Market Minutes for the week of November 27th:
“Thank you for flying Delta Business Express. We hope you enjoyed giving us the business as much as we enjoyed taking you for a ride.” — Cabin announcement from a Delta flight attendant.
Here is what I am thinking: 1.) Notes from the October 31-November 1 Federal Open Market Committee meeting showed members had widely positive views on growth in the labor market, consumer spending and manufacturing. Some members, for the first time, seemed concerned about the level of the stock market and what a sudden reversal in prices would do to the economy. 2.) Goldman Sachs chief U.S. equity strategist David Kostin says that with tax reform in place, the S&P 500 could rise another 10% in 2018 to a level of 2,850. “Our ‘rational exuberance’ rests on a combination of above-trend U.S and global economic growth, low albeit slowly rising interest rates, and profit growth added by corporate tax reform likely to be adopted by early next year.” 3.) According to a recent Gallup poll, concerns about the U.S. economy by Americans are the lowest in 18 years by one measure. 15% of Americans say the U.S. economy is a problem or concern. That percentage has been lower only one time in the last 25 years, a 13% reading in 1999 during the dot-com boom. A reading of 16% occurred during 2006-2007, just before the start of the Great Recession. Hmmm. 4.) Wow, what a wicked rotation we’ve had recently – out of technology, cloud and social media stocks – into banks, retailers, restaurants and small cap stocks. 5.) Why the sudden switch? Out of nowhere, there is a real chance for tax reform sooner than later, the potential easing of some of the Dodd-Frank banking rules and worries over the parabolic move in Bitcoin. Tax reform will boost earnings for domestic companies, many of which are small and mid-cap. Large technology won’t see much benefit from tax reform because their tax rates are already low. The recent speculation surrounding the price of Bitcoin smells of frothy market excess. What does that have to do with a one-day pounding (-1.7%) of the NASDAQ? Nothing, except the index is up 27.70% year to date and some of the companies that reside there are up much more than that. Any loosening of the banking handcuffs from Dodd-Frank means much better earnings for banks. 6.) More simply stated: technology is expensive, banks, retailers, restaurants and small caps are not, so the herd has moved money around a bit. I interpret this move as a healthy event for the current bull market. 7.) The spread between the 2-year Treasury yield and the 10-year Treasury yield has narrowed to 60 bps. While some think that spells trouble for ahead for stocks, history strongly suggests it is a better buy signal. According to Bloomberg, going back to 1985, when the 2-10 spread hit 60 bps, the average gain to the pre-recession peak in the 3 previous economic cycles was 63.57%. 8.) For November, the DJIA gained about 3.6% for the eighth-straight monthly gain and the longest streak of its kind since July of 1995. 9.) The move in the DJIA from 23,000 to 24,000 has been powered by six stocks that accounted for more than 600 points of the move. They are: United Health 148 pts., 3M 140 pts., Home Depot 103 pts., Wal-Mart 84 pts., Boeing 79 pts. and Apple 74 pts. 10.) Jim Cramer: “You can say what you want about Trump, but this is a man who gets up and tweets about the stock market being high and how proud he is of that…He loves the stock market as a barometer of what he is up to. It’s his Nielsens and his presidential approval rating polls all wrapped up into one and it can’t be faked.”
The Reuters/University of Michigan Consumer Sentiment Index rose to 98.5 in November from 97.8 in October. Current economic conditions: 113.5 vs 113.6 prior. Index of consumer expectations: 88.9 vs 87.6 prior.
The Conference Board said that its measure of consumer confidence climbed to 129.5 in November, registering the highest level of optimism since November of 2000 when the index hit 132.6.
The November Dallas Fed manufacturing index dropped to 19.4 from 27.6 in October. Although 4.6 points below the forecast, the 19.4 number is in line with the year to date average of 19.5. Some data points from questions asked in the index survey: 1.) Do you expect your firm to increase employment, leave employment unchanged or decrease employment over the next 6-12 months? Increase – 47.2%. Decrease – 9.3%. Balance – no change. 2.) Are you having problems finding qualified workers when hiring? Yes – 67.3%. No – 32.7%. 3.) If labor costs are increasing, are you passing the cost on to customers in the way of price increases? Yes – 34.5%. No – 49.5%. Balance – NA.
The November Richmond Fed manufacturing index exploded higher to a reading of 30 (an all-time high) vs 12 in October and is the fastest expansion rate since the survey was introduced in 1993! Data from the survey was impressive: New orders 35 vs 17 for Oct. Shipments 33 from 9 in Oct. Capacity utilization 19 vs 7 in Oct. Employment 18 from 10 in Oct. Average workweek 17 vs 8 in Oct.
The Commerce Department said that U.S. durable goods orders (ex-aircraft), fell by 1.2% in October vs a 2.1% increase in September.
U.S. 3rd quarter GDP has been revised higher to 3.3% from 3.0%. If the revision sticks, it will represent the fastest pace of quarterly growth in three years.
According to CNBC/Moody’s Analytics Rapid Update economists have cut their 4th quarter GDP forecast by 0.3% to a median growth rate of 2.4% due to a moderation in the growth of consumer consumption during the quarter.
The National Association of Realtors said that existing U.S home sales climbed by 2.0% in October as hurricane-related disruptions dissipated. Still a chronic shortage of houses is pushing prices beyond the range some first-time buyers.
The Commerce Department said that U.S new home sales rose 6.2% in October to 685,000 seasonally adjusted units, the highest rate in ten years. On a year-over-year basis for October, sales were higher by +18.7%.
The S&P CoreLogic Case-Shiller/Composite 20 home price index revealed that home prices in the U.S. rose by 6.2% in September on a year-over-year basis. The index is climbing at the fastest rate since June of 2014. Seasonally adjusted, 13 of the 20 cities reported price increases with Seattle, Las Vegas and San Diego showing the fastest rates of growth.
According to the FDIC (Federal Deposit Insurance Corporation), the 12-month loan growth rate fell for the 6th straight quarter in Q3 to its lowest level since the end of 2013. The business lending growth rate fell to its lowest rate since the beginning of 2011. BB&T CEO Kelly King says that corporate clients seem to be more interested in paying down bank loans by raising money in the bond market.
The Fed said that the November U.S. PMI Composite Flash reading came in at 54.6 vs 55.7 in October. The manufacturing PMI was 53.8 vs 54.5 in October.
Baker Hughes said that the U.S. oil and gas rig count increased by 8 rigs in the past week for a total of 923 for the third consecutive week of gains and reversing a steady streak of declines.
Reports out of Vienna, Austria confirm that OPEC and non-OPEC oil giant Russia have agreed to extend production cuts through the end of 2018. The deal will cut oil output by 1.8 million barrels per day during that time frame.
The Japanese manufacturing PMI rose by 1 point in November to 53.8. New orders and export orders were robust.
The November German IFO business confidence index climbed by 0.7 points to a level of 117.5, the highest level since the survey began in 1991.
French business confidence climbed by 2 points in November to the highest level since January 2008.
The Eurozone November manufacturing and services composite index advanced by 1.5 points to 57.5, which the highest level in 79 months.
In the U.K., retail sales surged in November with the CBI retail index 26 compared with a negative 36 in October. The U.K. CBI industrial orders index for November also jumped to 17 from a negative 2 in October, the best level since 1988.
From IHS Markit: “The message from the latest Eurozone PMI is clear: business is booming. Growth kicked higher in November to put the region on course for its best quarter since the start of 2011. The PMI is so far running at a level signaling a 0.8% increase in GDP in the final quarter of 2017, which would round-off the best year for a decade.”
According to Adobe Analytics, by Thanksgiving evening, U.S. shoppers had spent more than $1.52 online all before brick and mortar stores had even opened their doors. The number of orders placed via a smartphone device accounted for 46% of the traffic on retail websites while orders from desktop computers fell by 11% and orders from laptops fell by 6%.
Adobe Analytics reported that Black Friday online sales totaled a record $5.03 billion, up 16.9% from last year. Big sellers were Roku devices, Amazon devices, Hatchimal toys and the Nintendo Switch. Adobe forecasts online sales to total $107.4 billion this year which is an increase of 13.8% over last season.
Adobe forecasted that Cyber Monday spending would surpass $6.5 billion and make the cyber shopping day the biggest in digital spending day in history with sales climbing nearly 16%. As of 10:00 a.m. EST, sales had already eclipsed the $840 million mark. The actual final tally for Cyber Monday was $6.59 billion in online sales.
According to Headset, a marijuana market intelligence platform, in states where weed has been legalized, marijuana sales were up 3% at the start of the Black Friday weekend and continued to surge into Cyber Monday. Adrian Sedlin CEO of luxury marijuana startup Canndescent: “With cannabis coming out of prohibition, a number of whole new social rituals are being defined by the public. I think we will get to the point where gifting cannabis during the holidays is more acceptable than gifting a bottle of wine.”
According to MediaREDEF, here are the latest trend changes in traditional television (Live + VOD + DVR + TVE) watching by age group: 65+ (+7%), 50-64 (-1%), U.S. Pop. Total (-16%), 35-49 (-19%), 2-11 (-30%), 25-34 (-39%), 18-24 (-51%) and 12-17 (-51%).
The Financial Times said that Oxford University is planning its first-ever bond issue. Moody’s has assigned the university a top rating of Aaa which will allow the institution of higher learning get the financing on favorable terms. The $250 million of debt is expected to have a 100-year maturity and is well covered according to Moody’s, thanks to the success of the Oxford University Press, a publisher that made up 40% of the total revenue in 2016 as well as an endowment that reached £2.6 billion in 2016.
Disney once again has won the Thanksgiving box office competition. The new family animated film “Coco” from Pixar Animation Studios pulled in $71.2 million in the U.S and Canada. “Justice League,” from Time Warner grossed $59.6 million and Lionsgate “Wonder,” grossed $32.3 million. The record opening for Thanksgiving weekend films is still held by Disney’s 2013 hit “Frozen” which raked in $93.6 million.
Thor Industries (makers of Airstream trailers) reported blow-out fiscal 1st quarter earnings of $2.43 per share on revenue of $2.23 billion, an increase of 30.4% year over year. It appears that Millennials, Gen-X’ers and Baby Boomers are flocking to take part in the “RV-lifestyle,” according to Thor CEO Bob Martin.
Chinese e-commerce giant Alibaba is planning to issue up to $7 billion of its corporate bonds. It will be the second time the company has gone to the bond market in 3 years. This tranche will be rated A by Moody’s and will include a 40-year maturity.
An Alibaba-owned online auction site Taobao has recently sold a pair of used 747 cargo aircraft online for $48 million. The seller was the bankrupt Chinese air cargo company Jade Cargo International and the buyer is Chinese logistics company SF Express. The purchases are still not the highest winning bids for an online auction site according to BBC. The top sale remains a superyacht that went for $85 million on eBay in 2006.
Amazon is partnering up with Cerner, one of the largest health technology companies in the world. Their goal is to assist healthcare providers as they attempt to improve how they use data to make predictions about patient populations. Sources familiar with the matter said the partnership is focused on Cerner’s so-called population health product – Healtheintent – which allows hospitals to collect and analyze massive volumes of clinical data to improve patient’s health outcomes and reduce treatment costs.
Amazon reports a record holiday shopping weekend with its Echo Dot as the top-selling Amazon product around the world. It was the biggest seller at the company’s recently acquired Whole Foods stores and is completely sold out for the holiday season. The Echo Dot is an Alexa enabled smart device.
Amazon reports that the most products ever ordered in one day on Amazon.com occurred on Cyber Monday. From small businesses alone, nearly 140 million items were purchased on Amazon.com.
GBH Insights says that Amazon Prime customers are spending on average 20% to 25% more on holiday shopping this year and the expectation is that Amazon will capture as much as 50% of online holiday sales this year.
Instacart has announced a partnership with Albertsons, the nation’s second-largest grocer. The deal will expand the grocery delivery start-up’s service to more than 1,800 Albertson’s stores by the middle of next year.
Merck has announced a $10 billion share buyback program and will also increase the quarterly dividend to $0.48 per share.
DaVita, the largest U.S. provider of kidney care services, is considering a sale of DaVita Medical Group, the company’s physician’s network business. If a sale is consummated, it could bring up to $4 billion in value.
Reuters reports that Meredith is close to a deal to purchase Time Inc. The deal which could bring $2 billion, is being backed by the billionaire Koch brothers with $600 million in financing.
Barracuda Networks has agreed to be taken private four years after going public by buyout firm Thoma Bravo for $1.47 billion in cash. Thoma Bravo has spent billions buying listed companies such as Qlik Technologies, Riverbed Technology, SolarWinds and Compuware and it known for investing in tech and software companies.
Unilever PLC said that it will acquire New York-based hair-care and skin-care products company Sundial Brands for an undisclosed amount. Unilever houses such brands as Ben & Jerry’s and Hellmann’s in its portfolio and has said that Sundial Brands will operate as a stand-alone unit within the group.
Costco says that November comparable store sales grew by 10.8% vs a forecasted 7%. The company also posted 39% growth in its e-commerce channel during the month.
Family-owned Schwan’s has hired Piper Jaffray to explore the idea of going public. The 70-year old company which owns the Tony’s Pizza and Mrs. Smith’s brands, has roughly $260 million in annual sales and could bring more than $2.5 billion if sold to the public.
Salesforce.com has reported 3rd quarter earnings of $0.39 per share on revenue of $2.6 billion, an increase of 25.2% year over year.
Hewlett Packard Enterprises reports fiscal 4th quarter earnings of $0.31 per share on revenue of $7.8 billion, a decrease of 37.5% year over year.
Deere reports fiscal 4th quarter earnings of $1.57 per share on revenue of $7.09 billion, an increase of 25.5% year over year.
Lowe’s reports 3rd quarter earnings of $1.05 per share on revenue of $16.77 billion, an increase of 6.5% year over year.
Workday reports 3rd quarter earnings of $0.24 per share on revenue of $555 million, an increase of 34.3% year over year.
Kroger reports 3rd quarter earnings of $0.44 per share on revenue of $27.75 billion, an increase of 4.5% year over year.
Next week: Earnings from: AutoZone, Toll Brothers, Vail Resorts, Dollar General and Restoration Hardware. Economic reports: U.S. Manufacturing New Orders, U.S. ISM Non-Manufacturing Index, ADP Private Payrolls and U.S. Non-Farm Payrolls.
WTI Crude oil: $58.49 per barrel. 10-year U.S. Treasury note: 2.36%. Gold: $1,287 per ounce.
Sources: Real Money Pro, CNBC, Seeking Alpha, MarketWatch, 361 Capital, Reuters, Bloomberg, Estimize.com, National Association of Manufacturers, DwyerStrategies.com. and News.Gallup.com
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.