Market Minutes for the week of September 4th:
“I’ve learned…that a smile is an inexpensive way to improve your looks.” — Andy Rooney
Here is what I am thinking: 1.) Will there be an economic bump as the rebuilding from hurricanes Harvey and Irma begins? 2.) First Trust chief economist Brian Wesbury answers the question this way: “But even if the bump in real GDP growth in the first quarter of 2006 was due to Katrina, that doesn’t mean it was good news. It would be what Henry Hazlitt in his book ‘Economics in One Lesson’ called the ‘fallacy of the broken window’ – which we recommend all investors read. Hazlitt told a story about a vandal who broke a shopkeeper’s window, which caused the glassmaker to get an additional order. But the shopkeeper was planning on eventually using that same money to buy a new suit, so the tailor lost an order. In other words, even though rebuilding appears to create new economic activity, fixing things that have been destroyed actually robs an economy over time of the benefit of growth. Repairing physical capital does not generate new wealth, it only replaces old wealth.” 3.) Blaine Rollins CEO and founder of 361 Capital: “No matter what some may believe, natural disasters are not good for the economy. Sure, they might temporarily benefit some industries, but in total they pull spending away from other things like education and infrastructure. And massive disaster spending hogs resources causing disruption and inflation across the U.S. Just imagine owning a construction company in Phoenix, Denver or Dallas and find out that half of your work crew just drove to Houston to spend the next three to five years.” 4.) Given the scope of federal aid pledged to the victims of Harvey ($8 billion) and now Irma ($$$?), there is no way that Congress will not pass a debt limit increase. It’s a done deal! 5.) Doug Kass: “In the midst of an overloaded legislative process – a debt ceiling increase, a budget, regulatory and tax reform, a possible war or military escalation with North Korea and immigration – Trump laid the DACA decision in the lap of Congress yesterday.” 6.) Doug, I agree. Given the popularity of DACA, has Trump dropped another poisonous bomb among Republicans? 7.) It seems that these are just surreal times, 2 catastrophic hurricanes hit 2 major U.S. cities within 2 weeks of one another and North Korea, who is posing the most unnerving nuclear threat since the Cuban Missile Crisis? 8.) The 10-year Treasury bond has dipped to a 2.06% yield. Is this a sovereign flight to quality after Kim Jong-un’s latest physics experiment? It must be, because the U.S. economy is stronger than that yield would suggest. Still, if the 10-year stays at this level, there will be NO more Fed rate increases this year. 9.) I think money on the sidelines still wants to own equities. How else do you make sense of these one-day market sell-offs on fears that are seemingly forgotten the next day and met with across the board buying? It’s a bull market until it isn’t, I guess. 10.) Maybe the market knows what economist Scott Grannis knows: “Based on past correlations, the strength of the ISM manufacturing index says that revenues per share of major U.S. corporations are likely to remain strong for the foreseeable future. Coupled with near-record profits, this provides a reasonable basis for a continuing rally in equity prices.”
GDP for the 2nd quarter was revised higher to +3.0% from the prior reading of +2.6%.
The Atlanta Fed’s GDPNow is forecasting 3rd quarter GDP at 2.9%.
The Fed’s Beige Book, a summary of commentary about current economic conditions, said that business contacts across the U.S. expressed concerns about an extended slowdown in the auto industry (those worries could be premature however, if nearly 1 million cars have to be replaced or repaired as a result of Harvey). Other Beige Book tidbits: Freight prices have jumped as the Port of Charleston has had to take on more ship traffic as freighters were rerouted away from Houston. Legalization of cannabis has caused a growth in the demand for low-skilled workers in the San Francisco Fed district. The Minneapolis Fed said that attendance at the Sturgis Motor Cycle Rally in South Dakota was up 5% over last year. The Atlanta and Dallas Fed districts said that Hurricane Harvey created broad disruptions to economic activity along the Gulf Coast. The Kansas City Fed said that agricultural credit conditions continued to diminish and were expected to fall further in coming months.
Payroll processor ADP said that the U.S. economy added 237,000 private payrolls for the month of August.
The Labor Department said that the U.S. economy added 156,000 non-farm jobs in the month of August. By sector: manufacturing gained 36,000 new workers, construction contributed 28,000 and mining added an additional 7,000 jobs. Professional and technical services increased by 22,000 workers and health care grew by 20,000 new employees.
The Labor Department said that in the aftermath of Hurricane Harvey, initial claims for unemployment insurance have jumped higher by 62,000 to 298,000 vs 236,000 before the storm.
The University of Michigan Consumer Sentiment Survey for August showed a reading of 96.8, which was down from a preliminary reading 97.6. Sentiment continues to be much higher than the eight-month low of 93.4 set in July.
The Commerce Department said that factory orders for July fell by 3.3% from the prior month.
The ISM Manufacturing Index rose to 58.8 in August from 56.3 in July. Employment and production contributed to the increase. This type of index expansion, if it continues, is indicative of 3% to 4% GDP growth for the quarter according to economist Scott Grannis.
The ISM Nonmanufacturing Index held steady at 55.3 in August. Fifteen of the 17 non-manufacturing industries surveyed reported expansion. The remaining two industries – transportation/warehousing and agriculture, forestry, fishing and hunting – reported contractions.
The Commerce Department said that construction spending fell 0.6% in July vs an expected increase of 0.6%. Private construction spending fell by 0.4% and public construction spending fell by 1.4%.
Bloomberg reports that the supply channel for plastics and specialty chemicals is still paralyzed as a result of Hurricane Harvey. The Gulf Coast is home to around 90% of the nation’s capacity to turn out base plastics. Petrochemical plants that produce the goods and the rail companies that ship them are still restoring service and have not been able to deliver. Newell Brands (the maker of Rubbermaid products), has lowered guidance for 2017 due to the supply chain disruptions. The company says that it’s paying higher prices for source resins from alternative suppliers both at here and overseas.
Fed vice chairman, Stanley Fischer has announced that he will resign from the Fed around October 13. The 73-year-old Fischer has cited “personal reasons” for the resignation.
According to Josh Zumbrun of the Wall Street Journal, “For the first time in a decade, the world’s major economies are growing in sync, a result of lingering low-interest-rate stimulus from central banks and the gradual fading of crises that over years ricocheted from the U.S. to Greece, Brazil and beyond. All 45 countries tracked by the Organization for Economic Cooperation and Development are on track to grow this year…It is the first time since 2007 that all are growing and the most countries in acceleration since 2010, when many nations enjoyed a fleeting snapback from the global financial crisis.”
The NYSE (New York Stock Exchange) has filed a proposal to delay the release of important company news immediately following the closing bell to reduce investor confusion and disruption. Publishing material information after 4:00 p.m. Eastern time can cause a company’s stock to trade in other markets at drastically different prices than that of NYSE’s closing auction price. If the proposal passes, companies listed on the NYSE will have to delay news releases until 4:05 p.m.
CoreLogic says that at the end of July, nearly 46% of the 50 top real estate markets are overvalued. The combination of steadily rising prices (+6.7% in July), purchase demand and tight inventory is creating the overvaluation.
“According to a recent Cap Rate Survey by CBRE Group, the property type that suffered the greatest decline in value from the second half of 2016 to the first half of 2017 were retail “power centers,” where typically two or three big box stores surrounded by other retail and parking. Their average cap rate rose to 7.31% in the first half of this year, compared with 6.92% six months earlier.”, reports Peter Grant of the Wall Street Journal.
Wells Fargo has said that they have uncovered an additional 1.4 million instances of false account creation, bringing the total to 3.5 million.
Equifax reports that they have been the victim of a massive cyberattack that may have impacted 143 million U.S. customers. Information stolen includes S.S. numbers, dates of birth, addresses and driver’s license numbers. The attack occurred from mid-May through July and the company discovered it on July 29.
United Technologies has reached a deal to acquire Rockwell Collins for $23 billion. The purchase equals a total value of $140 per share in cash and stock. Rockwell Collins shareholders will receive $93.33 per share in cash and the remaining $46.67 in UTX stock.
Uber’s new CEO, Dara Khosrowshahi, said that the company should become a public company in the next 18 to 36 months.
Ford’s August car sales were powered by demand for the company’s F-Series trucks where sales rose 15% month over month. Sales by brand: Ford -2.0%, Lincoln -5.8%. Double-digit sales drops were seen in Taurus, Fiesta and Escape.
General Motors sales for August were up by 7.5%. Sales by brand: Chevrolet +11.4%, GMC +12.0%, Buick -23.0% and Cadillac – 8.0%.
According to CreditSights, Apple plans on entering the corporate bond markets once again. The company is looking to raise between $6 billion and $7 billion in an offering that will include 2-year fixed and floating rate notes, along with 5-year, 10-year and 30-year bonds.
Apple CEO Tim Cook has received an $89.6 million bonus (in Apple stock) because Apple’s stock delivered shareholder returns in the top third of the S&P 500 index during the last 3 years.
The Wall Street Journal is reporting that the iPhone 8 has had some early manufacturing problems and the launch will be delayed by a month.
Amazon has announced that it is beginning a city search for its second North American headquarters that will house 50,000 employees and cost $5 billion to acquire and operate. The online retailer is soliciting bids for the project called “HQ2” and it will prioritize cities with more than 1 million people.
Hewlett Packard Enterprises reports fiscal 3rd quarter earnings of $0.30 per share on revenue of $8.2 billion, an increase of 2.5% year over year.
Best Buy reports 2nd quarter earnings of $0.69 per share on revenue of $8.94 billion, an increase of 4.8% year over year.
Restoration Hardware reports 2nd quarter earnings of $0.65 per share on revenue of $615.3 million, an increase of 13.2% year over year.
Graydon Carter, editor of Vanity Fair magazine, is stepping down after 25 years at the helm.
J.J. Watt, NFL star for the Houston Texans set out to raise $200,000 for the victims of Hurricane Harvey. He started with $100,000 out of his own pocket. He raised the $200,000 in just 2 hours. In 2 days, he had raised $2 million and $5 million in 3 days. Skip ahead a week and J.J. has now raised over $27 million on youcaring.com. Donations have come from other NFL players, NFL team owners, professional athletes in other sports, celebrities, businesses and other individuals. Way to go J.J.!
Here is how the wealthy who are in the path of Hurricane Irma are handling the situation: In a blog post, billionaire Richard Branson said he is safe after riding the storm out in the wine cellar of his home on his private island (Necker) in the Caribbean. Well to do evacuees in South Florida are scrambling to get private jets out. According to XOJET and NetJets, prices are skyrocketing with flyers willing to pay 30% more than the normal $14,000 to $15,000 charter cost from Florida to New York. Private jet companies are diverting all the planes they can from California, the South and the Midwest but as of Thursday morning, there were no seats on any private jet left….no matter what anyone is willing to pay.
Next week: Earnings from: Oracle, Cracker Barrel and United Natural Foods. Economic reports: U.S. Producer Price Index for August, U.S. Consumer Price Index for August. Retail Sales for August and U.S. Industrial Production for August.
WTI crude oil: $47.63 per barrel. 10-year U.S. Treasury note: 2.05%. 30-year mortgage: 3.97%.
Sources: 361 Capital, Real Money Pro, CNBC, MarketWatch, Seeking Alpha, First Trust Economics, The Wall Street Journal, Bloomberg, Calafia Beach Pundit and Estimize.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.