November Consumer Price Index, U.S. Retail Sales for November and U.S. Industrial Production for November.
WTI crude oil: $56.60 per barrel. 10-year U.S. Treasury note: 2.37%. Gold: $1,250 per ounce.
Sources: Real Money Pro, CNBC, 361 Capital, Seeking Alpha, MarketWatch, Estimize.com, Bloomberg, Reuters, The Wall Street Journal, The Denver Post and JAF Smith.
P.S. I really like the state of Nebraska and I really like folks from the Cornhusker State, but I thought the picture below was funny. GO BIG RED!
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.