Market Minutes for the week of January 1st, 2018 —- Happy New Year!!
“Such a long, long time to be gone. And a short time to be there.” – Phil Lesh and Robert Hunter’s “Box of Rain”
Here is what I am thinking: 1.) I understand the outflow of money from bond funds after the passage of the tax reform bill…a stronger economy means higher interest rates. But equity outflows to the tune of $14.5 billion? I don’t get it. Isn’t this what we wanted, meaningful fiscal stimulus to kick the economy into high gear. I don’t think I’m missing something here. 2.) The latest AAII (American Association of Individual Investors) poll shows 59.8% bullishness, which is the highest level in almost 2 years and notably above the 38.5% historical average. Bears are nowhere to be found at 15.6% 3.) Charles Schwab said that cash balances in client accounts reached their lowest level on record in the 3rd quarter. 4.) LPL Financial said that its “relative strength” index, an indicator of technical momentum, is at its highest level in 22 years. This indicates the S&P 500 is at its most overbought level since 1995. 5.) Boston Consulting Group’s survey of large investors however shows less optimism with 68% of the respondents seeing the market as overvalued – by an average of 15% – and the percentage of bearish respondents at “more than twice the 29% of investors in last year’s survey who thought the market was overvalued.” 6.) Jeff Saut, chief investment strategist at Raymond James: “I would expect 2018 to be an almost repeat of 2017. People are still way underinvested…The professional investors are all in for the most part, but the individual investor is not all in…Earnings are starting to come in better than expected. And with tax reform, and especially the corporate tax cuts, I think earnings are going to continue to surprise on the upside.” 7.) What a year 2017 was! The DJIA had a record-breaking 71 all-time record closing highs in a single year. The DJIA closed higher for 9 months in a row, a feat that has not happened since 1959. The S&P 500, on a total return basis, closed higher in every month of the year, a feat that has never occurred before in its history. The NASDAQ has closed higher in 13 of the past 14 months. The VIX (Wall Street’s Fear Gauge) closed the year at the least fearful on record. The average closing price of the VIX in 2017 was 11.10 vs the 31-year historical yearly average of 20. 8.) I agree with senior NYSE floor trader Art Cashin about the lull in market trading activity between Christmas and New Year’s Day. He says: “A waste of car fare and a clean shirt!” 8.) Tom Graff, fixed income strategist at Brown Advisory: “My view is pretty simple: The Fed will keep hiking at a pace of one time per quarter, until economic conditions suggest otherwise. Core PCE, the Fed’s favorite inflation measure, was just 1.5% over the last year, and yet the Fed hiked in December. On balance, the FOMC in 2018 will be more hawkish than the same body in 2017, which means, if anything, the bar to stop hiking is higher, not lower. I’d guess the actual inflation prints don’t really matter, as long as the employment picture remains strong.” 9.) I am looking forward to 4th quarter earnings reports, which start coming in next week. We will get a feeling for whether corporate profits can support this unstoppable market. We should also get guidance from companies about the effects of a 21% tax rate for 2018 and beyond. 10.) It’s beginning to happen…EPS upgrades from the Street as a result of tax reform. January 3rd, we saw 29 upgrades and 2 downgrades.
And the Oscar goes to: Top 5 performers in the DJIA for 2017: 1.) Boeing +90%. 2.) Caterpillar +70%. 3.) Apple +47%. 4.) Visa +46%. 5.) Wal-Mart +44%. Top 5 performers in the NASDAQ for 2017: 1.) Align Technology +134%. 2.) Take-Two Interactive Software +122%. 3.) Vertex Pharmaceuticals +104%. 4.) MercadoLibre +102%. 5.) Wynn Resorts +95%. Top 5 performers in the S&P 500 for 2017: Align Technologies +134%. 2.) NRG Energy +134%. 3.) Vertex Pharmaceuticals +104%. 4.) Wynn Resorts +94%. 5.) Boeing +90%.
And the Bronx Cheer goes to: Bottom 5 performers in the DJIA for 2017: 1.) General Electric -45%. 2.) IBM -7%. 3.) Exxon Mobil -7%. 4.) Merck & Co. -3%, 5.) Verizon -0.4%. Bottom 5 performers in the NASDAQ: 1.) Dish Network -17%. 2.) O’Reilly Automotive -13%. 3.) Ulta Beauty -12%. 4.) Walgreens Boots Alliance -12%. 5.) Kraft Heinz -11%. Bottom 5 performers in the S&P 500: 1.) Baker Hughes -51%. 2.) Range Resources -50%. 3.) Under Armour -48/-45%. 4.) Scana Corp. -46%. 5.) General Electric -45%.
Top 5 2017 performers by industry in the S&P 500: 1.) Casinos & Gaming +53.41%. 2.) Home Building +52.79%. 3.) Computer Electronics & Retail +40.38%. 4.) Semiconductor Equipment +39.79%. 5.) Home Entertainment Software +35.37%. Bottom 5 2017 performers by industry in the S&P 500: 1.) Housewares & Specialties -51.00%. 2.) Oil & Gas Drilling -42.02% 3.) Energy Equipment & Services -36.50%. 4.) Oil & Gas Equipment Services -36.00%. 5.) Brewers -35.88%.
Mastercard Spending Pulse which tracks all forms of payment said that U.S. holiday retail sales rose by 4.9% year over year from November 1 through Christmas Eve, which is the best showing since 2011. E-commerce spending drove the gains, rising 18.1% during the period.
The Conference Board said that the consumer confidence index slipped to 122.1 in December from a revised 128.6 in November but still is showing the highest reading since late 2000. The “present” situation index edged up to 156.6 for the best reading since 2001.
The Institute for Supply Management (ISM) said that the Chicago PMI (Purchasing Manager’s Index) climbed to 67.6 in December from 63.9 in November and ended 2017 at the highest level since 2011. The amount of goods and services produced in the this region hit a 34-year peak and new orders touched a 3.5 year high.
The December ISM manufacturing index rose 1.5 points to 59.7, the second-best level of 2017. New orders surged by 5.4 points with 15 industries reporting growth in orders. Inventories remained low and export orders were up by 2.5 points, the best level since June.
The December ISM non-manufacturing (services) index fell by 1.5 points to 55.9, a 4-month low. Only 9 of 18 industries saw a gain in new orders. Not to worry, manufacturing is picking up the slack.
The IHS Markit U.S. Services PMI for December was 53.7 (revised). The reading indicates the smallest expansion for the service sector in 7 months. Not to worry, manufacturing is picking up the slack.
The Labor Department said that the U.S. economy generated 148,000 new non-farm jobs in December, much weaker than the 190,000 that had been forecasted. Healthcare added 31,000 jobs, construction added 30,000, manufacturing added 25,000 and the retail sector lost 20,000 jobs. Average weekly earnings growth crept up by 0.3% to 2.8% year over year.
Payroll processor ADP said that private payrolls grew by 250,000 in December for the biggest monthly job creation since March. December’s number put the average monthly job creation for 2017 at 212,000. By category, Professional and Business services generated 72,000 new positions followed by Education and Health Services with 50,000 and Transportation and Utilities with 45,000 new jobs.
The S&P CoreLogic Case-Shiller/Composite 20 Home Price Index showed that U.S. home prices rose by 6.2% in October eclipsing the previous peak established in 2006. Prices continue to rise at more than double the pace of wage growth, creating affordability pressures that have been offset by low mortgage rates. The hottest markets in October continue to be Seattle +12.7%, Las Vegas +10.2%, and San Diego +8.1%.
The National Association of Realtors said that November pending home sales slowed way down, rising only 0.2%. New buyers coming into the market are finding that their choices are limited, and competition is strong. Prices rose 6.2% in October and the supply of homes for sale fell to 3.4 months’ worth in November.
According to a 10-city survey real estate services firm CBRE found that the average price for “large industrial parcels” (50 to 100 acres), is now more than $100,000 per acre, up from around $50,000 a year ago. The driver behind the price increases can be found in the growth of e-commerce players across the U.S. as they compete for sites to build fulfillment centers for completing “last mile” deliveries.
Baker Hughes said that the total drilling rig count increased by 1 rig in the last week, remaining almost unchanged for the 2nd straight week after 5 weeks of gains in a row. Oil rigs were unchanged and gas rigs rose by 1.
Copper prices hit a 3.8-year high last Wednesday after a jump in Chinese imports in November boosted future demand. Copper is widely used in power generation and construction and prices of the metal are up by more than 10% in December and up nearly 30% for 2017.
IHS Markit’s December final manufacturing PMI for the Eurozone came in at 60.6, the fastest pace of factory growth in more than 2 decades.
The Wells Fargo Institute sees the passage of the tax reform bill to be a “game changer.” Scott Wren, the firm’s senior global equity strategist says that it is very likely that the stock market could see a 10% gain this year because the tax reform package is “single-handedly” extending the recovery. He says: “This tax package is definitely a kicker, and it’s going to boost our GDP number up a little bit. It’s going to boost our earnings number, our targets and it’s going to push out the length of this cycle.”
First Trust Chief Economist Brian Wesbury: “Now the tax rate is 21%, and full expensing of business investment for tax purposes is law. These changes will boost the incentive to invest and operate in the U.S., leading to more demand for labor, which means lower unemployment and faster wage growth, as well. From an economic perspective, this is a revolution.”
Jonathan Golub, chief U.S. Strategist for Credit Suisse looks for another strong year in 2018 for the S&P 500. He has raised his target for the index to 3,000 and his EPS forecast to $155, some of the most aggressive targets on the Street. Back in October, before the passage of the tax reform bill, his S&P 500 target was 2,875 and EPS of $139. From the publication Weighing In, “Golub writes than much of the tax benefit is likely priced into stocks and that much of 2018 will be driven by underlying profit growth and multiple expansion.”
Bank of America Merrill Lynch said that as Congress moved closer to passing the tax reform bill, redemptions from equity mutual funds and ETFs surged as investors saw the bill as already “priced in” to stock prices. During the week of the vote, equity redemptions from funds and ETFs totaled $14.5 billion, the 4th highest on record, and the biggest since August 2016, just weeks after Brexit. Bond fund redemptions totaled $3.2 billion, the biggest outflow in over a year and the 8th consecutive week of net outflows, the longest streak since the Great Recession of 2008.
BofA Merrill Lynch’s Sell-Side indicator measures the average equity allocation suggested by its Wall Street bank peers, and it’s bearish reading is forecasting another big gain for stocks in 2018. According to a BofA Merrill Lynch Global Research report: “Historically, when our indicator has been this low or lower [recommended percentage of equity exposure relative to total portfolio assets], total returns over the subsequent 12 months have been positive 93% of the time, with median 12-month returns of 19%.”
On Friday December 22nd, the entire universe of digital currencies saw heavy selling pressure. Before the selling started, CoinMarketCap estimated the cryptocurrency market (40 digital currencies in all) to be valued at $610.43 billion. When the selling was finished, this market had lost more than $184 billion in 24 hours, a 30.16% decline (Bitcoin cash fell by 37%). This is a dangerous and volatile game. Steer clear!
Optoro, a consulting firm that specializes in the business of return shipments, estimates that consumers will return $90 billion of unwanted gifts from this holiday season. That sum amounts to nearly 25% of the total value of all goods returned in a full calendar year. UPS says that business is booming with customers returning an average of 1 million packages per day to retailers in December. On “National Returns Day” which is January 3rd, UPS expects customers to return 1.4 million packages, an 8% increase over last season. UPS estimates that between Thanksgiving and New Year’s Eve of this year, they will have handled (in both directions), 750 million packages, 40 million more than in the last holiday season.
According to box office figures, “Star Wars: The Last Jedi” claimed the biggest box office haul of the Christmas holiday weekend taking in almost $100 million over the four-day period. Since its release 2 weeks ago it has grossed $395,627,411. It also became North America’s highest-grossing movie of 2017, topping $1 billion in global revenue, just 3 weeks after its release. It goes without saying that the film will make a nice profit for its investors.
With the success of “Star Wars: The Last Jedi,” Disney will be the box office leader in the U.S. for the second year in a row, pushing Disney’s total 2017 box office take to an astonishing $2.27 billion. Disney had recorded a box market share of 21.3% through Christmas of last year. Other studios year to date through Christmas: Warner Bros. at an 18.9% share, Universal at a14% share, Fox, a 12.8% share, and Sony, an 8.9% share.
According to the Wall Street Journal, Asian private equity giant SoftBank has made an offer to acquire 15% of ride-sharing service Uber. SoftBank’s offer values Uber at $48 billion, which is almost a 30% discount from the company’s valuation in 2016 of $69 billion.
British Airways is changing the way its economy passengers board in 2018. Starting in January, flyers will board in the order of price paid for a ticket. The more you pay, the quicker you to find your seat. Group 1 boards first and Group 5 (those in steerage and other peasants) boards last. Hmmm.
Airbus has said that if it fails to win a potential new order for 36 of Dubai’s Emirates Airlines’ A380s, it will phase out further production of the world’s biggest airliner. Demand for these 4-engine giants has fallen as airlines continue to choose smaller, more fuel-efficient twin-engined airplanes.
A diving save? Airbus has confirmed a mammoth order for 450 jets worth $49.5 billion. Indigo Partners will buy 274 A320neos and 156 A321neos. In addition, the company confirmed that China Aircraft Leasing will purchase 50 A320neos for $5.42 billion.
GBH Insights said that Amazon grabbed between 45% and 50% of all online holiday retail sales, up from 38% last year. E-commerce sales rose 18% year over year and Amazon Prime memberships jumped to 88 million with subscribers spending 22% more this holiday season than last.
Amazon claims to have sold “millions” more of the Echo and Echo Dot smart devices than it did last year. The Echo Dot was Amazon’s top-selling product across all categories. The company said that customers who purchased the Echo and Echo Dot last year used the device to do online “voice shopping” this year for other products such as the Amazon Fire TV Stick with the Alexa Voice Remote. Sales of the Amazon Fire TV Stick doubled over last year. The company also noted that the Amazon app shopping rose 70% this year over last year.
Amazon said that more than 5 billion items were shipped using the Amazon Prime membership in 2017. Prime membership includes unlimited free 2-day shipping.
According to e-commerce analytics provider, One Click Retail, Amazon was responsible for about 44% of all U.S. e-commerce sales in 2017, or about 4% of the total retail sales in the U.S. last year.
Apple said that its App Store has a record breaking holiday season. Customers spent $890 million in the seven-day period starting Christmas Eve. New Year’s Day had $300 million in purchases. The company also said that iOS developers earned $26.5 billion in 2017, up 30% over 2016.
Penske Media said that it is buying a majority stake in Rolling Stone from Wenner Media, it’s New York-based publisher. Terms of the transaction were not available but the Financial Times, citing people briefed on the deal, puts the value of the arrangement at more than $110 million. Don’t screw it up Penske! I don’t like the magazine’s politics, but I depend on the musical information.
Chubb said that the company is planning a one-time tax benefit in excess of $250 million in the fourth quarter due to the passage of the U.S. tax overhaul.
Southwest Airlines said that it will give a $1,000 bonus to all full-time and part-time employees to “celebrate the recent passage of the tax reform legislation.” The company also said that it has exercised its option to purchase 40 Boeing737 Max 8 airplanes for $4.5 billion.
JetBlue said that it will give bonuses of $1,000 to each of its 21,000 crew members as a result of the passage of the tax reform bill. The company said that the CEO and executive vice presidents would not be eligible for the bonus however.
ADT Inc., a home security company that was acquired by Apollo Global Management in 2016 plans to go public once again. The company has filed for an initial public offering with the Securities and Exchange Commission for 2018. Apollo will retain more than 50% of the shares but the new entity will be a combination of ADT and Protection 1, another home security company which has also been owned by Apollo.
General Motors December unit sales: -3.3%. By brand: Chevrolet -2.9%; GMC + 1.2%; Buick +4.7% and Cadillac -28.6%.
Ford December unit sales: +0.9%. Passenger car sales -5.5%; SUV sales +8.0%; Truck sales -1.0% and total 2017 sales -1.1% to 2,586,715 units.
Tesla reported it delivered a total of 29,870 vehicles, including 1,550 of the Model 3 sedan in the 4th quarter. Model S deliveries were up 9% for the quarter and Model X deliveries were up 27%.
Costco said that same store sales for December increased 11.5%, smashing consensus estimates of 8.1%. The impressive monthly report was driven by a 6.4% rise in U.S. traffic and a 33% jump in digital sales.
Walgreens Boots reports fiscal 1st quarter earnings of $1.28 per share on revenue of $30.74 billion, an increase of 7.9% year over year.
Next week: Earnings from: Delta Air Lines, Wells Fargo, and JP Morgan. Economic reports: December CPI (Consumer Price Index), December PPI (Producer Price Index), and U.S. Retail Sales for December.
WTI crude oil: $61.95 per barrel. 10-year U.S. Treasury note: 2.45%. Gold: $1,322 per ounce.
Sources: CNBC, Real Money Pro, Estimize.com, Bloomberg, MarketWatch, Seeking Alpha, 361 Capital, First Trust, The Wall Street Journal, IHS Markit Economics and The Grateful Dead.
P.S. Rest in peace Myron T. “Bags” Bagley. You took a risk and hired a fresh out of college, ambitious, 23-year old with an economics degree. You’ve always been a true friend and believed in me every step of the way. I will be forever thankful to you. I will miss you. “Such a long, long time to be gone. And a short time to be there.”
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.