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The Tweet Heard Around the World

Aug 10, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Earnings season is finally over and I’m happy to say the announcements were good for many if not most companies.  The ones that missed or guided lower were hit hard and you are probably already aware seeing as they made headline news, i.e. largest one-day market-cap drop by Facebook.  Investors are now turning to the third quarter and more importantly the back half of the year.  Trade tensions remain a concern as is much of the uncertainty regarding future interest rate hikes, a quickly rising budget deficit, the upcoming mid-term elections, and potentially rising inflation.  The first half of the year saw increased volatility and we anticipate the second half of the year to look the same.

Aside from earnings announcements, it was an interesting week for news.  Let’s start with Sears.  This company has been trying to remake itself for years (if not decades) into a more modern retailer to compete with the likes of Target and Kohls.  This week the company announced it will begin selling Hoover vacuum cleaners, Dockers, G.H. Bass & Co., Lucky Brands, and precious metals.  You read that right.  Precious metals.  In other news, the Wall Street Journal reported Facebook has asked big banks to share detailed financial information about customers as part of a plan to offer new services.  It talked to JP Morgan Chase, Wells Fargo, Citigroup, and U.S. Bancorp to get details including card transactions and checking account balances.  What could possibly go wrong?

Tesla made headline news this week with one tweet from Elon Musk.  Mr. Musk, the CEO of Tesla, tweeted that he has secured funding to take the company private.  Not only did this come as a surprise to investors and employees, apparently it came as a surprise to his own board of directors.  This is a very unusual situation, since there are rules and regulations regarding how material information is supposed to be disseminated, i.e. an 8K filing with the SEC.  Furthermore, Mr. Musk has yet to disclose the source of the $70 billion that will be needed to take the company private at the price of $420 per share as stated in his tweet.  As the most shorted stock, hundreds of millions of dollars, if not over a billion, was lost by investors who were squeezed when the stock price skyrocketed on this news.  If Mr. Musk was not being completely truthful in his tweet, he could be on the hook for both criminal and civil penalties.

On the subject of tariffs and the glacially moving trade war, China rattled its sabre some more this week.  One potentially large bargaining chip is Apple, which manufactures virtually all its products in the country.  Not only does Apple produce in China, but it sells a heck of a lot of phones there too.  Apple made $9.6 billion in revenue in China in just the second quarter of this year.  Another sector between a rock and a hard place is the U.S. automakers.  In a retaliatory move, China increased its tariff on U.S. automobiles to 25% while simultaneously dropping its tariff on European imports to 15%.  European manufacturers shipped 165K cars into China last month breaking the previous record of 134K set in July 2014 while U.S. manufacturers were relegated to only the wealthiest of Chinese consumers.  It’s a tough time to be Ford or General Motors.

Since having a trade war on one front isn’t enough, President Trump has increased levies on steel and aluminum imported from Turkey to 50% and 20% respectively.  The country is undergoing a slow meltdown with the value of its currency, the lira, falling over 13% in just one night to a new all-time low against the dollar.  Not unlike Greece some years ago, the European Union’s largest banks have significant exposure to Turkey and some fear Turkey’s problems could spill over into Europe.  Not to be ignored, Iran also made the news this week as sanctions are set to take effect.  The Trump Administration says it expects buyers of Iranian oil to begin winding down their purchases as of this week.  Furthermore, U.S. sanctions against Iran on sectors including automotive and aircraft returned on August 7, while oil companies have until November 4 to adjust.  Analysts say Iran’s losses could ultimately total 1 M bbl/day of oil which would presumably push up the price of both oil on the world market.

In closing, I encourage everyone to walk faster.  I came across a study this week that found that walking at an average pace was linked to a 20% reduction in the risk of mortality compared with walking at a slow pace.  Walking at a brisk or fast pace was associated with a risk reduction of 24% with similar results found for the risk of dying from cardiovascular disease.  If you’re thinking it’s too late for me, you’d be wrong.  The benefits are far more dramatic for older walkers.  Average pace walkers aged 60 years or over experienced a 46% reduction in risk of death from cardiovascular causes, and fast paced walkers a 53% risk reduction, the study found.  So, get out there and don’t dawdle.  Now you know!

August 10, 2018

Why a Bull and a Bear?

Aug 3, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Despite all the earnings announcements reported this week, the markets look to finish mostly flat.  This week was perhaps the busiest in terms of the number of companies reporting earnings and for the most part things continue to look good.  Having said that, investors remains focused on future growth not past growth, and in that light there were some disappointments as a handful of companies lowered guidance this week citing rising materials costs, labor costs, and the potential for tariffs impacting their bottom line.  For others, the rising value of the dollar has made it more difficult to sell overseas which creates a headwind that is being accounted for in forward guidance.  All said, the quarter that just ended was good and we expect continued growth albeit with the potential for more uncertainty on the horizon.

It is hard not to notice the significant rise in the technology sector this year.  What may come as a surprise to you is that roughly two-thirds of the S&P 500’s market return this year is attributable to five companies, otherwise known as the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google).  Put another way, this year’s returns do not have a broad base but are laser focused on one sector and more specifically, five companies.  In that light, it should be noted that Apple made history this week by becoming the first publicly traded company to break a market capitalization of more than $1 trillion.  To put this in perspective, Apple’s market cap is greater than the GDP of Sweden, Argentina, Switzerland, Saudi Arabia, The Netherlands, and Turkey.  It is also greater than the cost of World War I, the Vietnam War, and the Iraq War.  We remain optimistic regarding the economy, but would rather see the distribution of gains more widely dispersed among sectors and industries.

While we’re on the subject of the economy, it was announced this week that the U.S. Treasury Department plans to borrow more this quarter than it had previously estimated as tax reform and increased spending widens the nation’s budget deficit.  New projections put total net borrowing at $769 billion for the second half of 2018 and $1.33 trillion for the year.  What happened to the days when we were concerned about the spiraling national debt?  I guess the pendulum has swung to the opposite extreme with the belief the United States can borrow indefinitely.  It was also reported this week that healthcare spending in the U.S. will soon reach 20% of GDP, a significantly higher proportion than any other major economy.  The Wall Street Journal reports the key cost driver is price hikes, not increased demand.  Since 1960, the CPI has risen 700% while medical costs have exceeded 2000%.  Since 2000, prescription drug costs have grown 69%, hospital care 60%, and physician and clinal services 23%.

Now for the good news.  The Treasury Department is considering bypassing Congress to grant a $100 billion tax cut in a legally tenuous maneuver that would cut capital gains taxation and fulfill a long-held ambition of many investors.  By changing the definition of “cost” for calculating capital gains, taxpayers would be allowed to adjust the initial value of an asset (cost basis), such as a home or share of stock, for inflation when it sells.

Tariffs are still a growing concern with President Trump threatening an additional 25% on $200 billion of Chinese goods and China counter-threatening tariffs on an additional $60 billion in U.S. agricultural products.  Perhaps more positive is the olive leaf that new Mexican President AMLO has offered to wrap up NAFTA negotiations.  I’m sure Canada is wondering what just happened since it was not included in the latest round of discussions.  And speaking of tariffs, it seems BMW is looking to move some of its production out of the United States.  The company is planning on increasing production in Europe and has ruled out South Carolina for the site of a new manufacturing facility instead choosing Thailand.  Perhaps President Trump was right when he called trade a zero-sum game.  At least for now, it seems we’re on the losing end of that gambit.

In closing I came across an interesting picture this week that addressed something I had never considered.  Have you ever wondered why a bull represents a rising market and a bear a falling market?  I’m ashamed to admit that it had never really crossed my mind in all the decades I’ve been in this industry.  In a nutshell, the stock market got the names “Bear and Bull” because of the way in which these animals attack.  Bulls typically swipe up with their horns when attacking, while bears swipe down with their paws when attacking.  Seems obvious now but how did this never occur to me?  Now you know.

August 3, 2018

The Perfect Day

Jul 27, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

It was an earnings deluge this week as roughly one-third of the S&P 500 reported quarterly results.  So far, 87% of corporations that have reported earnings have exceeded Wall Street estimates, with FactSet now forecasting Q2 profits will be up 21% from a year earlier.  Having said that, investors are generally forward looking and will be watching closely for forward guidance.  As we discovered this week, those companies that reduced guidance took big hits.  One has only to look at Facebook and Twitter for the fallout.  Expect more landmines over the next couple of weeks.

Despite a few companies that had big misses, the majority are meeting expectations.  To a large extent, corporate tax reform has been a huge success in so far as companies’ earnings growth.  Second quarter Gross Domestic Product (GDP) was released today and while slightly below forecast, it came in at a sizzling 4.1% year-over-year.  For the sake of comparison, the average growth rate during an expansion is 3% which has been elusive for a very long time even during the current recovery.  This quarter benefits from a timing sweet spot, coming in after the deficit-busting cuts trickle through the economy, but before the effects of current tariffs are truly felt.  Some economists argue recent policies are simply pulling forward demand and the current growth trajectory is not sustainable.  Others argue that a rather large inventory build accounts for a disproportionate percent of the growth in Q2.  Either way, we expect Q2 to be the high-water mark for the year with GDP growth slowing to 3% in the third quarter and 2.5% in the fourth as the effect of tariffs take hold.

In other news, Boeing reported this week a growing concern over a pilot shortage.  The company projects demand for pilots will rise to 790K over the next 20 years.  Its projection is double the current workforce.  There is vigorous debate over the causes with many accusing the industry of making it increasingly difficult and expensive to become a pilot while offering entry-level pilots poverty level wages.  Ironically, the industry appears to be moving towards lowering the requirement from two pilots in the cockpit to only one, perhaps considering the dwindling number of pilots.  It should also be noted that the self-driving car movement isn’t the only form of transportation trying to remove humans from the equation.  Some airlines are now beginning to take more seriously the idea of autonomous airplane flight.  I guess time will tell.

While we’re talking about transportation, California always seems to be ground-zero with regards to new technologies and regulations.  In that vein, it had proposed increasingly rigorous fuel emission standards some years ago.  These standards went well beyond what the federal government had imposed and presented a dilemma for automobile manufacturers.  After all, it wouldn’t be practical or profitable to make one set of cars for California and another set for the rest of the country. This week the Trump administration challenged the state of California’s right to set its own fuel emission standard.  The EPA will attempt to pull back the waiver granted to California as part of the Clean Air Act and reset the standard back to the 2020 level of 35mpg per manufacturer fleet.

One last bit of news made me chuckle as it seems global commerce is not always as straightforward as one might think.  President Trump’s desire for Europe to buy more natural gas from the U.S. will face a reality test, as Russian gas is significantly cheaper and U.S. exporters may not want to rush to Europe since their gas fetches much higher prices in Asia.  One energy analysts put it this way, “Where gas goes is just dictated by dynamics of the global gas market and it’s not clear to me what any European Union policy maker could actually do to change that.”

In closing I want to share with you a study I came across this week.  The premise of the study was to discover what makes up the perfect day.  Of course, the answer can be quite different from person to person, but it sought to find out common characteristics of an ideal day for the average person.  There were plenty of characteristics, but the main ones included waking up at 8:15am with a sunny, spring-like weather forecast with temperatures reaching 74 degrees, and respondents being able to enjoy three hours outside.  They see themselves spending four hours with their family and three hours with friends, then coming home and hopping on the couch where they’d spend a few hours watching television.  When all is said and done, the perfect day would end with bed at 10:50pm.  Using these characteristics, researchers concluded the average person has only 15 ‘perfect’ days per year.  My goal is for more than the average.  How about you?

July 27, 2018

Tariffs: From Seafood to Mattresses

Jul 13, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

You wouldn’t know it if you weren’t paying close attention, but the market was up this week.  With all the tensions between President Trump and NATO, Theresa May, China, Mueller, etc. you’d think that things were going worse than they are.  In fact, Microsoft hit a new all-time high this week.  That’s not to say all sectors and industries are doing well, but instead to point out that there are pockets of strength that remain.  However, the big concern continues to be tariffs which now appear to be more than just a negotiating tactic but instead a policy strategy.

Let’s talk tariffs.  This week China imposed a retaliatory tariff on U.S. optical fiber products of up to 78% hitting primarily U.S. company Corning (GLW).  The White House quickly published a new list of tariffs calling for a 10% tariff on $200 billion worth of Chinese goods which will likely become official in about two months.  Ironically, fearing a trade war, exporters rushed shipments to avoid the coming tariffs and thereby pushed the June trade deficit to a record $28.97 billion giving President Trump further ammunition to use against China.  For now, financial markets so far have shrugged off the first round of tariffs, but a new list would mark an escalation.  However, the following industries have already begun to feel the heat:

  • The textile industry is front-and-center in the escalation of tariffs. As a group there have been broad declines, but companies hit particularly hard include PVH, Tapestry, Gildan Activewear, Fossil, Vera Bradley, and Skechers.
  • Also hit hard is the soybean industry. Soybean prices fell to their lowest price in nearly a decade with domestic supplies set to rise to the highest level ever on expectations that China will cut into exports.  The USDA expects soybean exports to fall 11% next year with other countries failing to offset the lost demand in China.

Looking more broadly, it appears the corporate tax reform has resulted in what many analysts had expected.  S&P 500 companies are on track to repurchase up to $800 billion in shares this year – a total that would top the 2007 record.  However, despite these record share buybacks, a full 57% of those companies are trailing the S&P 500’s YTD performance, which marks the highest ratio of underperforming stocks since 2008.  One must wonder if corporate executives are buying high, just as in the previous record year of 2007.  Among sizable repurchasers this year not seeing a very good return on investment is Oracle, McDonald’s, and Bank of America.

In company news, Starbucks has big plans to ditch plastic straws in favor or new lids and recycled paper straws.  Starbucks isn’t the first company to do this, but seems to get more than its share of attention.  The movement to reduce plastic is gaining traction.  PayPal announced it plans on spending $3 billion annually on mergers and acquisitions that enable it to acquire specific capabilities.  The company is ambitious in its plans to grow and has a healthy balance sheet to help it get there.  And lastly, P&G announced it is not immune from tariffs, but not from China as might be expected.  Instead, the company says the vast majority of its products will be impacted by tariffs in Canada after the Canadian government decided not to issue an exemption.  It seems our stalwart ally to the north is done playing “nice” guy.

In closing, I came across an article today that got me thinking.  There used to be a time when the titans of industry worked to make the world a better place.  For example, Rockefeller donated more than $500 million to various philanthropic causes.  In more modern times, we have Bill Gates and Warren Buffett who himself has given away more than $46 billion since 2000.  But it seems, imperceptibly gradual, that philanthropy has diminished over time.  There are perhaps many good reasons explaining away this observation, including the possibility that the premise is completely wrong.  However, I’d be interested in knowing your thoughts after reading the following article.   Survival of the richest: The wealthy are plotting to leave us behind.  Let me know.

July 13, 2018

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