Market Minutes for the week of November 6th:
“Youth would be an ideal state if it came a little later in life.” – Herbert Henry Asquith
Here’s what I am thinking: 1.) Since the Trump victory one year ago, assets under management for mutual funds and exchange-traded funds have surged almost 16%, or $2.9 trillion, to $21.1 trillion. The total combines inflows and returns. 2.) Fear? What fear? The CBOE Volatility Index (VIX) closed at its lowest level (9.42 on Monday) since calculations began in 1990. 3.) Not so fast. News that the Senate version of the tax reform bill could be delayed until 2019 has pushed the VIX higher by 10.0% as we approach the end of the week. 4.) The stock market clearly wants tax reform sooner rather than later, but given the run the market has had, a pullback on this news isn’t unexpected. 5.) Also a cause for concern is the decline in junk bond prices over the past several weeks (down 1.6%). Wall Street has long used the behavior of junk bond prices as the “canary in the coal mine” for stocks. Weaker high-yield bond prices often lead to a pause in the stock market. 6.) Current thoughts from the “Stock Trader’s Almanac”: The DJIA and S&P 500 are currently in a 7-consecutive-month winning streak. The streak began in April and has run through October. During that time the DJIA has gained 13.3% and the S&P 500 has gained 9.0%. Streaks of 7 months or more are somewhat uncommon. Since 1901, the DJIA has had 15 such streaks lasting 7 months or more. The S&P 500 has achieved this 17 times previously since 1930. 7.) Simultaneous DJIA and S&P 500 streaks have occurred only 9 times including the current streak. 8.) When previous streaks have ended, the loss during the down month has been 3.02% for the DJIA and 2.56% for the S&P 500. Both averages were higher 3 and 6 months later. Three bear markets (-20% or more) began within one year after the streaks have ended. 9.) Bottom line: the current run in the market for 2017 is in unique company. 10.) A 3% to 5% pullback, although not likely in the current economic climate, is perfectly reasonable and not surprising at this point.
Factset’s John Butters reports, “To date, 81% of the companies in the S&P 500 have reported actual results for Q3 2017. In terms of earnings, more companies (74%) are reporting actual EPS [earnings per share] above estimates compared to the five-year average. In aggregate, companies are reporting earnings that are 4.8% above the estimates, which is also above the five-year average. In terms of sales, more companies (66%) are reporting actual sales above estimates compared to the five-year average. In aggregate, companies are reporting sales that are 1.2% above estimates, which is also above the five-year average.
The blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) earnings growth rate for the third quarter is 5.9% today, which is higher than the earnings growth rate of 4.4% last week.” The biggest contributors to the increase came from Information Technology, Energy and Materials.
UPS earnings conference call: “This is a broad-based growth…We’re really growing across the globe…better than we’ve seen in over five years. Really, really coming out of the recession was the only other time we saw this kind of growth number. The data that we see has the ocean utilization at over 97%. So you have a high, high, demand environment now with capacity really becoming tight…then you get up in the air, this is the fourth consecutive quarter where you really had demand outpacing capacity.”
Broadcom offers $103 billion for Qualcomm. United Technologies buys Rockwell Collins for $30 billion. Emerson Electric offers $28.9 billion for Rockwell Automation. Disney is in talks with 21st Century Fox. CVS is mulling a deal to acquire Aetna. What is going on? With plenty of financing available, company managements are taking action by creating economies of scale and boosting their bottom lines. “Greater clarity on the prospect of lower corporate tax rates and a general sense that the Trump administration won’t be as aggressive on anti-trust issues as regulators during the latter half of the Obama years, are making conditions ripe for deals”, reports Liz Moyer of CNBC.
According to the U.S. Census Bureau, homeownership rose to 63.9% in the 3rd quarter, the highest level since 2014. The peak is 69%, which occurred right before the housing crash.
Morgan Stanley has raised its price target for oil by $7 to $9 per barrel through 2020. The investment bank says the world is hungry for U.S. shale crude oil (easier to refine) and forecasts $56 per barrel in the final quarter of this year and $58 by the end of the 2nd quarter of 2018.
According to the Wall Street Journal and the Federal Reserve those without high school degrees are seeing the best job market in decades. At the peak of the Great Recession, the unemployment rate for those who lacked a high school diploma was near 16%. Today that number is closer to 6%.
Company officials and vendors say that retailers such as Macy’s, J.C. Penney, Kohl’s, Nordstrom, Dillard’s and Lord & Taylor are scaling back on their ordering for this holiday season. They want to avoid the results of prior seasons when they were stuck with large stockpiles of unsold inventory that led to steep and money losing markdowns.
According to Markit, the Japanese PMI rose 2.4 points in October, the best showing since August 2015. New orders rose sharply to the best level since May 2013.
The Eurozone services PMI rose to 55 in September. Germany, Italy and Spain saw small declines while France and Ireland saw the fastest pace of gains.
German factory orders jumped by 1% month over month and was way better than the forecast of down 1.1%.
Italy’s manufacturing PMI hit 57.8 in September, a 6.5 year high. Jobs created – at the best levels since June 1997. Output and new orders – rose at the best rate since 2011.
50-year Swiss government bonds yield 0.50%. The one-month U.S. Treasury Bill yields 1.0%. Hmmm, which would you choose? (Bloomberg)
The 10-year Greek government bond currently yields 5.0%. In 2015, when Greece was on the verge of default, the bond carried a yield of nearly 19%. Wow, what a great trade if you had the courage to take the risk!
Gallup’s initial survey of consumer’s 2017 Christmas shopping plans suggest that retailers could see the best holiday sales in years. The amount Americans say they plan to spend on Christmas gifts this season is now at $906, up from $785 last year. That represents one of the biggest year over year increases in Gallup’s survey.
Adobe’s CEO, Shantanu Narayen, says that online sales could hit $100 billion this holiday season with mobile overtaking the PC in terms of where all of these transactions are happening. Narayen also expects “Cyber Monday” to be the biggest in history, generating over $6.6 billion in sales, 16.5% better than last year.
Lowe’s has said that it will set up “smart home” centers in 70 locations nationwide which will feature various tech gadgets for purchase. The mini stores will showcase more than 60 smart home products sold from brands such as Google, Sonos, Nest, Samsung and Ring.
CNBC says that Twenty-First Century Fox has been holding talks to sell most or all of itself to Disney. For Disney, a deal would take out a competitor to its film studio and give the Mouse House significant TV production assets.
Broadcom has made an unsolicited offer to buy Qualcomm for $70 per share in a deal valued at $103 billion, the largest technology acquisition ever.
Apple is planning a $7 billion corporate bond offering to raise funds to pay dividends and buy back shares. The company is planning to offer 2, 3, 5, 7, 10 and 30-year fixed rate notes.
On Wednesday, Apple’s market cap went over the $900 billion for the first time. $268.9 billion of the value is in cash on the balance sheet. (Factset)
Amazon has said that it will roll out a handful of Amazon pop-up stores in selected Whole Foods locations over the holidays. The Amazon-staffed stores will launch in mid-November at locations in Illinois, Michigan, Florida, California and Colorado. Shoppers will be able to try Amazon devices, such as Echo, Echo Dot, Fire TV, Kindle e-readers and Fire Tablets.
Priceline reports 3rd quarter earnings of $35.22 per share on revenue of $4.43 billion, an increase of 20.1% year over year.
Uniti Group reports 3rd quarter earnings of $0.55 per share on revenue of $245.2 million, an increase of 22.5% year over year.
Zillow reports 3rd quarter earnings of $0.19 per share on revenue of $281.8 million, an increase of 25.5% year over year.
Walt Disney reports fiscal 4th quarter earnings of $1.07 on revenue of $12.78 billion, a decrease of 2.7% year over year.
Twenty-First Century Fox reports fiscal 1st quarter earnings of $0.49 per share on revenue of $7 billion, an increase of 7.5% year over year.
New York Times reports 3rd quarter earnings of $0.13 per share on revenue of $385.64 million, an increase of 6.1% year over year.
CenturyLink reports 3rd quarter earnings of $0.44 per share on revenue of $4.03 billion, a decrease of 8.0% year over year.
Square reports 3rd quarter adjusted earnings of $0.07 per share on revenue of $257.1 million, an increase of 44.6% year over year.
DineEquity reports 3rd quarter earnings of $0.91 per share on revenue of $144.67 million, a decrease of 7.3% year over year.
Macy’s reports 3rd quarter earnings of $0.23 per share on revenue of $5.28 billion, a decrease of 6.2% year over year.
Nordstrom reports 3rd quarter earnings of $0.71 per share on revenue of $3.63 billion, an increase of 2.5% year over year.
Roku reports 3rd quarter earnings of -$0.10 per share on revenue of $124.78 million, an increase of 40.1% year over year.
Next week: Earnings from: Home Depot, T.J. Maxx, Cisco, Target, Wal-Mart and Best Buy. Economic reports: U.S Producer Price Index, U.S. Consumer Price Index, Retail Sales, Housing Starts, U.S. Industrial Production and the Philly Fed Manufacturing Index.
WTI Crude oil: $56.75 per barrel. 10-year U.S. Treasury note: 2.40%. 30-year mortgage: 4.12%.
Sources: 361 Capital, Bloomberg, FactSet, Real Money Pro, CNBC, Seeking Alpha, MarketWatch, The Wall Street Journal and Estimize.com
P.S. Cascade’s very own Rob Wrubel has written and published his second book: “Financial Freedom for Special Needs Families.” He was recently interviewed and quoted on CNBC regarding pending tax reform legislation and its impact on special needs families. Here is the link:
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.