Market Minutes for the week of January 8th:
“Without promotion, something terrible happens…Nothing!” – P.T. Barnum
Here is what I am thinking: 1.) The power of this market is taking my breath away. Last week the DJIA made the fastest 1,000-point move in history, when in just 23 trading days, the DJIA jumped from 24,000 to 25,000. This outpaces the March 2017 move of 1,000 points (to 21,000) which took 24 days. This week, the DJIA has set another speed record with the fastest 500 point move in history (7 trading days). 2.) Ralph Acampora, the godfather of technical analysis: “I am so bullish, I have to sit down and calm down.” He has a near-term target for the Dow of 25,900 and a secondary target for the year of 28,700. The driving force behind those targets Acampora says will be a “healthy” rotation from technology stocks to energy names and financial companies. 3.) Why does this market keep going up? There is enthusiasm and optimism for better EPS this year from tax savings, and yet an even more powerful reason: Because of years of buybacks, mergers and acquisitions and lack of IPOs, the supply of publicly traded companies has dwindled. There are less than half the number of publicly traded companies today versus when I started my career 36 years ago. Bigger, however, is the math behind stock buybacks. If companies are going to realize greater profits because of new tax savings going forward, and those profits are divided into fewer shares because of share repurchases, you are going to get higher earnings per share (EPS), and earnings per share (EPS) growth is what drives stock prices. 4.) Tony Dwyer, Chief Market Strategist for Canaccord Genuity: “We would like to point out that market peaks are NOT built on euphoria and high optimism, they are built on excessive optimism that ignores deterioration under the economic and market surface. In other words, the major market indices making new highs while the various Advance/Decline lines trending lower. Small cap indices dropping. Weakening credit and higher delinquencies associated with an inverted yield curve. Sharply slower economic data and weakening profit margins. Deteriorating consumer and business sentiment.” Thanks Tony, none of these warning signs exists as far as I can tell. 5.) Is China really intending to back away from the purchase of U.S. Treasury bonds? That worry has pushed the 10-year yield to 2.60% in just several days. 6.) Tom Graff, fixed income strategist for Brown Advisory says not to worry: “I put almost no weight on this China story. China’s buying and selling of Treasury bonds is entirely related to managing their currency…Perhaps more importantly, Chinese net buying of Treasuries hasn’t been obviously impactful on interest rate in recent years. From September 2012 to November 2013, China’s holdings increased 14% to $160 billion. Treasury rates rose 90bps during that time. China was a net seller of nearly $100 billion from November 2013 to February 2015. Treasury rates fell 80bps. From November 2015 to November 2016, China was a net seller to the tune of $215 billion, and the 10-year rose a whopping…10bps…Chinese selling Treasuries is a bogey man that you can safely ignore.” 7.) Both short rates and long rates will move higher this year if inflation begins to accelerate and the economy gets “too far over its ski tips.” 8.) Wow, oil prices are ripping higher. Brent crude touches $70 per barrel and WTI crude touches $64 per barrel. The move is being pushed by stronger-than-expected global demand which is being fueled by surging worldwide economic growth, against ongoing output limits (supply constraints) from OPEC and Russia. 9.) Will Trump pull out of NAFTA? I doubt it. His tough talk may be posturing to get Mexico on the financial hook for the Wall. 10.) It’s good to see that brick and mortar retailers had an encouraging holiday sales season.
The Commerce Department said that wholesale inventories rose by 0.8% in November, suggesting that inventory investment will probably contribute to stronger economic growth in the 4th quarter.
The Bureau of Labor Statistics said that producer prices (PPI) fell by 0.1% in December versus a forecasted 0.2% rise. Year-over-year producer prices have risen by a modest 2.6%. Consumer prices (CPI) increased by 0.3% for a 1.8% year over year increase.
The Commerce Department reports that retail sales for December rose by 0.4% and 5.4% over the same period a year ago. The National Retail Federation said that the strongest performers were retailers who sold building materials, furniture and electronics. Overall sales totaled $691.9 billion and the 5.4% year over year increase was the biggest jump since the end of the Great Recession of 2008-2009.
The Federal Reserve said that consumer credit growth surged in November to $3.83 trillion. The $28 billion increase was the largest monthly increase in 16 years. Revolving credit (credit cards) accelerated at 13.3% annual rate in the month and non-revolving credit (student and car loans) increased at a 7.2% annual rate, the fastest pace since October of 2016.
The December NFIB (National Federation of Independent Business) small business optimism index dropped to 104.9 from November’s multi-year decade high of 107.5. Interestingly, Future Compensation Plans jumped by 8 points to 23%, the highest reading since 2000. No doubt driven by tax reform.
According to a survey by TD Bank, record home equity led to $152 billion in remodeling spending in 2017.
TD Ameritrade’s Investor Movement Index climbed to 8.59 last month, its second straight monthly record. The index measures TD Ameritrade clients’ behavior, aggregating their positions and activity, to assess how they are positioned. “Retail investors ended 2017 with [equity] exposure at all-time highs. Our clients were net buyers during December, resulting in one of the longest buying streaks in the history of the index,” TD Ameritrade wrote in its press release.
Bloomberg said that Eurozone consumer confidence ended 2017 at 116, the highest level since December of 2000.
On what corporations will do with their savings from the new 21% tax rate: Scott Grannis, the Calafia Beach Pundit says: “But, argue the skeptics, won’t businesses just use their extra profits to buy back shares and increase their dividends, making the wealthy even wealthier, without creating any new jobs? This oft-repeated allegation is an empty argument, because it ignores one key thing: what do those who receive the money from buybacks and dividends do with it?”
Grannis goes on to reference an essay from John Cochrane who explains it like this: “The larger economic point: In the end, investment in the whole economy has nothing to do with the financial decision of individual companies. Investment will increase if the marginal, after-tax, return to investment increases. Lowering the corporate tax rate operates on that marginal incentive to new investments. It does not operate by ‘giving companies cash” which they may use, individually, to buy new forklifts, or to send to investors. Thinking about the cash, and not the marginal incentive, is a central mistake.”
More from Scott Grannis: “One reason for increased business optimism is undoubtedly the huge reduction in regulatory burdens that the Trump administration has managed to achieve in one short year. Under Trump’s leadership, there has been a one-third reduction in the number of pages in last year’s Federal Register compared to Obama’s last year, and the number of rules in the 2017 Federal Register was the lowest since records were first kept in the mid-1970s.”
“The ICR Conference is a unique platform where private and public management teams, institutional investors, sell-side research analysts, investment bankers, private equity professionals and select media connect with one another with the goal of understanding consumer trends and public company prospects as the year begins”, as stated on their website. The 2018 conference has just concluded and here is what Jim Cramer, who attended the gathering, had to say in summary: “The consumer is alive and well and spending. The consumer wants value. The consumer want reliability. And the consumer will pay for it.” Other takeaways: 1.) “…there is a spirit among the purveyors of anything retail that the cutthroat race to the bottom [the first full-priced Christmas since the Great Recession] for so many companies, is over.” 2.) The consumer feels better post the election of Trump. 3.) Companies will still have a ton of money left over even after expansion, because they were high federal taxpayers in 2017 but not in 2018. 4.) For consumers, employment matters, wages matter. Confidence from plentiful jobs and rising wages is inspiring a lot more spending. 5.) E-commerce. Companies feel like they have gotten to the point where they have caught up to Amazon.com when it comes to digitization of their businesses and have now have an e-commerce strategy that works and doesn’t break the bank. 6.) There is a sense among retail companies that the consumer will recognize value when they see it and they will become loyal to the brand.
North Korea’s sole airline is called Air Koryo and it is one of the worst airlines in the world. Air Koryo’s one lone in-flight meal is the “Koryo burger”, which is a piece of mystery meat, topped with processed cheese, a lettuce leaf or sprinkle of cabbage and a runny red sauce. The meal is served ice cold.
According to a study done by the New York City Food Policy Center at Hunter College, the top 3 worst (unhealthy) domestic airline meals come from 1.) Hawaiian Airlines. 2.) Spirit Airlines. 3.) Allegiant Airlines. The top 3 most healthy airline meals are 1.) Delta Airlines. 2.) Virgin America. 3.) Air Canada & Jet Blue. The meal on the Hawaiian Air flight between New York and Honolulu consists of stir-fried chicken with vegetables, fruit, cheese, crackers and AlohaMac Chocolate and clocks in at 1,480 calories.
Airfarewatchdog.com found in a recent 2017 survey, that 92% of travelers said that the air-travel experience “leaves a lot to be desired.” The experience looks like it’s about to get even more aggravating. British Airways has announced that it is removing the capacity for seats to recline on its new A320 and A321neo aircraft. The airline is the first non-budget carrier to join the ranks of “rigid seating” in the ongoing battle for more seat capacity and revenue per mile.
According to NOAA (National Oceanic and Atmospheric Administration), 2017 was not only the third-warmest year on record, but it was also the most expensive in terms of United States disaster losses. The total cost for 1 drought, 2 floods, 1 freeze, 8 severe storms, 3 tropical cyclones and 1 wildfire came to $306 billion. The previous record was for 2005 at $214.8 billion. Hurricanes Irma, Maria and Harvey cost $265 billion and puts them in the top 5 costliest hurricanes on record along with Katrina and Sandy.
Mark Holowesko, fund manager of Templeton Foreign and Templeton Growth: “More energy hits the earth from the sun in one hour than is consumed by the world’s population from power plants in one year.” No wonder it was hot last year.
The city of Seattle, Washington kicked off 2018 with a new sugar tax: 1.75 cents per fluid ounce. At Seattle area Costco stores new price signage details the rip-off: Dr. Pepper (36) 12 oz. cans priced at $9.99 + City of Seattle Sweetened Beverage Recovery Fee @ $7.56, for a grand total of $17.55 per case. Gatorade Frost Variety Pack (35) 16.9 oz. bottles priced at $15.99 + City of Seattle Sweetened Beverage Recovery Fee @ $10.34, for a grand total of $26.33 for the case. Just insane!
The new 2019 Subaru Ascent SUV is a seven-eight passenger vehicle and comes with, count ‘em, 19 cup and bottle holders which works out to a minimum 2.4 beverage holder-to-passenger ratio. Imagine if you owned this SUV in Seattle and all of your passengers climbed onboard with sugary drinks that filled all of the cup holders, it would probably cost more to fill those cupholders than it costs to fill the SUV with gas! Great observation from Blaine Rollins of 361 Capital.
According to an article in the Wall Street Journal, Maine cannot find enough snowplow drivers. The state Department of Transportation has about 50 openings among 700 positions and cannot fill them. To make matters worse, cities like Portland (Maine), hire their own drivers and pay them more and private sector demand for experienced drivers is high. The state also has one of the lowest unemployment rates in the nation at 3.5%.
The Governor of Alabama has announced that Toyota and Mazda will build a final assembly plant in Huntsville, Alabama. The plant, scheduled to open in 2021, will employ 4,000 workers and produce up to 300,000 vehicles per year. The plant could make Alabama the fourth-biggest state in the U.S. when it comes to auto manufacturing.
MoviePass, the movie-ticketing subscription service, says that it now passed over 1.5 million subscribers, up from 1 million just 30 days ago. The company is privately held and owned by Helios and Matheson Analytics.
Celgene has said that it will acquire Impact Biomedicines for $7 billion. Impact Biomedicines has a drug named “Fedratinib” that has shown promise in the treatment of the blood cancer Myelofibrosis.
GoPro has announced that COO Charles Prober will leave the company on February 16th. And in the same announcement, CEO Nick Woodman said that the company has hired JP Morgan to explore a sale of GoPro after a disappointing holiday season that resulted in layoffs of 20% of the workforce.
Sears Holdings, the parent of Sears and Kmart stores, has announced that it will close 100 more stores in 2018. The closings consist of 64 Kmart and 39 Sears stores and should be complete by April of this year.
According to Bloomberg, Fitbit is working on a fitness smart watch for kids as it battles Apple’s push into health tech watches.
Taco Bell reported it will begin selling Nacho Fries for $1 for a limited time starting January 25th. The roll-out comes shortly after the company said it would introduce 20 $1 items in test markets nationwide this year. Taco Bell told CNBC that its $1 menu items generated more than $500 million in sales last year and its $5 boxes generated an additional $1 billion for the brand.
In honor of the legalization of cannabis on January 1st in California, Jack in the Box is teaming up with Snoop Dog’s Merry Jane cannabis site to offer the “Merry Munchie Meal.” A box of the greasy stoner snacks sells for $4.20 (clever pricing) and includes a side that is half curly fries and half onion rings – as well as tacos, 5 Mini Churros, 3 crispy chicken strips, and a drink.
Amazon said that Amazon Alexa will soon be available in headphones, smartwatches and other wearables as Amazon’s Alexa Mobile Accessory Kit will allow device makers to incorporate Alexa into their products. For once Amazon isn’t ahead of the crowd. Bose’s new QC35 headphones have Google Assistant built in, and the Apple Watch has long offered support for Siri.
Amazon introduced Alexa Onboard, a system that allows drivers access Alexa via the car’s infotainment system.
Google reports customers have bought “tens of millions” home devices from them, including its smart speakers and Chromecast TV streaming devices. According to the company, since mid-October, 6.7 million smart speakers have been sold and Google Assistant is now available on 400 million of its devices.
Hulu claims to have closed 2017 with more than 17 million subscribers. That represents 40% growth over the last time the direct-to-consumer media company reported the number of subscribers in 2016.
GBH Insights estimates that technology companies will bring home over $400 billion of cash from overseas in 2018 as a result of the tax reform bill signed into law in December. Apple will represent $200 billion of that amount.
Spotify has announced that it hit 70 million paid subscribers in December. It reached its last key milestone, 60 million paid subs in July. Including the ad-supported free tier, Spotify claims more than 140 million subscribers. The company intends to go public this year.
According to CNBC, Boeing and Brazilian airplane maker Embraer are continuing to work towards a deal. The sticking point: the issue of assuring Brazil’s leadership of the sovereignty of Embraer’s defense business.
Boeing says it capped off a record 2017 by delivering more planes in a year (763) than ever before. The company also said that it booked new orders for 912 commercial aircraft bringing Boeing’s backlog to 5,864 planes, an all-time high.
Target announced same-store sales climbed 3.4% during the holiday season and said that overall sales are on track to grow by 25% in 2018. They also indicated that tax reform legislation should create additional cash flow for 2018 which it will use for capital investment, dividends and share repurchases.
Nordstrom said that its net sales increased by 2.5% during this past holiday season and same-store sales rose 1.2%.
Visa has said that in response to the passage of the tax reform bill, the company will raise the 401(k) match for its employees from 3% of base pay to 5%.
As a result the passed tax reform legislation, Johnson & Johnson said it plans to repatriate $16 billion in overseas cash that will give the company more flexibility for future growth initiatives.
Walmart said that as a result of new tax legislation, it will increase the starting wage for all hourly associates in the U.S. to $11.00. The company also said that it would expand maternity and parental leave benefits and provide a one-time cash bonus for eligible associates of up to $1,000. In another announcement, Walmart said that it plans to close up to 10% of its 561 Sam’s Club stores starting this year. The closures will cost up to 10,000 jobs.
KB Home reports 4th quarter earnings of $0.84 per share on revenue of $1.4 billion, an increase of 17.6% year over year.
Delta Air Lines reports 4th quarter earnings of $0.96 per share on revenue of $10 .25 billion, an increase of 8.4% year over year.
JPMorgan Chase reports 4th quarter earnings of $1.76 per share on revenue of $25.45 billion, an increase of 4.6% year over year.
Wells Fargo reports 4th quarter earnings of $1.16 per share on revenue of $22.15 billion, an increase of 2.4% year over year. The bank also said that 4th quarter earnings were negatively impacted by a $3.25 billion litigation charge. Hmmmm.
Next week: Earnings from: Citigroup, CSX, UnitedHealth, Bank of America/Merrill Lynch, Goldman Sachs, U.S. Bank, Alcoa and Kinder Morgan. Economics reports: Industrial Production for December, Housing Starts for December and the Philadelphia FED Manufacturing Index for January.
WTI crude oil: $64.33 per barrel. 10-year Treasury note: 2.53%. Gold: $1,322 per ounce.
Sources: CNBC, Real Money Pro, 361 Capital, Calafia Beach Pundit, Seeking Alpha, MarketWatch, Bloomberg, Reuters,
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.