Market Minutes for the week of June 5th:
“My favorite shots are the practice swing and the conceded putt. The rest can never be mastered.” – Lord Ian MacDonald Robertson (Scottish High Court Justice)
Here is what I am thinking: 1.) The 10-year Treasury note at 2.18% is screaming: Slower Economy Ahead. 2.) Right now, the economic statistics say: No Way. The stock market is saying: No Way. 3.) I am a bit confused. 4.) Jim Cramer thinks German money is buying the 10-year because the German equivalent Bund is yielding 0.26%. He also thinks Italian money is buying the 10-year as well because the Italian 10-year equivalent is yielding 2.30%. Which one would you rather own, the U.S. or Italy? 5.) Does the Fed still move to raise interest rates next week? 6.) It looks like the Comey testimony didn’t produce a “smoking gun” 7.) Unfortunately, the year is almost half over and it seems that tax reform and infrastructure spending now move into next year. 8.) Will the president’s problems lead to a “watered down” fiscal policy stimulus? 9.) The ECB (European Central Bank) leaves their benchmark interest rate unchanged and drops guidance for further rate cuts. 10.) This confirms to me that the European economy is recovering nicely. 11.) Only three weeks until we start getting get a look at 2nd quarter earnings.
The ISM Non-Manufacturing Index for May fell by 0.6 points to 56.9% but still remains in very robust territory.
The Labor Department said that final revised U.S. worker productivity for the 1st quarter was unchanged vs the first report of -0.6%.
The Bureau of Labor Statistics said job openings in April reached a record high, with the government’s count revealing 6 million positions waiting to be filled according to the JOLTS (Job Openings and Labor Turnover) Survey. The closely monitored “quits rate” also dropped for the month, falling 111,000 to about 3 million. The number is regarded as a gauge of worker confidence that better jobs are available elsewhere. Peter Boockvar, chief market analyst at the Lindsay Group: “If one is looking for a job, it’s out there. It just may not be exactly what is wanted.”
U-3 is the look at unemployment we get every month from the Department of Labor and is defined as “total unemployed, as a percentage of the civilian labor force.” U-6 is much broader measure of unemployment than U3 because U-6 is defined as all unemployed, “plus persons marginally attached to the labor force, plus total employed part-time for economic reasons, as a percentage of the civilian labor force.” In other words, the unemployed, the underemployed and the discouraged. In the past two years, the U-6 rate has seen a lot of improvement and is now near its historical average. The U-6’s 3-month drop is the largest since 2014.
The Commerce Department said that new orders for U.S.-made goods fell by 0.2% in April for the first drop in five months. Orders for March revised higher to 1.0%.
Orders for non-defense capital goods excluding aircraft were revised higher for April to 0.1% vs the initial report of -0.1%.
A weaker May jobs report has influenced the Atlanta Fed Tracker to lower its 2nd quarter GDP forecast from 4.0% to 3.4%.
Baker Hughes reports that the U.S. oil drilling rig count rose by 11 rigs, marking the 20th straight week that the count has risen.
U.S. crude oil production has surged by 9% over the last eight months to 9.3 million barrels per day. Analysts from Barclays say that production will keep growing in spite of rising drilling costs and stagnant prices. The reasons: 1.) cheap credit and 2.) more efficient drilling methods.
The Energy Information Administration (EIA) says that the U.S. will be producing a record 10 million barrels of oil per day in 2018 (a level not seen in 47 years) at an average price of $53.61 per barrel. Acting EIA Administrator Howard Gruenspecht said, “Increased drilling activity in U.S. tight oil basins, especially those located in Texas, is the main contributor to oil production growth, as the total number of active rigs drilling for oil in the United States has more than doubled over the past 12 months.”
When will oil prices move sustainably higher? Oil field service company Schlumberger says, “When the deep water wells begin to run out.” The real deep water wells can produce 20x the amount of oil as a good single shale project. According to Schlumberger, most new deep water projects around the world have stopped since 2015 and by next year, some of the old deep water wells will begin to experience worrisome decline rates.
CoreLogic says that home values climbed a healthy 6.9% in April when compared with April 2016 but that is a decline from 7.1% in March and a 7% increase in February. In San Francisco, April sales were the slowest in 6 years as the market has begun to suffer from high prices.
The Mortgage Bankers Association said that mortgage applications rose by 10% last week to their highest level since May of 2010. Low borrowing costs combined with a steady job growth are likely driving the increase.
The Fed said that Americans’ household net worth rose by 1.4% to $94.8 trillion in the first 3 months of 2017. U.S. stock and mutual fund portfolios jumped $1.3 trillion in value in the January-March quarter. Home values increased by $499 billion.
The Fed said that consumer credit for the month of April rose by $8.2 billion, just over half of the consensus estimate of $15.5 billion and only 40% of March’s $19.5 billion increase. This was the lowest monthly rise in consumer credit since August 2011.
Moody’s said that the increase in credit card charge-offs between Q4 and Q1 was the highest since 2009 and is surprising given the strength of the job market. Synchrony Financial said charge-offs rose to 5.4% in the quarter compared to 4.84% a year ago. Capital One said charge-offs rose 5.31% compared to 4.23% a year earlier.
The most recent Business Roundtable CEO Economic Outlook Index reached its highest level since the second quarter of 2014. Roundtable Chairman Jamie Dimon, CEO of JP Morgan Chase said, “The survey results reflect confidence from America’s leading employers in the prospects for tax reform, as well as the tangible economic benefits that tax reform will produce.” Dimon went to say that its necessary that the politicians get to work on passing tax reform sooner than later or this confidence will evaporate quickly.
The European services and manufacturing index for May was unchanged at 56.8, a six-year high. Markit says, “Optimism about the one year outlook for output rose to its highest level since data for this series were first collected in July 2012.”
It looks like Theresa May’s Conservative party lost its majority in Thursday’s snap election but still remains the largest party in Parliament. The Conservative party is paying for the past 3 terror attacks because Theresa May, in her previous role as Home Secretary, was responsible for cutting the U.K.’s police force numbers and has suffered from accusations that she has put the nation at greater risk of terror.
The Paris-based Organization for Economic Co-operation and Development (ODEC) has forecasted the global economy to grow at 3.5% in 2017 and 3.6% in the following year, as confidence is rising and investment and trade are ramping up from low levels. The forecast for the euro zone is for 1.8% growth in 2017 and 2018. The increase in European projections is lifted by strong growth in Germany, Europe’s largest economy.
“Just four days after Banco Popular chairman Emilio Saracho told his employees “don’t panic” as a result of the company’s crashing stock price, on Wednesday morning the ECB [European Central Bank] confirmed that the sixth largest bank in Spain was indeed on the verge of collapse and ordered it to be sold, which is what happened when Santander acquired the bank for €1.00 after Santatander’s equity and riskiest assets were bailed-in, i.e. wiped out, imposing losses of about €3.3 billion on the bank’s security holders.”, from Tyler Durden of Zero Hedge.
President Trump is expected to nominate Randal Quarles and Marvin Goodfriend to two of the three upcoming vacancies at the Federal Reserve. Should Trump nominate them and they receive confirmation, it would represent the first steps in a possible substantial remaking of the Fed. Both appointees have conservative roots. Quarles currently heads a private equity firm called the Cynosure Group and Goodfriend is known as a heavyweight conservative economist. As a member of the Manhattan Institute’s Shadow Open Market Committee, he has long been opposed to the Fed’s easy money policies. Quarles in the past has called Dodd-Frank “a failure of ambition” and a “concession to inappropriate pressures.”
So, you want to be an astronaut. NASA has selected 12 new astronauts from a field of 18,300 applicants. According to Bloomberg’s Kyle Stock, “There have been about 350 professional star voyagers in the nation’s history. Some 56 of them are active or in training and 22 are ‘management astronauts’ no longer eligible for space flight. About 60 are deceased. Given the numbers, a more realistic career goal might be playing quarterback in the NFL or running a Fortune 500 company.” Getting in the door requires four things: 1.) U.S. citizenship. 2.) A Bachelor’s degree in science, engineering or math. 3.) The ability to pass a NASA physical. 4.) 1,000 hours of flying a jet or three years of “related, progressively responsible and professional experience.” There are no slouches in the new class. “All of the new astronauts have at least one graduate degree and four of the 12 are trained test pilots … Then there is Jonny Kim, a decorated Navy SEAL who completed 100 combat missions and went on to Harvard Medical School.” …Harvard.
The summer movie box office has gotten off to a slow start. Heading into the summer season, industry analysts had expected it to be the best summer since 2013, when movie goers spent $4.9 billion. To date, the season’s box office revenue is down 21.8% compared to the same time in 2013 and up only 0.2% from 2016. Memorial Day 2017 was Hollywood’s worst Memorial Day since 1999. Not all movies have been a bust so far this summer. Disney’s “Guardians of the Galaxy Vol. 2” took in $146.5 million in its opening weekend and has grossed $816.6 million worldwide to date. “Wonder Woman” took in $100.5 million in last weekend’s release.
“New York City tourism officials are forecasting the first drop-off in foreign visitors this year since the financial crisis. Foreigners account for half of the tourism spending even though they amount to just one fifth of tourists to New York.”, reports Justin Lahart and Miriam Gottfried of the Wall Street Journal.
According to a Natixis U.S. Investor Survey, 70% of young people (under 35) say they expect to get an inheritance. The problem is that only 40% of their parents say they plan to leave one. The research shows that millennials expect to retire at age 59 while their Baby Boomer parents plan on working to 65. To make that happen, millennials are hoping for a windfall. Unfortunately, they will be disappointed as the survey says that “44% of Boomers don’t have a will; 57% don’t expect to have any money to pass on and 35% plan to spend whatever money is left on themselves. Meanwhile, 24% of Boomers expect that contributions from their children will play an important role in funding their retirement.” Sounds like not everyone is on the same page!
MarketWatch’s Ryan Vlastelica reports that, “According to Legg Mason’s annual Global Investment Survey, released earlier this month, 82% of millennial investors who were surveyed said that their investment decisions were influenced by the financial crisis [of 2008-2009]. More than half – 57% – said they were “strongly influenced” by the crisis. That influence has led them away from the kind of risky assets that have been soaring since the market bottomed in early 2009.” The survey finds that now, as markets hit new highs, millennial investors are showing a growing openness to Wall Street. Nearly 80% of millennial investors plan to take on more risk this year, with 66% of them expressing an interest in equities. About 45% plan to take on ‘much more risk’ in their portfolios.” Although millennials were optimistic about the market overall, the survey found that 86% of young women were optimistic and only 69% of young male investors shared the same optimism.
Apple has introduced the iPad Pro 10.5-inch, its first iPad to support HDR (high dynamic range) video. It comes with 64 GB of storage and will start at $649. It is available to be ordered now and will begin shipping the week of June 12.
Apple has announced its new operating system for the Mac and it is called the MacOS High Sierra. New features include a faster Safari, the ability to keep videos from auto-playing when you visit a page and an “intelligent tracking prevention” to protect your privacy and browsing history. Apple has launched a peer-to-peer payment system in its iOS 11 called Pay Cash and will serve to be a direct competitor to PayPal, Square, Venmo and possibly even Facebook. Pay Cash will allow you to send money to people you know, transfer it to and from your bank, and use it for Apple Pay purchases.
Apple Music, the company’s music streaming service has hit 27 million subscribers. It is gaining ground but still trails Spotify, which had 50 million subscribers in March and 100 million active users. The two-year old service starts at $9.99 per month and last year received a facelift which included displays of song lyrics, chart-toppers, live radio, concerts, recently played songs and curated playlists.
According to a report published by Digital TV Research, Netflix could reach 128 million subscribers by 2022, bumping revenue to $15 billion. That would be 44% increase from the 89 million paid subscribers it had at the end of 2016. The report expects that the number of international subscribers will surpass U.S. subscribers by early 2018.
Plumbing and fixtures company Kohler has come up with a unique way of displaying their products in showrooms. At Kohler’s Experience Center in New York City, shoppers can make a one-hour appointment to “take a shower” and test out a deluxe bathing room designed with shower heads that spray water at different temperatures and from different angles. The 10,000-foot showroom is the first of nine locations around the world. Other planned sites are London, Shanghai and West Hollywood, Calif.
Children’s clothing company, Gymboree has missed a June 1st interest payment due on its outstanding notes due in 2018, according to a filing with the SEC. S&P Global says that they have lowered the company’s credit rating to “D” from “CC” and expects a general default on Gymboree’s debt obligations.
Shares of Nordstrom spiked on Thursday after the company said it is exploring a “going private” transaction by the company’s family after establishing a special committee to consider the deal.
Alibaba, the “Chinese Amazon” is forecasting massive revenue growth of 45% to 49% for 2017! That target implies sales of up to $34.3 billion for the year.
J.M. Smucker reports fiscal 4th quarter earnings of $1.80 per share on revenue of $1.78 billion, a decrease of 1.7% year over year.
Next week: Earnings from: Kroger and Bob Evans Farms. Economic reports: U.S. Industrial Production, Philly FED Manufacturing Index, CPI for May, PPI for May, U.S. Retail Sales and New Housing Starts.
WTI crude oil: $45.92 per barrel. 10-year U.S. Treasury note: 2.20% 30-year mortgage: 3.96%
Sources: Real Money Pro, CNBC, 361 Capital, Seeking Alpha, MarketWatch, Estimize.com, Zero Hedge, The Wall Street Journal and Bloomberg.
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.