Market Minutes for the week of March 27th:
“If you don’t have time to do it right, when will you have time to do it over?” – John Wooden
Peter Boockvar, Chief Market Analyst for The Lindsey Group: “Can we all assume that altering the U.S. tax code along the lines of the hopes and wishes created on November 8th just got much more challenging. Paul Ryan on Friday said ‘Yes, this does make tax reform more difficult but doesn’t make it impossible.’ I have no doubt that taxes will be cut to some extent but we all know that it’s the tax increases needed to pay for them (no more hoped for savings from overhauling the ACA) that remains very controversial and now politically we’ve seen there are no slam dunks for DJT … Bottom line, I am really disappointed that the ACA is not going to change for the better (for now) and I am really p***ed off that tax reform now may get all chopped up with potentially only modest changes. That said, I believe it is GUT CHECK time for everyone that is a fiduciary of other people’s money which I am one of. A watered down Trump agenda with no changes of substance to healthcare and a more modest tax reform bill is NOT what I believe is currently priced into stocks.”
The National Federation of Independent Business: “The House’s failure today to pass the American Health Care Act is extremely disappointing. Small businesses have struggled for seven years under Obamacare’s taxes and mandates, and now that struggle will continue for the foreseeable future. Passing a bill with a massive tax reduction for small businesses should have been the easiest of votes for both parties.”
Scott Grannis (former chief economist for Western Asset Management and current author of the Calafia Beach Pundit) on the failure of Obamacare reform: “I don’t buy the conventional wisdom that says that this is a failure of leadership. Leadership alone cannot fix Obamacare. A solution to the problem of Obamacare is going to be extremely difficult, and it can’t and shouldn’t be done overnight. Obamacare was doomed to fail, as I pointed out many times over the years, because it attempted to rejigger a huge fraction of the U.S. economy, and that is something that is virtually impossible to accomplish in a successful fashion by government diktat. Only a freely functioning market economy can make something so huge and so complex work in an efficient manner.”
Jim Cramer: “I have said over and over that while Trump’s a part of this advance, there’s much else happening away from Trump that’s positive, and the most important thing that Trump has accomplished is to deregulate the overregulated economy. Please remember that for every law that was passed under Obama, there were 25 rules promulgated, and that rollback is the most important thing that can happen to business now.”
Scott Grannis on tax reform: “Successful tax reform should involve a few simple ingredients: tax rates should be lower and flatter than they are now, and deductions and subsidies should be far fewer. (Please, Republicans, please don’t attempt to impose a Border Tax system on the U.S. economy, since that is very complex and it will have many unforeseen consequences, some good and some very bad. Please don’t listen to Trump and his economically illiterate trade advisor Peter Navarro.) Lower and flatter tax rates coupled with fewer subsidies and deductions should boost the economy because they will reduce the amount by which the government interferes in private markets, and they will increase the incentives for the private sector to work, invest and innovate. Tax reform can deliver a stronger economy, and a stronger economy ought to make it much easier to reform Obamacare.”
The March Conference Board Consumer Confidence Index surged to 125.6 from 116.1 in February, an increase well above the estimate of 114. This is the best level since December of 2000 (when it peaked at 144.7 in January of that year). The answers to the labor market questions were the most positive note within the report. Those who said jobs are “plentiful” climbed 4.8 points to a level not seen since August 2001. Caution, the index is a coincident/lagging indicator and the reading was taken before the failure of the House to pass healthcare reform last Friday.
Final GDP for the 4th quarter of 2016 came in at 2.1%. For the entire year, GDP grew at 1.6%, the economy’s worst performance since 2011.
The Richmond Fed Regional Manufacturing Composite Index expanded in March to 22 from 17 in February. New orders, shipments and better employment all contributed to the gain.
The National Association of Realtors says that pending home sales for February rose by 5.5% vs a decrease of 2.8% in January. February’s rise was driven in part by unseasonably warm weather.
Freddie Mac reports that the Single-Family seriously delinquent rate fell to 0.98% in February. That reading is down 1.26% from a year ago at this time and is the lowest reading since June of 2008. The seriously delinquent rate peaked at 4.20% in February of 2010.
The February trade balance shrunk by $4 billion from the January reading. Exports totaled $126.8 billion while imports totaled $191.6 billion. The improvement can be attributed to a weaker U.S. dollar.
Baker Hughes says that the weekly oil rig count rose for the 11th consecutive week, adding another 10 rigs for a total of 662.
A join committee of ministers from OPEC and non-OPEC oil producers will evaluate whether the current production cut-backs set in place last December, should be extended for another six months.
U.S. oil producers have stepped up to replace the oil OPEC is trying to keep from the markets. Last week, more than 1 million barrels of crude per day were sent from the U.S, making it the third largest week for exports in history and twice that of the 2016′s average. In addition to oil, the U.S. exported more fuel last week — a steadily growing business. We shipped out 1.1 million barrels of diesel fuel per day and 608,000 barrels of gasoline per day, up from 400,000 barrels per day a year ago at this time.
Exxon Mobile, Royal Dutch Shell and Chevron are forecasting shale investments for this to total $10 billion, a huge spike compared to years prior. Shell says they can “make money in the Permian [Basin] with oil at $40 per barrel, with new wells profitable at about $20 per barrel.” Shell said that it’s costs per well has dropped 60% from 2013 to around $5.5 million. They are now drilling five wells per pad instead of the usual single well per pad. This saves money that used to be spent moving rigs from site to site.
On a separate note, according to foxbusiness.com, $30 billion has been spent on land acquisitions in the Permian Basin since mid-2016. 2017-2019 will likely see the biggest rise ever in mega projects according to Goldman Sachs as the record capital expenditures of 2011-2013 become profitable.
The S&P/Case-Shiller 20-city home price index climbed by 5.7% for the 3-month period ending in January. With the move, home prices have hit a 31-month high. Western metro areas still dominate with the largest price increases: Seattle 11.3% y/o/y, Portland 9.7% y/o/y and Denver 9.2% y/o/y. The San Francisco marked is rebounding after it appeared to hit bottom.
Metrostudy, a housing analytics company, says that Denver metro area housing starts were up 22% in 2016 over 2015. 68% of the homes in the market have a base price of $400,000, while homes $500,000 or more represent 27%. Veteran Denver home builder Gene Myers of Thrive Home Builders says he could build 50% more homes if he could only find workers to build them. When the Great Recession of 2008-2009 hit, many construction workers left and headed to the oil fields. Some have not come back and that coupled with president Trump’s immigration stance, has caused an acute labor shortage.
The German economy continues to thrive as the number of unemployed fell by 30,000 in November, the most since 2011.
94-year-old Loraine Maurer of Evansville, Indiana was recently celebrated for her 44 years of service at the local McDonald’s in the Evansville area where she still works two days a week. Ms. Maurer says, ”I get in here at 5 o’clock when they open. I have to get up at three … If the weather was bad, [my customers] come after me in the mornings, and when my shift was over, they came over to McDonald’s and picked me up and took me home. You can’t ask for more than that.”
Amazon has announced that beginning April 1, it will begin collecting sales taxes from all states with a sales tax. Tax-free shopping will end next month in Hawaii, Idaho, Maine and New Mexico, the four remaining holdouts. In May, Alaska, Delaware, Oregon, Montana and New Hampshire will be the only states where Amazon won’t collect taxes.
Drive-up grocery stores are the latest perk of being an Amazon Prime member. The company announced on Tuesday AmazonFresh Pickup, a drive-in type grocery store for Prime members. It works like this, members order their groceries online, schedule a pickup time, then drive to the location to have their bags loaded into their car. Meats, produce, bread and dairy are among the items available and are ready for pickup as little as 15 minutes after the order is placed.
Facebook is entering the crowdfunding space as a new feature will let users 18 and older try to solicit funds for education, emergencies, medical needs and funerals. According to the company, The Personal Fundraiser tool will help users to “raise money for themselves, a friend, or someone or something not on Facebook”.
McDonald’s says that fresh ground beef will replace frozen patties in their Quarter Pounders later this year. Dallas and Tulsa have been test markets where more than 400 restaurants have been serving up fresh beef for about a year now.
Yum Brands (Pizza Hut, KFC and Taco Bell) CEO Greg Creed says that humans could be replaced in the food services industry by AI, robots and automation “by the mid [2020s].” Automated kiosks in Shanghai and a robot greeter at one Pizza Hut are already a reality for the company.
Blue Apron is cooking up an IPO. Investment bankers have been hired by the biggest meal kit company in the U.S. for a public offering planned for later this year. Sources say that New York City-based Blue Apron has selected Goldman Sachs, Morgan Stanley and Citigroup to lead the offering.
Mars Chocolate of North America is increasing its U.S manufacturing investments which will create about 250 new jobs. An estimate $70 million will go into existing factories which ensures that 95% of Mars’ chocolate products will be made in the USA.
American Airlines has agreed to acquire a 2.68% stake in China Southern Airways for $200 million.
Ford Motor said that it will spend $1.2 billion to retool Michigan assembly and engine plants to build Ford Rangers and Broncos. The investment will create or retain 130 jobs according to the company.
Snap (parent of Snapchat) and NBCUniversal have reached an advertising deal for the Winter Olympics that could be worth $50 to $75 million. Live, exclusive NBC Olympic content would be shared alongside user posts on Snapchat. The deal would also allow NBC to sell advertising on the social media platform according to The Wall Street Journal.
Google-owned YouTube continues to lose revenue as more and more companies are pulling or limiting their advertising over concerns that their commercials are being run alongside objectionable content. Add PepsiCo, Wal-Mart, General Motors and Starbucks to the list.
Bain Capital will acquire Sealed Air’s Diversey Care division and part of its Food Care division for $3.2 billion.
Investment bank and financial services firm Cowen & Co., has sold a 20% stake of the firm to CEFC China for roughly $100 million and will also receive $175 million in debt financing.
Chinese conglomerate Tencent has taken a passive 5% stake in Tesla.
Darden Restaurants (owner of: Olive Garden, Longhorn Steakhouse, Capital Grille, Yard House, Eddie V’s, Seasons 52 and Bahama Breeze) has announced that it will acquire Cheddar’s Scratch Kitchen for $780 million in cash. Founded in 1979, Cheddar’s has 165 locations in 28 states. The company also reported fiscal 3rd quarter earnings of $1.32 per share on revenue of $1.88 billion, an increase of 1.6% year over year.
Restoration Hardware reports 4th quarter earnings of $0.68 per share on revenue of $586.7 million, a decrease of 9.3% year over year.
Lululemon Athletica reports 4th quarter earnings of $1.00 per share on revenue of $789.9 million, an increase of 12.2% year over year.
Next week: Earnings from: Carnival Cruise Line, Greenbrier Cos., Bed Bath & Beyond, Walgreens and CarMax. Economic reports: ADP Private Payrolls, U.S. Non-Farm Payrolls, Purchasing Manager’s Index, Manufacturing New Orders and U.S. ISM Non-Manufacturing Index.
WTI crude oil: $50.41 per barrel. 10-year U.S Treasury note: 2.39% 30-year mortgage: 4.33%.
Sources: Zero Hedge, Calafia Beach Pundit, CNBC, Real Money Pro, Seeking Alpha, MarketWatch, Calculated Risk and Zero Hedge.
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.