Market Minutes for the week of June 12th:
“The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.” — Rudiger Dornbusch (German economist)
Here is what I am thinking: 1.) Goldman Sachs says that the “Goldilocks” scenario for technology stocks can’t continue, so out of the blue these earnings juggernauts are getting sold like they are going out of business? 2.) Can’t people who manage money ever think for themselves? 3.) Last Thursday, Wall Street’s fear gauge, the VIX, fell to its lowest point in 23 years, when it traded at 9.37. 4.) So, of course the following day, technology stocks cratered losing almost 2.5%. 6.) The stock market never accommodates the consensus of the masses. 7.) The price of crude oil is just getting crushed, the lowest level since last November. 8.) The Fed raises their benchmark lending rate by 0.25% to 0.91%. 9.) They did it even though inflation is declining and retail sales are softening. 10.) According to their comments, they clearly want to continue down the path of balance sheet reduction. 11.) I agree with Jim Cramer, Fed Chair Yellen wants to get interest rates off of “emergency” levels (which is what below 1% is), because there is no longer an emergency in the economy. 12.) Kroger’s (Fred Meyer and King Soopers/City Market) forward guidance was shockingly downbeat. Are Walmart, Costco and Amazon with their pricing power driving the traditional grocery store down the same road as the clothing and sporting goods retailers?
The Commerce Department said that U.S. wholesale inventories fell by 0.5% for April. Total inventories by merchant wholesalers were $591 billion for the month and the inventory to sales ratio was 1.25. Auto inventories dropped by 1.4% month over month, Farm Products tumbled 2.4% and Petroleum product inventories fell by 5%.
The Fed said that U.S. factory output fell by 0.4% in May based on a broad decline in production, including automobiles. Auto and auto parts output fell by 2% and output for fabricated metal products fell 0.7%.
GDPNow, the Atlanta Fed tracker of intra-quarter GDP forecasts has lowered its 2nd quarter GDP estimate to +3.2% because of weaker job growth and inventory drawdowns. Back in April, the forecast for 2nd quarter growth was as high as 4.5%.
The Labor Department said that U.S. producer prices (PPI) were unchanged for the month of May. For the 12 months ended May, wholesale prices rose 2.4%.
The Labor Department said that U.S. consumer prices (CPI) fell by 0.1% in May. For the 12 months ended May, consumer prices rose 1.9%.
The Commerce Department said that May retail sales fell by 0.3%, the biggest decline in 16 months and driven by lower gasoline prices and fewer car and truck sales. Internet sales were up 0.8% and sales at traditional department stores were down by 1.0%, the worst performance in nearly a year. May’s retail sales decline unwound April’s rise of 0.4%.
The Fed said that the Empire State manufacturing index for June rose to 19.8 from a -1.0 in May for its highest reading since September of 2014.
The Fed said that the Philly Fed manufacturing index fell to 27.6 in June from a reading of 38.8 for May. Economists had anticipated a pull back since May’s reading was the second highest in more than 30 years.
Last Thursday, the House of Representatives voted along party lines to roll back the Dodd-Frank Rule. Called the Financial Choice Act, the measure would let banks reject some regulations if they hold enough capital. It would also repeal the Volcker rule that barred banks from speculative trading. Conventional wisdom believes the Choice Act has little chance of passing the Senate.
According to the Wall Street Journal, former Goldman Sachs president Gary Cohn will lead the search for a new Fed head to replace Janet Yellen whose term expires at the end of January 2018.
What to expect from the Fed this week? Brian Wesbury, chief economist at First Trust: “…We expect both the Fed’s statement as well as Fed Chief Yellen’s press conference to keep it on course to start unwinding its bloated balance sheet later this year. Our best guess is another rate hike in September [after one this week] followed by six months of balance sheet reductions before rate hikes start again in March of 2018. However, we wouldn’t be surprised if the Fed embarked on balance sheet reductions a little earlier while moving a September rate hike to December. Either way, the Fed would be moving in the right direction.”
Brian Wesbury on what the Fed said on Wednesday: “First, although the market consensus is that the Fed isn’t going to raise rates again until 2018, the Fed thinks we still have one more hike in 2017, with the odds of two hikes equal to the odds of none at all. Second, the Fed has a concrete plan to start reducing the size of its bloated balance sheet … Third, compared to three months ago, the Fed is expecting a little more economic growth this year, less unemployment and less inflation … Fourth, the Fed is not impressed by the recent softness in inflation and does not think that softness is a reason to change the protected path of monetary policy … Fifth, the Fed is no longer concerned about the potential influence of foreign events…”
According to a CNBC/SurveyMonkey Small Business Survey, America’s small-business owners are very confident about their prospects in 2018 and are optimistic about the condition of the U.S. economy. Data was collected in April and male small-business owners were found to be more confident than their female counterparts. Businesses with less than 4 employees were less confident than those with 50 or more employees.
According to the Department of Energy, shale oil production is expected to jump again in July, marking the 4th straight month the DOE has predicted monthly growth above 100,000 barrels per day. The Permian basin should lead the way with 65,000 barrels per day and the Eagle Ford Basin is projected to contribute 43,000 barrels per day to production.
Should oil prices trend higher as time goes on? Dan Dicker says yes: “Let’s look at the fundamentals today. Is the oil supply contracting? Yes. Is global production rolling over – and here in the U.S. in two of three major U.S. shale plays? Check. Has the OPEC deal to remove 1.6 million barrels a day held with unprecedented compliance? Yep. Are capex budgets still in collapse, making replacement of spent wells expensive, if not impossible? Check, check and check.”
This from Doug Kass, “The China proxy that is the Australian economy reported a much better than expected May jobs number. They said that 42,000 jobs were added, well more than the estimate of up 10,000 and the unemployment rate fell two tenths to 5.5%, the lowest since early 2013. Adjusting the job gain for population, it would be like the U.S. adding 560,000 jobs in a single month.”
JOC.com reports that nationwide, the industrial warehouse vacancy rate is 5.3%, a 17-year low. The reason: e-commerce fulfillment and distribution centers are being created at a rapid pace and leasing up most of the available space. Furthermore, the construction pipeline for these spaces is full and not able to keep up with demand. Jones Lang LaSalle says, “There’s simply little to no industrial product available.”
Real estate brokerage Redfin said that the average house sold in May went under contract in just 37 days, that’s the fastest pace since Redfin began tracking the market seven years ago. Denver, Colorado led the nation in fastest sales, with almost half of its new listings going under contract in only 6 days. Seattle, Washington, Grand Rapids, Michigan, Portland, Oregon and Omaha, Nebraska rounded out the top five.
The Commerce Department said that May housing starts fell to a seasonally adjusted rate of 1.09 million, down 5.5% from April. Single-family starts were down 3.9% month over month and up 2.3% year over year.
The world’s best airport? Singapore’s Changi Airport, a title it has held for the last 5 years according to Skytrax’s World Airport Awards. The airports amenities include a free movie theater, outdoor swimming pool and a butterfly garden that features more than 1,000 insects ranging from 40 different species. It is even touted as its own destination within Singapore, where it’s common to see families visit Changi to dine and shop on the weekends.
Do you want to take a trip and not have to worry about packing a suitcase? DUFL is an online concierge service that does all the packing and then delivers the suitcase to your destination. DUFL costs $99 per trip plus $9.95 for storage and works as an outsourced wardrobe. As a trip approaches, the customer logs onto the DUFL website or hits the app on the phone to begin selecting items from their personal “closet” in DUFL’s vast warehouse (photographs of every article of clothing are uploaded.) DUFL then cleans the clothes, packs them in tissue paper and FedExs the suitcase to the customer’s destination. 90% of DUFL’s customers are business travelers but 35% are women because DUFL will also pack hair dryers, pillows, cosmetics, cleansers and various toiletries.
A recent report from the U.S. Department of Transportation said that complaints about airline service jumped roughly 70% between March and April. Airlines for America vice president John Heimlich says, “April was indeed an aberration due to some lengthy and extensive winter storms.” Flights all across the country were affected by bad weather. Okay Mr. Heimlich, that’s probably true but the DOT said that complaints also increased regarding the treatment of disabled passengers and discrimination. The industry’s mishandled bag rate for April was 2.53 bags per 1,000 passengers vs March’s 2.24.
Not only did NASA pick 12 new astronauts out of a field of 18,300, but the newly minted space travelers will be eligible to earn a maximum of $150,000 per year if they come from a civilian background, but could make as little as $68,000 per year if they come from military service. For those that came from the cockpit, their sacrifice is mighty given that pilots for United Airlines earn on average between $269,000 and $328,000 per year.
According to the Giving USA Annual Report, published by the Giving USA Foundation, individuals, estates, foundations and corporations gave $390.05 billion to charity last year, up from $379.89 billion in 2015. Giving by individuals was especially strong, up 3.9% at $282 billion. Giving by foundations rose 3.5%. Giving by bequests fell by 9% and giving by corporations rose 3.5%.
Michael Ruhlman, author of the book “Grocery: The Buying and Selling of Food in America” says that the current super market has over 40,000 choices of product compared to the late 1990s when there were 7,000 items to choose from.
Reuters says that Uber CEO Travis Kalanick, is expected to take a leave of absence from the company and Kalanick ally SVP Emil Michael, will leave the company entirely. Uber is currently under investigation for sexism and sexual harassment. The company is also in a legal battle with Google’s Waymo over autonomous vehicle trade secrets.
Amazon said that they will open a third fulfillment center in Colorado. The new warehouse, a three-story, 855,000 square foot facility will employ 1,500 full-time workers and will handle smaller items such books, electronics and toys. The new Thornton facility is unique in the sense that it will be the first in Colorado to have robots working alongside humans to pick and pack items shipped to Colorado shoppers.
General Electric CEO Jeffrey Immelt will step down from the company after 16 years at the helm. John Flannery, head of GE Healthcare and a 30-year veteran of the company, will take over as the new CEO on August 1.
Jaguar Land Rover has announced that it will make a $25 million investment in ride-hailing service Lyft. Jaguar proposes to test a variety of transportation services with Lyft, including autonomous vehicles.
The Wall Street Journal reports that General Motors is extending its summer plant shutdowns as inventories remain high and sales slow. Plants in Lordstown, Ohio and the Fairfax plant in Kansas City (Chevy Malibu) will be offline for 5 weeks in June and July.
SiriusXM has announced it is making a $480 million investment in music streamer Pandora. For the investment, SiriusXM gets 3 board seats, including the Chairmanship, which will increase their board membership to nine.
Digital Realty Trust, a data center company, is merging with DuPont Fabros Technology in an all-stock transaction valued at $7.6 billion. DRT says that the transaction will support the growth of hyper-scale users in the top U.S. data center metro areas.
Honeywell intends to acquire cyber security firm Nextnine for an undisclosed sum. The firm provides cyber security and remote monitoring for 6,200 industrial worldwide locations. Honeywell says the acquisition is part of its “Connected Plant” initiative.
Neiman Marcus Group announced it has terminated talks regarding a partial or full sale of the company. According to the Wall Street Journal, just days before, the parent of Neiman Marcus, Hudson’s Bay, had been in talks with Saks Fifth Avenue.
Verizon has completed its acquisition of Yahoo. The assets obtained from Yahoo will be combined with AOL brands under a new subsidiary named “Oath.” Yahoo CEO Marissa Mayer will resign and receive a $23 million “golden parachute.”
Piper Jaffray analyst Sam Kemp says that Facebook advertising revenue could triple by 2022, based on growth of its Instagram ad units, e-commerce relevance, Messenger audience, and through outsourcing customer service.
3,000 Michigan workers will be trained for digital marketing jobs through funding by Facebook over the next two years.
Sources and suppliers say that the iPhone 8 will be able to recognize your face and unlock the phone when you look at it. It will be water proof (previously water resistant) and you won’t need to plug it in to charge it.
Google is spending $30 million to provide temporary, prefab housing for 300 of its Silicon Valley employees, as rents reach unaffordable levels. Facebook has pledged to plan and design 1,500 units in Menlo Park, California for its employees. 15% of the units will be classified as affordable housing.
“A recent study by Apartment List found that millennials in San Jose, California have the longest wait to purchase a home of anyone in the generation nationwide: Odds are they won’t be in the position to afford a home there for “almost 24 years,” or “until the year 2041.”, according to CNBC’s Ester Bloom.
Kroger reports 1st quarter earnings $0.58 per share on revenue of $36.29 billion, an increase of 4.9% year over year. Forward guidance was however miserable and unoptimistic.
Amazon is buying Whole Foods for $42 per share in a deal valued at $13.7 billion. Holy Cow!!
Next week: Earnings from: Bed Bath & Beyond, Sonic, Adobe, FedEx, La-Z-Boy, Accenture, Oracle, KB Home and Lennar. Economic reports: 2nd quarter GDP and Existing Home Sales.
WTI crude oil: $44.50 per barrel. 10-year U.S. Treasury note: 2.16% 30-year mortgage: 3.90%.
Sources: Reuters, CNBC, First Trust, 361 Capital, Real Money, CNBC, MarketWatch, Seeking Alpha, Estimize.com, the Denver Post, Zero Hedge, the Wall Street Journal and Bloomberg.
p.s. — The animosity and rage between political parties has finally turned dangerous and potentially deadly. A modern day Civil War?
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.