Browsing articles in "Weekly Market Update"

Capital Markets Clogged – Call a Plumber

Sep 27, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

This being the first official week of Fall, I would have hoped for temps to cool off a little.  Instead, it appears things are heating up again, not unlike what is happening politically in Washington D.C.  This week we saw the House of Representatives launch an impeachment inquiry, the United Nations facing the heat on climate change, and a liquidity anomaly that doesn’t seem to be going away.  In all, it was a busy and contentious week for the markets.

Let’s start with the liquidity anomaly which started last week.  I didn’t report on it because, frankly, no one seemed to know precisely what was causing it.  To be honest, there still isn’t a clear answer.  For decades, banks with excess cash would lend that money to those banks who need to borrow to meet reserve requirements.  This is a very low-risk proposition since the borrowing typically is only overnight.  The banks with extra cash make a little money in interest and provide liquidity to the financial system, while those who need to borrow have a well-oiled structure to do so.

However, starting last week banks who needed to borrow discovered there wasn’t enough money in the system and overnight rates shot up to 10%.  Ultimately, the Federal Reserve had to step in with $75 billion per day in liquidity injections to keep the system solvent.  This emergency liquidity, which was supposed to last just a few days, continued into this week and was expanded to $100 billion per day.  Why are banks no longer lending to each other?  Is it a question of confidence?  Or instead, why do banks have less excess cash?  Is it a question of these banks finding investments with better returns elsewhere?  Likely, the Federal Reserve understands why this is happening, but has yet to share that explanation with the market.  Essentially, this is a $400 billion bailout that is going largely unreported.  I hope a more forthcoming explanation will be out soon.

Out of Europe, we learned this week that individuals do not have the right to be forgotten worldwide.  Europe’s top court ruled that Alphabet’s Google does not have to remove links to sensitive personal data worldwide, five years after this case was originally heard.  However, people do have the right to be forgotten in Europe.  Chalk one up to Google.   Also, out of Europe, the high court ruled that Starbucks does not have to pay almost $33 million in back taxes to the Netherlands.  This is important because the same judges will decide a similar, albeit significantly larger, $14 billion case against Apple.  And lastly, the British Supreme Court ruled that the suspension of Parliament by Boris Johnson was unconstitutional.  This throws the whole Brexit fiasco into another dimension.  Will the parliament reconvene?  Will Boris Johnson be forced to resign?  Will a new Brexit deal be agreed upon in the next month?  It is impossible to know.

In closing, you might be wondering how have markets responded to previous impeachment proceedings?  The S&P 500 fell as much as 4.9% on October 8, 1998, the day the House voted to begin impeachment proceedings against President Clinton, before trimming losses to end the day down 1.2%.  By the time Clinton was acquitted by the Senate in February 1999, the index was up 28%.  Markets shrugged off an impeachment inquiry against President Nixon on February 6, 1974, but the S&P 500 fell around 30% by the time he resigned due to Watergate.  To be fair, with Nixon there were other forces at play including the suspension of the gold standard and a recession following the oil shock of late 1973.  Based on these two limited cases, the market will either go up or down.  Now you know.

September 27, 2019

Whoa There Buddy!

Sep 20, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

This week was a mixed bag regarding economic data and headline news.  The tailwind of the last few weeks hit a bit of a snag with an attack on Saudi Arabia’s oil fields and a strike by the UAW at General Motors.  Yet despite these developments, investors remained fully engaged in the markets with the prospect of another interest rate cut.  Basically, it was just another week with lots of news and little traction.

The trade war, which feels like it has been going on forever, appears to be hitting its mark.  We learned that China’s output growth weakened to 4.4% in August, the weakest in almost 18 years.  Retail sales and investment gauges worsened as well, reinforcing views that China will have to respond with either fiscal or monetary stimulus to keep its economy growing above 6%.  Before we get too giddy, it should be noted that the United States is also suffering a slowdown with its gross domestic product (GDP) expected to fall to 1.8% later this year and some predicting as low as 1% in the first half of next year.  I would call this the opposite of a zero-sum game since we’re both losing for “winning”.  Unfortunately, the politics of this issue is slowly slipping into the start election season and that changes everything.  Expect the posturing to increase in the months ahead if this doesn’t get resolved soon.

As expected, the Federal Reserve cut the Fed Funds interest rate by another 0.25% to a range of 1.75-2.00%.  The economic data remains somewhat strong with August industrial production and capacity utilization coming in stronger than expected, August housing starts blasting through estimates, and existing home sales powering past the consensus.  So it was with a bit or irony that Fed Chair, Jerome Powell, announced a rate cut amidst this backdrop of otherwise good economic data.  When repeatedly questioned about this by reporters, he said, “Today’s move was insurance against ongoing risks.”  While somewhat vague, I think we all know what he’s saying.

In company news, Amazon announced it plans on having 100,000 electric delivery trucks on the road by 2024, with the first few hitting streets by 2021.  The company struck a deal with Rivian, which it also happens to be an investor in and who has partnered with Ford to bring electric vehicles, most notably pickup trucks, to market.  Perhaps because of this or perhaps due to the global slowdown, FedEx reported lower earnings guidance and sold off on the news. And lastly, as much as I dislike talking about pumpkin anything before the start of Fall, it seems Starbucks decided to bring back the Pumpkin Spice Latte earlier than ever this year.  Officially it launched the pumpkin abomination August 27th, and reportedly saw foot traffic increase by 19%.  Where does the insanity end?

In more serious news, the Trump administration revoked California’s ability to set its own auto emissions standards.  It revoked California’s waiver on emissions, “in order to produce far less expensive cars for the consumer, while making cars substantially safer.”  While this is undoubtedly a setback for the environment, it is a clear win for the auto manufacturers who have been on an aggressive timeline to improve fuel efficiency.  With the likes of Tesla and Rivian, I can’t imagine the tide turning now.  In fact, General Motors announced this week that it is committing to invest $7B in an all-electric pickup truck and an advanced battery system in the U.S. as part of its contract talks with the UAW.  If manufacturers solve the price and range issues of electric vehicles, it seems almost inevitable the internal combustion engine will go the way of the dodo.  Perhaps this week’s news buys them a bit more time.

In closing, I’ve reported in the past on new words officially being added to the Merriam-Webster dictionary.  While this may not be a new word by any stretch of the imagination, its spelling may surprise you.  It seems in recent years the spelling of the word “whoa” has slowly morphed into “woah.”  See, even my spell check thinks it is wrong.  Yet, the debate between these two spelling seems to be most evident along generational lines with those in Gen X and the Baby Boomers using the more traditional, whoa!   This hotly contested debate finally made its way to Merriam-Webster, who decided last month that whoa is the correct spelling.  Now that I’ve brought this to your attention, you can’t help but see this everywhere.  Tell those millennials to slow it down with their progress.  Now you know.

September 20, 2019

Zero or Lower

Sep 13, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

The momentum continued this week with rumors of a trade breakthrough and a delay of new tariffs on Chinese goods.  In addition to what appears to be positive developments on the trade front, the Federal Reserve is up next week with the highly anticipated next round of interest rate cuts.  Given this backdrop, the markets look to continue the upward trend started a few weeks ago.

While data for the United States remains stable, that coming out of Europe shows weakness persisting.  With this information in hand, the European Central Bank (ECB) announced this week it is further cutting its interest rate.  While this is not unlike what is happening in the United States, what is different is that their deposit rate is now -0.50%.  The outcome is that the $27.8 trillion of non-U.S. dollar investment grade global debt is collectively yielding just 0.11%.  Of all global investment grade debt delivering any yield, 95% is from the United States.  This will likely continue to put pressure on U.S. interest rates as foreign investors look abroad, specifically to the United States, for credit opportunities.  Naturally, President Trump further reiterated his displeasure for his choice of Federal Reserve Chairman, Jerome Powell, and insists that the Federal Reserve should lower interest rates to zero or lower immediately.

Last week I posed the question whether corporate debt is the next big bubble.  Given the demand for a positive yield in investment grade paper, U.S. companies have been more than happy to oblige.  The downside is that increasing levels of corporate debt could lead to credit downgrades.  Well, not a week since I wrote about this, we learned that Moody’s credit rating agency has cut its rating on Ford to junk status citing concerns over the automaker’s balance sheet.  The company no longer carries an investment grade credit rating as Moody’s cites weak earnings and cash generation as the company pursues a lengthy and costly restructuring.  While Ford may be the most recent example of what I am talking about, I suspect it won’t be the only one or the last one in the years ahead.

In other news, the U.K. remains a bit of a basket case with Brexit still up in the air.  A lot of political maneuvering is happening between the various political parties without a clear idea of an endgame.  The British courts have ruled Boris Johnson’s shutdown of parliament as unconstitutional, yet the ambiguity of the situation remains intact.  For now, it appears the British government is gridlocked and potentially sidelined until October 15th, just two weeks before the Brexit deadline.

As for company news, there was quite a bit this week.  Apple held an event during which it introduced its latest iPhones and an updated Apple Watch.  There weren’t any huge innovations, unless you count the addition of a new ultra wide-angle lens.  5G capability was absent this year and could diminish some consumers desire to upgrade in favor of waiting until next year when this will undoubtedly be available.  Toyota reported it is testing a solar-powered Prius that was inspired by new ultra-thin solar panels developed for satellites.  The electricity from the panels goes directly to the drive battery, so the Prius can charge while moving or when parked.  On a good day, the charge can be sufficient for up to 35 miles of travel.  Perhaps closer to home, we learned this week that Fifth Third Bank has been approved for a national charter.  In his statement, CEO Joseph Otting said a national charter and associated regulatory framework would make it easier for the bank to successfully conduct business across the country.  Implicit in that statement is “across the country.”  It seems a nationwide expansion is in order.

To close out this week let’s talk about traffic.  The kind of traffic that seems to grow with each passing year and clog our highways and major thoroughfares.  No matter how many lanes are built, it never seems to be enough.  In fact, it seems to invite more traffic.  This week I read an article about a Chinese company taking an interest in a German flying taxi start-up named Volocopter.  If anyone can pull this off it is the engineering of the Germans with the manufacturing prowess of the Chinese.  Maybe we’ve been looking at this wrong the whole time.  Instead of laying down more pavement, maybe we should be looking to the skies?  Volocopter looks to bring its VoloCity all-electric aircraft to commercial launch within the next three years.  Now you know.

September 12, 2019

Stand United

Sep 6, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Stand United

What was shaping up to be a difficult week turned out to be somewhat different.  As of September 1st, the U.S. and China began imposing new tariffs on each other’s goods and the U.S. reported its manufacturing sector contracted in August.  However, as the week continued there grew a quiet optimism first with trade talks set to resume between the United States and China and then with predictions for another Federal Reserve (Fed) interest rate cut in September.  The political winds seem to change direction often and in seemingly random ways.  This week they appear to have moved in our favor.

According to the Federal Reserve’s Beige Book, the economy plugged along at a “modest” pace through the end of August.  This language matches with the pace described in the July report.  However, manufacturing activity was down slightly from the previous report and agricultural conditions remained weak.  If a silver lining was to be found, it is in the fact that the majority of businesses remain optimistic about the near-term outlook.  The key takeaway from the report was “modest” in almost every way.

Several Federal Reserve governors went on record this week.  The consensus is that the economy is in a good place, but not without risk and uncertainty.  New York Fed President, John Williams, points to the recent downward revision for GDP growth and sizable downward revision to payroll employment for 2018.  One implication of these revisions is that the economy’s underlying momentum was already somewhat less robust than previously thought.  Based on his, and others recent commentary, the market is now looking for one rate cut in September (in less than two weeks) and another in late October.

In company news, we have a few bits of information to pass along.  On the back of a wildly successful opening in Shanghai last week, Costco has already made plans to open its second store in China.  Considering the demand, this appears to be a significant growth driver for the company.  Walmart announced it will discontinue the sale of some rifle and all handgun ammunition when its current inventory runs out.  This is a big stand by the largest retailer in the United States and could mark a turning point.  Amazon is pushing the boundaries of technology with the advent of a hand scanner.  The company is testing scanners that can identify individual human hands as a way to ring up store purchases.  And not to be left out, Kellogg unveils a new plant-based product line.  My first reaction was, “but isn’t cereal already plant based?”  Then I remembered the company also owns MorningStar Farms which sells processed meat in various forms.

One last thing before we get to the story of the week.  A consequence of this historically low interest rate environment is that companies have been issuing debt in record numbers in lieu of raising capital by selling additional shares.  Increasing the number of shares dilutes existing shareholders and generally brings on the ire of investors.  However, generating additional debt for non-productive uses, i.e. buying back shares, is also viewed with a heap of side-eye.  This week we learned Apple is issuing $4-5 billion in bonds, and while no one will question its ability to pay back this debt, most companies don’t have that kind of free cash flow or cash on the books.  Issuing debt for non-productive uses has long been debated but more recently has become de rigueur in C-suites across the country.  It is hard to make a blanket statement on the practice; however, it is worth questioning when taking on debt crosses the threshold from a corporate strategy to reckless behavior.  Is corporate debt the next big bubble?  Perhaps not today when rates are pushing the zero-bound, but this won’t always be the case.

To close out this week, I have to admit I got a bit of a chuckle out of this next story.  I don’t think anyone enjoys paying income tax.  However, as more jobs are being replaced with automation, it seems the IRS fears fewer will be paying an income tax.  Oh, the irony.  However, it’s a brave new world and the IRS is now considering taxing robots.  With fewer workers, it stands to reason that there would be less income tax going into the government coffers.  If a robot replaces a factory worker who produces say, $50,000 of work annually, the IRS is considering the idea that the company should be taxed at the same level to offset losses in income and Social Security.  Perhaps the day will come when we don’t view automation as a threat, but will instead stand with our robot brethren against the tyranny (said tongue in cheek).  I just wanted to bring this current situation to your attention.  Now you know.

September 6, 2019



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