Market Minutes for the week of January 29th: (Caution…. It’s a long one. A lot happening).
“If the meek are going to inherit the earth, our linemen are going to be land barons.” – Bill Muir (former offensive coordinator of the Tampa Bay Buccaneers)
Here is what I am thinking and hearing: 1.) The S&P 500 has closed at a new record 13 times in January, the most since February 1998. So far this year, the index had returned (with dividends reinvested) 6.3% through January 25th. Among the S&P 500’s components, 117 have double-digit positive returns. 232 have beaten the market with returns of 6.4% or more. 408 have positive returns. One is flat. 96 are down and 35 are down 5% or more (includes 5 that are down more than 10%). The top performer so far in 2018: Netflix 40% (the stock was up 55% in 2017). 2.) The trend known as the January Barometer was coined in 1972 and it comes from an old Street saying, “As goes January, so goes the year.” According to the Stock Trader’s Almanac, between 1950 and 2017, the barometer has been correct 58 of 67 times for an 87% accuracy rate. As far as the S&P 500 is concerned, January 2018 just finished 5.62% higher, so there could be an 87% chance the market has another positive year. We will see. 3.) Dealogic reports that the IPO market set a record in January with almost $8 billion priced in 17 new offerings. That is the most capital ever raised on record for January. The previous record was set in 2014 with $5.3 billion in IPO deals done. 4.) So far, earnings reports for the 4th quarter and forward EPS guidance for 2018 has been impressive. The percentage of companies beating earnings estimates stands at 70.1%. The percentage of companies beating revenue estimates is at 71.6%. The percentage of S&P 500 companies raising FY’18 EPS guidance is near 82%. 5.) Wait a minute! Wow, rates on the 10-year Treasury note are acting worried about the return of inflation and have jumped to 2.84%, the highest level since April 2014. Why are rates rising? One, the dollar is falling, especially after Mnuchin’s comments in Davos last week. A weaker dollar implies higher inflation and less demand for U.S. Treasuries. Two, although the European Central Bank (ECB) has said it plans to buy bonds through the end of September as part of its own quantitative easing program, some European central bankers feel it should end now. Dutch central bank president Klaas Knot: “There is no reason whatsoever to continue the program. I feel that we need to be clear about this.” Inference? Weaker demand for U.S. Treasuries. 6.) As I said a couple of weeks ago, if the 10-year trades to 4.0%, I get worried that bond yields start to compete with the dividend yield from stocks. The old Wall Street adage says: “Bull markets don’t die of old age, they are killed by higher interest rates.” 7.) Hmmm. Earlier in the week, the markets were down a total of 2.0% in two consecutive days. Looks like my concern with rising rates is becoming a reality, not at 4.0% but right here at 2.84%. 8.) As the global expansion grows, the worlds’ central banks are moving away from a negative interest rate framework and the utopia of quantitative easing (QE). The equity markets haven’t had to deal with this since before 2008, so it becomes easier to understand how shifting monetary policy in Europe and the U.S. could trigger the first 5% correction since Brexit in 2016. 9.) That said, just stunning quarterly revenue numbers from the “FANG” and related companies. FB –$12.9 billion. AMZN – $60.45 billion. NFLX – $3.3 billion. GOOGL – $32.2 billion. APPL – $88.3 billion. MSFT – $28.9 billion. In all, nearly one-quarter of a trillion dollars in sales in one single 3-month period. 10.) Apple’s cash reserves hit a new record at $285.1 billion! Amazon’s sales for the full year of 2017 were $177.9 billion, a 31% increase over last year! Facebook saw a 48% increase in advertising revenue in the 4th quarter!
GDPNow, the Atlanta Fed’s GDP tracker, is pointing to 5.4% growth in the 1stst quarter, powered higher by strong consumer spending. If the forecast remains, it would be the best quarter of growth since the end of the Great Recession in 2009.
The Institute for Supply Management (ISM) said that the Chicago Purchasing Manager’s Index (PMI) for January came in at 65.7 which was better than the consensus estimate of 64.
The U.S. ISM manufacturing index for January rose by 0.5 points to 59.1. New orders fell off by 2 points. Backlogs were up by 1.2 points. Export orders were up by 2.2 points. Prices paid rose by 4.4 points and employment fell by 4 points. Of the 18 industries surveyed, 14 saw growth, 4 saw contraction and all 18 reported “paying higher prices.”
The Commerce Department announced that factory orders for December climbed by 1.7%, advancing for the 5th straight month.
The Commerce Department said that U.S. construction spending for December rose by 0.7% to a record-setting $1.25 trillion. On a year over year basis, construction spending advanced by 2.6%.
The Commerce Department also said that personal incomes rose by 0.4% in December and wages increased by 0.5%
In last week’s GDP report, the Commerce Department reported that consumer spending, which makes up more than two-thirds of U.S. economic activity, escalated at a 3.8% rate in the 4th quarter. This marks the fastest acceleration since the 4th quarter of 2014. The amount of savings declined in the quarter falling to $384.4 billion from $478.3 billion in the 3rd quarter. Business investment in equipment climbed at an 11.4% rate in the quarter, the fastest rate since the 3rd quarter of 2014. A favorite inflation indicator of the Fed, the consumption expenditure price index (PCE) excluding food and energy, advanced at a 1.9% rate, the fastest pace in more than a year and more than the 1.3% increase in the 3rd quarter.
According to the Bureau of Economic Analysis (BEA), the decline in the personal savings rate to 2.4% was on the surface the lowest level of savings since 2005. Beneath the surface however, the number may have been closer to 6.0% according the Federal Reserve. What’s the reason for the difference? The BEA regards the full purchase price of high-value items such as cars as a one-time expense, without taking into consideration that most people pay through monthly installment plans. The Fed’s tool only looks at monthly payments when calculating the savings rate.
The National Association for Business Economics (NABE) found in a survey that the net percentage of companies that have increased wages and salaries over the last three months climbed to 48 in January, up from 37 in October, the third highest reading in 18 years (since April 1982). Not a single respondent reported a drop in wages.
The Conference Board said that consumer confidence rose in January to 125.4 vs a forecasted 123.1. In November, the index hit a high of 129.5, the highest level since November 2000 when the index hit 132.6.
Payroll processor ADP said that the U.S. economy added 234,000 new private jobs in January while economists were forecasting a gain of 185,000.
The Bureau of Labor Statistics reported that the U.S. economy added 200,000 new non-farm jobs in January. Average hourly pay rose by $0.09 to $26.74 per hour. The rise of 0.3% pushed the yearly increase to 2.9% from 2.6%, signifying the highest level since the end of the Great Recession in 2009.
The Labor Department said that U.S. worker productivity (hourly output per worker) fell by 0.1% in the 4th quarter vs an expected rise of 1.0%. It is the first decline in quarterly productivity since 2016. Economists blame the decline on a shortage of workers and the after effects of the hurricanes.
The National Association of Realtors (NAR) said that pending home sales advanced by 0.5% in December to the highest level since March 2017. Pending sales were down 5.1% in the Northeast and 0.3% in the Midwest while pending closings were up 2.6% in the South and 1.5% in the west.
The S&P CoreLogic Case-Shiller 20-City Home Price Index revealed that home prices in November increased by 6.2%, another new high. Prices nationally, are presently 6% higher than their last peak in 2006 and rising 3 times faster than the rate of inflation. Markets such as San Diego, Los Angeles, Las Vegas, Seattle and San Francisco continue to see strong gains.
In spite of rising home prices, the Census Bureau says that the rate of homeownership in the 4th quarter, hit a three-year high at 64.2%. Homeownership hit an all-time high of 69.1% in 2004 as the housing bubble inflated. After the bubble burst, the rate of ownership dropped to 62.9% in 2016. In the under 35 age group, homeownership rose by 1.3% year over year to 36%. For those aged 35 – 44, the increase was a modest 0.2% to 58.9%. In the 44 – 54 aged group the rate of ownership declined by 0.3% to 69.5%.
The jump in bond yields has pushed mortgage rates their highest levels in 4 years. Matthew Graham of Mortgage News Daily said, “Some lenders will be at 4.5% on their best-of-case scenario 30-year fixed quotes.” Higher rates, combined with higher home prices, will make this spring housing market even more challenging.
Baker Hughes said that last week’s drilling rig count rose by 11 rigs to a total of 947. Oil rigs were up by 12 to 757 and gas rigs fell by 1 to 188.
The French economy grew by 0.6% in the 4th quarter and 2.4% year over year, the best growth rate since 2011. The Spanish economy also saw a good 4th quarter with 3.1% year over year growth and marks the 11th consecutive quarter with a 3 handle.
According to Bloomberg, the state of Illinois is getting so desperate to support the state’s massively underfunded pension system, that they are considering a $107 billion bond offering to get the retirement system back to a near-funded status. If it happens, it would be the biggest debt sale in the history of the municipal markets, exceeding what Puerto Rico accumulated in the runup to its record-setting bankruptcy.
Here’s what Barron’s Mark Schwartz has to say about corporate tax reform: “There will be very little incentive for U.S. companies to move operations abroad. They will have to pay a U.S. tax of up to 10% on foreign earnings if the tax they pay abroad is less than the new 21% U.S. rate. We’re going into a two-year period where gross domestic product will grow 3.5% to 4%, instead of 2%. That’s a big difference. At 2% growth, there’s no big pressure to expand capacity. A couple of quarters of 3.5% – we’re kind of there already – and you’ll see capital expenditures take off. Capex will grow 8% to 9% in 2018, and be stronger in 2019. Tax reform permits companies to depreciate 100% of new equipment in year one versus 50% before.”
According to the Wall Street Journal’s Theo Francis, Peter Loftus and Heather Haddon, “The same provision, speeding up tax deductions for capital spending, has prompted Kimberly-Clark, the diaper and tissue maker, to accelerate at least one major project…The board votes next month on a U.S. factory retooling expected to cost hundreds of millions of dollars. There wasn’t a timeline for the project previously.” CEO Tom Falk says: “It gives us more incentive to invest, particularly in the U.S. The project made sense before the tax benefit. It makes more sense after the tax benefit.”
Delta Airlines has shortened the leash on “comfort,” “support” and “service animals” on their planes. There have been incidents involving interactions with other passengers involving turkeys, gliding possums, snakes and spiders who, have been boarded as therapy (animals, reptiles and insects). As of March 1st, dogs, cats, snakes, turkeys, possums and spiders need more paperwork to board. Passengers with service animals will be required to produce a veterinary health form or vaccination record. Passengers with support animals to help with psychiatric needs, will also require a letter signed by a doctor or mental health professional detailing the passenger’s need for the animal and a second letter that declares that the animal can behave properly without the need for a kennel.
Forward Cabin has reported that American Airlines may begin treating overhead bins like reserved parking spots. The company sent around an internal memo last week naming a few perks for passengers who pay extra for legroom. The memo said the airlines will install placards that mark some overhead bins as being for the exclusive use of “main cabin extra” passengers who pay an extra $20 for various perks.
NPD Group, a market research company that tracks trends in 2 dozen industries, says that habits of millennials are driving down the demand for outdoor gear. Industry retail sales totaled $18.9 billion from December 2016 through November of last year, down 6% from the previous 12 months. Greg Powell, NPD’s senior advisor for the sports industry states: “Millennials are outdoorsy and support environmental preservation and sustainability, but they have a different take on health and fitness than their predecessors. They have a more lighthearted approach that involves their friends.” Powell says that millennials are less likely to demand gear that stands up to extreme conditions. Using boots as an example Powell articulates: “The hardest, most extreme condition some of these boots are going to have is walking from the Prius to the craft brewery.”
The Centers for Disease Control and Prevention found that the number of cruise ships failing health and safety inspections hit a 10-year high in 2017. Last year, there were 14 instances where a cruise ship failed an inspection. Carnival Cruise Lines operated five ships that received failed grades, three of which were given in November and December. The number of failed inspections however, represents just a small part of the industry’s overall performance (around 250 inspections were performed last year), although it’s a substantial rise from recent years. Only two ships were given a failing grades in a CDC inspection in 2016.
Since 2016, Seattle has held the title of “tower crane capital” of the U.S. At the beginning of 2018, it still holds the title, but its lead has shrunk by half as its crane count dropped in 2017. There are now just 9 cranes separating Seattle from three cities tied with second-most cranes – Los Angeles, Denver and Chicago.
Starbucks stated in their earnings conference call last week that same store sales for the 4th quarter grew at a lackluster 2% rate. The company said that “Our holiday merchandise that we had did not perform up to our expectations.” They also said that holiday sales of gift cards were well below expectations.
To make up for the 4th quarter whiff, Starbucks said they will begin to shift their attention to afternoon traffic, where customers are more likely to drink cold beverages. Starbuck CEO Kevin Johnson said, “We have a big opportunity to leverage our core beverage platforms, particularly in iced coffee, tea, cold brew and draft beverages, all of which skew toward the afternoon.”
Starbucks also said it is testing a cashless store to gain a better understanding of how digital and credit card payments affect customer behavior and experiences. CEO Kevin Johnson: “Thirty percent of our payments in the United States [are] done with a mobile phone. Over 40% are done with phones and Star Value cards with rewards. In China, over 60% of our tenders come from mobile payments.”
Wynn CEO Steve Wynn is the focus of a report in the Wall Street Journal that alleges a pattern of sexual misconduct spanning decades. Mr Wynn blames his ex-wife for the accusations as the two are involved in a bitter legal battle over a divorce settlement revision.
FedEx has announced three major programs in the wake of the passage of corporate tax reform. They will pay in excess of $200 million for the increased compensation by advancing 2018 annual pay increases by 6 months to April 1st. They will make a voluntary contribution of $1.5 billion to their pension plan. A $1.5 billion investment will be allocated to expanding the FedEx hub in Indianapolis and modernizing the Memphis SuperHub.
Lowe’s says that it will give bonuses of up to $1,000 to 260,000 employees based on length of service, and expand employee benefits based on the passage of corporate tax reform.
Exxon Mobil announces it will invest more than $50 billion in the U.S. through 2023 due to the recent tax law changes and “unique strengths of our company.”
Electronic Arts, Disney and the NFL are teaming up in a historic deal to mark ESPN’s first long-term competitive gaming agreement. The upcoming EA Sports Madden NFL 18 Championship Series will offer exclusive broadcast rights to Disney XD and ESPN.
Details remain sketchy but, Amazon, JP Morgan and Berkshire Hathaway have announced a partnership to cut the costs of healthcare and improve service for employees. The three giant companies which collectively employ more than 1.1 million people, will launch an independent operation that is intended to be free from profit-making incentives. Currently, JP Morgan spends around $1.2 billion on medical benefits annually and the goal of the partnership is to cut those costs by 20%.
“Google Home now has an installed base of 14 million units, according to estimates from research firm CIRP. Amazon Echo speakers have an installed base of 31 million which gives the Alexa-enabled line a 69% market share compared to Google’s 31%. As of September, the market share stood at were 76% Amazon and 24% for Google. The Google Home Mini drove Google’s gains since the budget-friendly device accounted for 40% of Google Home device sales in the during the holiday quarter”, reports Brandy Betz of Seeking Alpha.
Facebook has announced it is banning ads that promote cryptocurrencies. This policy covers bitcoin in addition to other coin offerings.
Facebook said in its earnings call that changes they made last quarter to its service scaled back the time spent on the site by 50 million hours per day. CEO Mark Zuckerberg said: “By focusing on meaningful connections, our community and business will be stronger over the long term.”
Boeing’s venture aerospace arm, Boeing HorizonX, has taken an undisclosed stake in battery start-up Cuberg. The company has already taken another investment position in electric-plane start-up Zunum.
Dr Pepper Snapple Group and Keurig Green Mountain have reported plans to merge creating Keurig Dr Pepper. Shareholders in Dr. Pepper Snapple Group will receive $103.75 per share as a special cash dividend and hold on to 13% of the new company which will be valued at nearly $11 billion.
Thompson Reuters has confirmed that it is in advanced discussions to sell a major stake in its financial and risk business to private-equity company Blackstone Group. No terms have been revealed but Thompson’s financial and risk business is the company’s largest operation. In 2016, it generated more than half of the company’s annual revenue of $11.2 billion.
Microsoft has announced that it has purchased backend game platform PlayFab for an undisclosed amount. PlayFab provides cost-effective services to create and launch cloud-connected games across all platforms and will tie into Azure, Microsoft’s cloud platform.
Lockheed Martin reports 4th quarter earnings of $4.30 per share on revenue of $15.14 billion, an increase of 10.1% year over year.
AbbVie reports 4th quarter earnings of $1.48 per share on revenue of $7.74 billion, an increase of 13.8% year over year.
Boeing reports 4th quarter earnings of $4.80 on revenue of $25.4 billion, an increase of 9.1% year over year.
Amazon reports 4th quarter earnings of $3.75 per share on revenue of $60.4 billion, an increase of 38% year over year. WOW
Google reports 4th quarter earnings of $9.70 per share on revenue of $32.32 billion, an increase of 24% year over year. WOW
Apple reports fiscal 1st quarter earnings of $3.89 per share on revenue of $88.3 billion, an increase of 12.7% year over year.
Microsoft reports fiscal 2nd quarter earnings of $0.96 per share on revenue of $28.9 billion, an increase of 12.0% year over year.
Facebook reports 4th quarter earnings of 2.21 per share on revenue of $12.9 billion, an increase of 47.2% year over year. WOW
AT&T reports 4th quarter earnings of $0.78 per share on revenue of $41.7 billion, a decrease of 0.3% year over year.
Next week: Earnings reports from: Chipotle, Gilead, Disney, General Motors, Allergan, Tesla, Cognizant Technology Solutions, Expedia and Activision Blizzard. Economic reports: ISM Non-Manufacturing Index for January.
WTI crude oil: $64.67 per barrel. 10-year U.S. Treasury note: 2.84%. Gold: $1,337 per ounce.
Sources: Real Money Pro, CNBC, 361 Capital, Denver Post, Estimize.com, Seeking Alpha, MarketWatch, First Trust Economics, Bloomberg, Investing.com and the Wall Street Journal.
PS: We are pleased to welcome Malissa Mackin as our new Director of First Impressions on the phone and at the front desk.
PS: According to a survey of 1,000 by personal finance website LendEDU, the average cost of hosting a Super Bowl party will be $207. Of that, 35% will go to food and non-alcoholic beverages, while 28% will be spent on beer, wine and spirits. The rest of the money 37%, will go to purchasing fan gear, decorations and other items. The National Retail Federation says that one-in-five adults (18%), plan on throwing a Super Bowl bash.
PS: HR firm Challenger Gray & Christmas estimates that Sunday’s Super Bowl could cost employers over $3 billion in Monday absenteeism. Data mined by the Bureau of Labor Statistics indicates about 60.1% of Super Bowl viewers are employed. If all of those 60.1%, come in an hour late or spend an hour discussing the game when they should be working, it could cost employers $1.78 billion.
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.