9/14/18 – Stocks Rebound on Trade News

Stocks rebounded this week as rumors of improved trade talks with China. Trade continues to be a market moving topic, with news of trade deals pushing stocks higher while talk of tariffs tends to pull them lower. For the week, the Dow gained 0.9% while the S&P 500 increased 1.2%.

Tomorrow marks the 10-year anniversary of the Lehman Brothers bankruptcy that many cite as the start of the Financial Crisis. Lehman Brothers failed on September 15, 2008 and that bankruptcy sent the Dow down 4.4%, its worst daily performance since September 11th. The Lehman bankruptcy had been months in the making as the value of its mortgage securities continued to decline. The bank had significant debt and used a lot of overnight funding. As the crisis unfolded, Lehman lost the ability to borrow in the short-term market. That coupled with its then-current state of insolvency forced the company into bankruptcy. Of all the firms that failed during 2008, Lehman was the only one that was pushed into bankruptcy. Bear Stearns, Washington Mutual, Wachovia and others were sold to stronger banks. While investors in all the failed companies suffered large losses, Lehman shareholders faced a complete loss.

Today, we see banks with significantly lower debt levels relative to Lehman as well as less dependency on short-term debt markets for liquidity. The financial sector is stronger today than we saw through most of the early 2000’s and increased capital requirements provide more cushion for banks to absorb losses. Bank regulation is a fine line between requiring too much capital, which limits lending and economic activity and too little capital which can cause a bank failure with small declines in asset values.  Read More 

Oil increased this week, gaining 1.8% to close at $68.98/barrel. The yield on the 10-yr Treasury moved higher, closing at 3.00% from 2.94% last week. The average rate on a 30-yr fixed rate mortgage moved higher to 4.60%, from 4.54% last week.

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9/7/18 – Stocks Pull Back in Holiday Week

Stocks declined during the first week of September despite a strong August jobs report released this morning. The Dow declined 0.2% while the S&P 500 was down 1.0%.

The August jobs report showed the economy added 201k net new jobs last month while the unemployment rate remained at 3.9%. Wages increased at a 2.9% annual rate, the fastest rate since 2009. We’re also seeing more people leave part-time (not by choice) jobs and move into full-time jobs. In many respects, this a very similar report to what we’ve seen over the last 95 months of positive job growth. Steady gains in employment and relatively moderate wage growth. Strength in the labor market continues. Nothing in this report changes my view that the Fed will increase rates against by 0.25% later this month at their meeting. Read More

Electric car company Tesla saw its stock down as much as 9% today following a strange, late night interview with founder and CEO Elon Musk. Musk has been under intense scrutiny recently and has hinted at burnout and potentially needing a break. In spite of this, or maybe as a release, he spent almost three hours on a late night interview with Joe Rogan that involved drinking whiskey and smoking what Rogan told him was a marijuana/tobacco combination. This morning, two senior executives announced they were leaving the company. While neither specifically mentioned Musk’s mental state or the interview, the timing suggests some senior people at Tesla are losing faith in Musk. Tesla stock is down more than 30% over the last month. Read More

Oil decreased this week, declining 3.1% to close at $67.73/barrel. The yield on the 10-yr Treasury moved higher, closing at 2.94% from 2.86% last week. The average rate on a 30-yr fixed rate mortgage moved higher to 4.54%, from 4.52% last week.

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8/31/18 – Stocks Keep Moving Higher

Stocks finished August on another strong note. Both indices increased this week on better than expected economic growth news. The latest update to 2nd quarter growth showed the economy grew at a 4.2% annual rate versus the initial estimate of 4.1%. First quarter growth was also revised higher. The US economy grew at a 3.2% annual rate in the first half of the year. The US hasn’t had a calendar year of growth in excess of 3% since 2005. On the week, the Dow gained 0.7% while the S&P 500 increased 0.9%.

Many government pensions struggle from inadequate assets to pay future liabilities. Chicago is one of the worst in the nation. The city’s four pension funds are $28 billion underfunded. To put that into perspective, the funds have total assets of only $10 billion. The pension funds are round 25% funded. To help close this gap, the city is considering issuing $10 billion in debt to lend to the pension fun. The pension fund would then invest that $10 billion. Early reports suggest a 5.25% interest rate on the debt. To make this work, the pension fund would need to generate annualized returns greater than 5.25% over the life of the bond. Given where interest rates are and how much fixed income investments pension funds own, that seems like a pretty high hurdle rate. Over the last ten years, government pension funds have averaged 6-7% a year in investment returns. Assuming a 6.5% annualized return, Chicago would reduce its liability by $125 million a year. That’s not bad, but it doesn’t seem worth the risk of under performing the interest on the debt. It will be interesting to see what Chicago decides and whether other financially strapped pension funds look at similar debt issuance. Read More

Oil increased this week, gaining 2.0% to close at $69.91/barrel. The yield on the 10-yr Treasury moved higher, closing at 2.86% from 2.82% last week. The average rate on a 30-yr fixed rate mortgage moved higher to 4.52%, from 4.51% last week.

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8/24/18 – Stocks Close Week at Record Highs

We’re firmly into the slow news portion of August. The last two weeks of August see many traders and investors take vacation and trading volumes are typically well below average. The little news we did get though, helped fuel the rally as the Fed Chairman spoke in Jackson Hole, WY stating he continues to see a strong US economy. This means we’ll likely see one more interest rate increase this year and several again next year. On the week, the Dow gained 0.5% while the S&P 500 increased 0.9%.

Most of us are familiar with the Apple App Store and the Google Play Store. What many people don’t realize is how those two stores generate significant profit for Apple and Google. Both companies charge up to 30% fees for apps, games and subscriptions sold through the sites. Netflix for example, pays a recurring 15% commission on all subscriptions created through the Netflix app. Apple and Google continue to collect that commission year after year. If consumers sign up on the Netflix website, Netflix keeps all the revenue. Netflix and others are currently trying new ways of reaching consumers to avoid paying the app store commissions. Some companies are beginning to charge higher subscription prices to consumers who sign up through the app, essentially passing the commission onto the end user. The App Store and Google Play have given developers a great way to reach consumers, but many developers are now questioning the value of the commissions. It will be interesting to see how this plays out and what Apple and Google do in response. Read More

Oil increased this week, gaining 4.1% to close at $68.56/barrel, breaking a seven week streak of declining oil prices. The yield on the 10-yr Treasury moved lower, closing at 2.82% from 2.86% last week. The average rate on a 30-yr fixed rate mortgage moved lower to 4.51%, from 4.53% last week.

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8/17/18 – Stocks Rebound

Markets finished a strong week with some positive news on the trade front. Rumors circulated Friday afternoon suggesting the US and China have a framework to negotiate a new trade agreement. We’ve heard similar rumors before, but the fact they keep arising suggests to me both sides want to reach an agreement and end this unhelpful tariff talk we’ve been experiencing. For the week, the Dow gained 1.4% while the S&P 500 gained 0.6%.

In an interesting comment today, Trump mentioned he was asking to the SEC to evaluate whether companies should continue reporting financial results every quarter or whether we should move to a six-month reporting period. The idea apparently came out of a meeting Trump has with leading CEOs and was brought up by outgoing Pepsi CEO Indra Nooyi. The US has required quarterly financial reporting for 80+ years, but Europe only requires an annual report and a mid-year update. As with most things, there are pros and cons to each situation. Reporting every three months gives investors, specifically small investors, better transparency into the ongoing performance of a company. Most financial regulation in the last 20-30 years has been towards increased transparency for investors. Reversing that seems somewhat risky.

On the flip side, one of the downsides of such frequent financial reporting is it tends to put management focus on short-term objectives and planning. Running a successful business requires strategic, long-term thinking and planning. That long-term planning and implementation is often derailed by investors wanting to see immediate results. Personally, I’d like to see reporting go to twice a year. Earnings cause so much volatility in the market and the reporting periods are so small, relatively speaking. Most companies speak at investor conferences throughout the year, so investors would still get a steady flow of information in my mind. Management could then focus on running the business with a longer-term focus than they currently receive from investors. Read More 

Oil declined this week, decreasing 2.8% to close at $65.87/barrel. The yield on the 10-yr Treasury moved lower, closing at 2.86% from 2.87% last week. The average rate on a 30-yr fixed rate mortgage moved lower to 4.53%, from 4.59% last week.

I am required to file annual documentation with securities regulators that detail information about me and my firm. You can find the latest copy of my Form ADV Part 2 here.

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8/10/18 – Stocks Retreat on Turkish Concerns

Markets broke a five-week winning streak as concerns over a potential financial crisis in Turkey spooked markets today, pushing both major indices negative on the week. For the week, the Dow declined 0.6% while the S&P 500 was down 0.2%.

Turkey seems to be the latest country headed for financial crisis due to too much sovereign debt denominated in a foreign currency coupled with questionable central bank policy. President Tayyip Erdogan has pushed the financial sector to lend more while pushing the central bank to lower interest rates. This has predictably led to a sharp increase in inflation and a decline in the value of the Turkish Lira. The value of the Lira declined 20% this week relative to the US Dollar and is down over 40% in 2018. Turkey runs a trade and current account deficit. That means it needs foreign investment to close the gap and that investment has dried up over the past year. Erdogan continues to crackdown on the economy and political opposition post the attempted ‘coup’ in 2016 and that has made investors view Turkey a riskier place to invest. Turkey’s current account deficit leaves them short of US dollars or Euros to defend its currency, not a good position to be in when it has significant non-Lira denominated government debt.

All of this will put a lot of pressure on the Turkish banking sector, which could eventually require a bailout or collapse. We saw similar issues in Greece 5-6 years ago, but Turkey’s economy is four times the size of Greece. No one really knows exactly how much exposure European banks have to Turkey, but this has some potential to spread a banking crisis to other parts of Europe. It will be interesting to see how willing Europe will be to bailout the Turkish banking sector and that willingness will likely depend on how exposed European banks are to the country. I don’t see this having a significant risk to the US economy in the medium term, but it clearly caused some volatility today. Read More

Oil declined this week, decreasing 1.2% to close at $67.78/barrel. The yield on the 10-yr Treasury moved lower, closing at 2.87% from 2.95% last week. The average rate on a 30-yr fixed rate mortgage moved lower to 4.59%, from 4.60% last week.

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8/3/18 – Disappointing Jobs Report Doesn’t Hurt Stocks

The Dow was essentially flat while the S&P 500 gained 0.8% in a week that ended with a somewhat disappointing jobs report. The divergence between the indices continues a trend we’ve seen this year where larger companies have lagged small and mid-cap names. Some of that divergence is due to tariffs having an outsized impact on multinational companies, but it’s also typical to see smaller names outperform in a strong economy.

The July jobs report was released this morning and showed the US economy added 157k net new jobs in the month. That was below the 190k consensus estimate and well below the last few months. Prior months were revised higher and the three month average remains a very healthy 224k. Over the year, job growth has averaged 219k/month, the best year since 2015. The unemployment rate remained at 3.9%. Wage growth held steady at 2.7%. Read More

Trucking is one industry being hit hard by a labor shortage. Truck driver is the most common job in roughly two-thirds of US states and yet the industry is currently looking to add 51k new drivers. Companies are starting to offer signing bonuses, loan repayment, enhanced training and other perks to attract new drivers. They are also attempting to recruit more females into the industry. Men make up 94% of all truck drivers, but with the shortage in drivers, more companies are realizing they need to market to all job seekers. The (in)ability of many people to pass a drug test is also hurting the industries’ ability to find qualified drivers. Watch More

Oil declined this week, decreasing 0.5% to close at $68.59/barrel. The yield on the 10-yr Treasury ticked lower, closing at 2.95% from 2.96% last week. The average rate on a 30-yr fixed rate mortgage moved higher to 4.60%, from 4.54% last week.

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7/27/18 – Stocks Rally on Earnings & Economic Growth

Both indices gained ground in a week that saw generally positive earnings results and 2nd quarter economic growth that exceeded 4%. This is the first time in four years that the economy grew at a 4% annualized rate for a quarter. The Dow gained 1.6% this week while the S&P 500 rose 0.6%.

The US economy grew at a annualized rate of 4.1% in the 2nd quarter in the initial reading from the Commerce Department. The economy benefited from economic activity that occurred ahead of tariffs and potential tariffs, but overall the report was still quite positive. From 2010 through 2016, the US economy grew at an average annual rate of 2.1%. Over the last five quarters, the economy has grown at an average of 3.1%. While that might not seem like a large difference, on an $18.5 trillion economy that amounts to significantly more economic activity. Growing at 4% for a sustained period, which occurred during the Reagan and Clinton terms, seems unlikely given the overall size of our economy today versus during the 80/90s. Even growing around 3% would give us an economy like we haven’t seen since the 90s. So far this century, economic growth averaged roughly 2% per year. Read more

While earnings have generally been very good this quarter, Facebook and Twitter significantly disappointed investors. Facebook achieved a dubious honor by suffering the largest single-day loss in value in history when the company’s value declined by over $100 billion after its earnings report. Facebook continues to make a lot of money with very high profit margins, but the company expects margins to decline over the next few years as it invests in security and other initiatives. Twitter declined over 20% today following a decline in monthly average users. Twitter purged millions of accounts last month in an attempt to eliminate fake/bot accounts. Everyone seems to believe that a larger company needs to buy Twitter, but so far no company has been able to justify the price.

Oil declined this week, decreasing 1.9% to close at $68.94/barrel. The yield on the 10-yr Treasury moved higher, closing at 2.96% from 2.89% last week. The average rate on a 30-yr fixed rate mortgage moved higher to 4.54%, from 4.52% last week.

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7/20/18 – Stocks Largely Unchanged

Stocks had a volatile week, but ended largely in line with last week. Earnings continued and Trump made two concerning market comments, but stocks largely shrugged off the headlines. For the week the Dow increased 0.2% while the S&P was unchanged.

The Trump administration this week stated it was willing to put tariffs on all the goods/services we import from China. Since we have such a large trade imbalance with China, China can’t effectively retaliate with additional tariffs, but they still have many levers to pull in this fight. This appears to be additional negotiation, but at some point, we need to dial back the tariff talk and focus on increasing trade. The problem with tariffs and concerns around the trade imbalance is they assume the world is a zero-sum game. Meaning, if one side wins, then another side definitionally has to lose. I view trade completely opposite. It is a win-win for everyone. If one company, industry, country, etc can produce a higher quality product for a lower price, that frees up other companies, industries, countries to consume more and focus on what they can most effectively produce. We don’t all grow fruits and vegetables in our backyard because farms can more efficiently produce food for the masses. The same is true for global trade. Read More

Trump also made comments about the Federal Reserve and interest rate policy. The Fed operates independent of the political system and Presidents typically don’t try to influence, or comment on, interest rate policy. Trump aides said the President isn’t happy with the Fed continuing to raise interest rates, fearing it will derail his other economic plans. I think the Fed has generally done a good job of slowly raising interest rates and attempting to return us to a more normal interest environment. It hasn’t worked exactly as planned, and longer-term rates aren’t following the short-term rates higher, but the Fed  is attempting to keep the economy from over-heating and helping savers in the process. The aides added the President understands the Fed operates independently, but I’d still prefer he let the Fed do its job without political commentary. Read More

Oil declined this week, decreasing 0.5% to close at $70.31/barrel. The yield on the 10-yr Treasury moved higher, closing at 2.839% from 2.823% last week. The average rate on a 30-yr fixed rate mortgage ticked lower to 4.52%, from 4.53% last week.

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7/13/18 – Stocks Rally as Earnings Season Begins

Stocks posted their best week in over month, gaining ground for a second consecutive week. The Dow gained 2.3% while the S&P 300 increased 1.5%. Optimism around second quarter earnings and reduced concerns about a trade war helped fuel stocks.

Second quarter earnings officially kicked off today with JP Morgan, Wells Fargo and Citigroup reporting results. All three beat on earnings, but only JP Morgan also beat on the top line. I thought the results were generally positive, but the stocks all sold off slightly today. The financial sector has struggled this year, but has rebounded some since the Fed approved incremental buybacks and dividends for the main banks. Corporate loan growth was stronger than expected suggesting companies are looking to issue debt while rates are still relatively low to fund business investment or capital returns to shareholders. It’s somewhat concerning that financials are lagging the overall market given a raising interest rate environment, economic growth that looks to approach or exceed 3% annually and strong financial results. Over the next three weeks, almost 90% of the S&P 500 will report earnings and we should get a better read on how corporate America is evaluating the economy. Read More

The demise the of the brick and mortar retail business is often discussed as customers increasingly prefer online shopping. To fight this trend, Nordstrom is trying something completely different with the opening of several stores with no inventory. It’s an interesting idea intended to give shoppers a place to relax (beer and wine are served) as well as try on and return online orders. Customers can ship orders directly to the stores, which at 3,000 square feet are significantly smaller than a traditional Nordstrom location. It will be interesting to see how consumers respond to this offering and whether other retailers follow suit. Read More

Oil declined this week, decreasing 4.4% to close at $70.69/barrel. The yield on the 10-yr Treasury moved higher, closing at 2.83% from 2.82% last week. The average rate on a 30-yr fixed rate mortgage ticked higher to 4.53%, from 4.52% last week.

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