Browsing articles in "Weekly Market Update"

Leaning Pillars

Jun 14, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

I do my best each week to keep you informed on the latest developments in the market.  Sometimes it is a piece of economic data which surprises to the upside or downside and moves the markets.  Other times, it is geopolitical events which take center stage and drive investors one direction or another.  Frequently, there are unexpected company announcements which make headline news and drive stocks higher or lower.  However, sometimes I like to take a step back and reflect on the bigger picture.  This week is one of those weeks.

There are four pillars of government policy that effect the economy.  Those pillars are monetary policy, fiscal policy, trade policy, and regulations.  The two which get the lion’s share of both media and investor attention are monetary and fiscal policy.  Monetary policy is controlled by the Federal Reserve and, as of last week, appears to be moving toward a more accommodative position (lowering interest rates).  Fiscal policy is controlled by Congress and for some time has been quite accommodative, to the point that we’re generating on the order of a trillion-dollar annual deficit.  However, it is the final two pillars I want to talk about today.

Trade policy often takes a back seat to the more headline-grabbing monetary and fiscal policy.  However, we find ourselves in a period of significant uncertainty, mainly due to trade skirmishes on many fronts.  Whether we’re looking at China, or Mexico, or Canada, or Europe, it seems we’re on the brink of a full-blown trade war on any given day.  While this strategy, and it is a strategy, may make sense in keeping our trading partners off balance, it also has the consequence of keeping companies off balance.  Decisions on capital expenditures, like building new manufacturing plants or hiring additional employees, becomes very difficult.  No one wants to be the executive to expand at exactly the wrong time.  Not only that but companies that produce abroad, whether we’re talking iPhones in China or automobiles in Mexico, are faced with difficult challenges in supply chain management not to mention margins and profitability.  The uncertainty creates doubt, which creates inaction, which leads to slowing economic growth.

Regulations can be implemented for many purposes but also serve to slow growth.  In some cases, this is a good thing, i.e. regulations on pollution or dumping chemicals.  In other cases, it is a bit murkier, i.e. blocking mergers or acquisitions that are viewed as creating an anti-competitive environment.  There are two large mergers that have stalled and a third that is likely to face stiff headwinds.  CVS agreed to acquire Aetna over a year ago and won Department of Justice approval last fall.  However, a federal judge looks to block the merger which would be unprecedented.  Another example is Sprint and T-Mobile which has the blessing of the Federal Communications Commission (FCC) but is being sued by no less than nine state attorneys’ general.  Lastly, there is the recently announced merger between Raytheon and United Technologies which ran headfirst into President Trump’s concern over consolidation in the defense sector.  While it is understandable and often necessary to regulate industries for the greater good, sometimes that regulation is capricious and arbitrary.

Two sectors that have a cloud hanging over them are the Healthcare and Technology sectors.  The former has profited from the exponential increase in drug prices, and is blamed for the opioid crisis.  Health insurance companies and pharmaceutical distribution companies face many regulatory and legal hurdles in the months and possibly years ahead.  More recently, technology companies have come under scrutiny for their privacy practices, i.e. Facebook, monopoly issues, i.e. Google, and anti-competitive business models, i.e. Apple & Amazon.  Despite recent moves to deregulate some industries, like energy, it appears there is a strong appetite on both sides of the aisle to regulate others.

While the media and analysts focus on the Federal Reserve and interest rates, or conversely, Congress and rising budget deficits, we should pay equal attention to the other pillars that go unmentioned.  Trade and regulation are critical components of economic growth and for the better part of this year have been used as a negotiation strategy at the expense of corporations and the economy alike.  The U.S. economy remains on solid footing and despite the trade rhetoric and regulatory hurdles, continues to grow.  Just think how much better off we would be if these headwinds abated and the markets were allowed to grow unhindered.  Now that’s something to think about.

June 14, 2019

Impossible but Not Necessarily Healthy

Jun 7, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

In recent weeks, we’ve watched the markets slowly sell off due to trade war rhetoric and moderating economic data.  Fortunately, investors have a new champion in the Federal Reserve (Fed) which announced this week it will do whatever is necessary to stabilize the U.S. Economy.  The market took this to mean that the Fed plans on cutting interest rates, possibly as soon as this year.  In fact, analysts put a 90% probability of a rate cut in September, rising to 97% by December.  What the Fed sees and how soon it acts remain unclear.  However, when the Fed changes policy, it is worth paying attention.

Despite further talks, there has not been any progress (at least that we are aware of) on the trade front.  The President said this week he will wait until after his meeting with Chinese President Xi, at the G20 meeting at the end of this month, to decide if further tariffs are warranted.  What’s new this week is that President Trump now appears ready and willing to impose trade tariffs on Mexico over the issue with illegal immigration.  As soon as Monday, we may hear about a 5% tariff, rising by 5% each month, up to 25% on all goods coming into the United States from Mexico.  Unlike the impasse with China, it is believed this negotiation will be resolved quickly.

I’ve talked a lot lately about how tariffs can hurt economic growth and are generally viewed by scholars and conservatives alike as a bad idea.  However, there are some who benefit from tariffs.  It appears Vietnam has so far emerged as the largest beneficiary of this trade war, gaining an estimated 8% of its gross domestic product (GDP) from new business.  Other major beneficiaries are Taiwan, Chile, Malaysia, and Argentina who have seen additional exports to the U.S. and China.

Aside from troubles with China and Mexico, Venezuela (which hasn’t been in the news lately) is teetering on the brink of insolvency.  Earlier this week, the country failed to make an interest payment on a gold swap agreement valued at $750 million with Deutsche Bank, leading the lender to take possession of the gold used as collateral.  The loan that Deutsche Bank made in 2016 was backed by 20 tons of gold as collateral.  Venezuela’s gold holdings, one of Maduro’s few sources of capital to keep his regime going and his military forces loyal, have been shrinking.  In March, Venezuela’s central bank missed a deadline to buy back gold from Citigroup for almost $1.1 billion.  And earlier, the Bank of England refused to give back $1.2 billion worth of Venezuelan gold.  This doesn’t bode well for either the government or the people of Venezuela.

Enough talk about geopolitical issues.  Let’s talk about some good news.  The 30-year mortgage fell to a two-year low this week.  The 30-year fixed-rate mortgage averaged 3.82% down from 4.54% this time last year.  With rates dropping below 4%, there are over $2 trillion of outstanding conventional mortgages eligible to be refinanced – meaning the majority of what was originated in 2018.  Also worth noting, U.S. household net worth made the biggest quarterly gain in 14 years.  U.S. household net worth rose 4.5% in Q1 2019, more than offsetting the 3.6% decline in the last quarter of 2018.  Household debt growth moderated to an annual rate of 2.3% from 2.8% last quarter, while the household saving rate improved to 6.7% of disposable personal income from 6.5% in Q4.

In closing I turn to food, which seems like a regular occurrence.  This week we learned that chicken may be the new red meat.  New research, published in the American Journal of Clinical Nutrition, is raising questions about poultry and cholesterol.  The small study found that consuming high levels of red meat or poultry resulted in higher blood cholesterol than consuming an equal amount of plant-based protein.  The main takeaway is that we should all be watching saturated fat.  Call me skeptical, but the release of this study seems extraordinarily timed with the upsurge of plant-based protein that is making headline news, i.e. Beyond Meat, the Impossible Burger, etc.  Oddly enough, while the plant-based proteins may be better for the environment, they are not exactly a healthier alternative.   An 8oz serving of Impossible meat has 28 grams of total fat (36% daily value) and 16 grams of saturated fat (80% of daily value).  To its credit, it has no cholesterol (which the study appears to have focused on).  Now you know.

June 6, 2019

Turning Water into a Lifestyle Product

May 31, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Despite an abbreviated trading week, the markets had a lot to say.  The needle ticked a bit higher on the “fear” gauge as investors moved money into fixed income driving interest rates lower.  The 10-yr treasury, that had been at 2.75% just two weeks ago, now hovers around 2.2% which represents a large move in a rather short period of time.  What’s driving volatility can be summed up in two words – trade and uncertainty.  There’s too little of the first and an abundance of the second.

Optimism, exhibited just a few weeks ago, is waning as investors and analysts grapple with the fallout of worsening trade rhetoric between China and the United States.  The hope had been that both countries could knock out a deal, perhaps not to either’s liking, but allowing each to save face and claim victory no matter how small or real the outcome.  That hope is fading as both sides appear to be digging in for the long haul.  The S&P 500 has pulled back over the past month and currently sits right at its 50-day moving average.  As long-term investors, we recognize that times like this present buying opportunities and should be viewed as part of the overall investment cycle.  Additionally, having a well-constructed portfolio that is properly diversified can help reduce some, but not all, of the volatility.  Keeping a positive outlook is vital during these rough patches.

So, what’s going on with trade that has investors troubled?  In retaliation for putting a ban on Huawei, China announced it is halting all soybean purchases and is considering putting a moratorium on the sale of rare earth elements to the U.S.  Rare earth elements, while not actually rare, are a crucial component of products that cut across the U.S. economy, not only in the tech sector but the energy, automobile, and defense industries as well.  We know agriculture is being hurt by these tariffs as demonstrated by the President’s proposal to give $16.5 billion in aid to farmers this year.  Further, over 95% of rare earth elements come from China and while it would be an inconvenience if we couldn’t buy the next smartphone, it is another matter if it impacts missile guidance systems, antimissile defense systems, and satellites.  While not impossible, it will take time for the United States to rebuild its rare earth elements industry.  That gives China real leverage for now.

In other trade news, Germany, France, and the U.K. created a workaround for those countries wishing to continue to do business with Iran in the face of U.S. sanctions.  European countries broadly oppose President Trump’s decision to withdraw from the nuclear accord.  The proposed plan would allow companies to trade with Iran without the use of U.S. dollars or American banks.  However, this proposal is drawing heat from U.S. officials, leading to a strongly worded letter issuing a threat of punishment to those countries deciding not to comply with the trade restrictions.  While it does not stipulate what the consequences would be, it is reasonable to believe that sanctions could be placed on those non-complying countries.

In company news, the New York Times reported that Google now has more temporary and contract workers (121,000) than actual employees (101,000).  Though they often work side by side with full-time employees, they are employed by outside agencies.  In response, Google CEO, Mr. Pichai announced that by April 2020 Google would commit to pay temporary staff $15 per hour and offer 12 weeks of parental leave and healthcare by 2022.  Perhaps the company cannot attract enough qualified individuals to fulfill its ranks.  On the other hand, Google isn’t the only company in Silicon Valley to use these practices.

In closing, let’s talk about water.  The bottled water industry has been on an exponential growth trajectory in recent years.  I’m going to sidestep the controversy over the sourcing of said water or even its quality.  However, let’s talk about its marketing.  This week I learned there is a startup marketing its water as “Liquid Death” and runs $21.99 for a 12-pack.  The cans are festooned with dripping golden skulls and the tagline, “murder your thirst.”  It isn’t flavored and claims no health benefits.  It is simply water with a big marketing budget.  To be fair, it isn’t the first to make such a splash.  Others include “Bulletproof FATwater” and LIFEWTR, each suggesting different benefits.  Perhaps it’s just me, but has this gone a little too far?  Now you know.

May 31, 2019

Happy Memorial Day!

May 24, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

It’s been a slow melt over the past four weeks with the market ending each week a little lower.  May has not been a favorable month for investors.  This week was no different than the last few, the driving force being a lack of progress on trade with China.  In addition, there is Theresa May’s resignation as British Prime Minister, an on-again, off-again Twitter war with Iran, and a widening dislike between the President and Democratic leadership on Capitol Hill.  To be fair, the markets are holding up well given the circumstances.

Putting the aforementioned aside, there is a lot to report on corporate news.  Despite booming pickup truck sales, Ford announced it will be restructuring (again) with the goal of saving $600 million annually.  The company reported it plans to cut 7,000 salaried jobs by August or roughly 10% of its global salaried workforce.  Ironically, Fiat Chrysler released plans to build a $1.6 billion assembly plant and invest $900 million to modernize a second plant in Detroit.  I’m not sure these two announcements cancel each other out, but it is a welcome sight to have production come back to Detroit.

The technology sector had a difficult week after President Trump put a ban on Huawei, the largest telecommunications-equipment company in the world and second largest smartphone manufacturer ahead of Apple.  Oh, and it is in China.  Technically, it is a trade blacklist that bans companies from selling components that Huawei uses to assemble its own finished products.  Those companies affected include Qualcomm, Xilinix, Broadcom, Corning, Micron, and STMicroelectronics.  So why did the President put a ban on Huawei?  That’s not as clear.  The official line is that, “Huawei’s hardware puts the U.S. at risk for espionage.”  However, there is almost certainly more to this story than we’re being told.

Boeing’s woes have temporarily subsided with the software update on its 737 MAX completed, or more specifically its MCAS system.  The FAA announced it expects the grounding to be lifted as soon as late June.  However, I say “temporarily” because China’s top three airlines have called for compensation from Boeing for losses incurred by the grounding and delayed deliveries of 737 MAX planes.  I suspect these airlines won’t be the only ones demanding compensation and your guess is as good as mine how much they will be able to extract from Boeing.  Perhaps bad timing, but Boeing’s next commercial jet design, dubbed the 797, is expected to have a cockpit that seats only one pilot, with a second ground-based pilot “monitoring several aircraft.”  I can’t imagine this is a good time to be proposing such a radical change.

In other news, Facebook reported it removed nearly 3.4 billion fake accounts from October, 2018 to March, 2019.  By its explanation, this is twice the number of fraudulent accounts deleted in the previous six-month period.  As a result, the company estimates that 5% of its 2.4 billion monthly active users are fake accounts.  This is a staggering number of fake accounts and really calls into question whether the novelty of Facebook has worn off in the face of bad actors with malevolent intent.  Could the era of social media be coming to a natural end?

In closing, let’s talk about genetically modified food (GMO) which has been around for some decades.  The goal of scientists has been to make our food more resistant to pests, help them grow faster, and make them drought resistant.  Among the many success stories are corn, soybeans, sugar beets, alfalfa, canola, and squash.  Up until now genetic modification was solely done in the realm of plant based food.  This week, AquaBounty Technologies announced the FDA has approved its request to produce genetically modified salmon in the U.S.  The genetic modification causes the salmon to grow twice as fast as those in the wild.  The company touts sustainability while its opponents call the product a “frankenfish.”  The company plans to initiate operations at its fish farm in Indiana.  Now you know.

May 24, 2019

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