7/7/17 – Jobs Report Lifts Stocks

Strong Jobs Report Lifts Stocks Higher on the Week

Stocks rallied today following a better than expected June jobs report. Today’s moves pulled both major indices positive on the week. The combination of the jobs report and the sharp move higher in the the 10-yr Treasury the last week or so points to a better economy than some have thought over the last few months. Read More

June Jobs Report – The US economy added 222k net new jobs in June. This was well above the 179k average estimate among economists. Additionally the figures for April and May were revised higher by 47k total jobs. The unemployment rate moved slightly higher to 4.4% from 4.3% a month ago. We’ve had a relatively soft stretch in the labor market over the first half of the year, so hopefully this is the beginning of a stronger trend and not an outlier. There are still concerns in the labor market. Too many working age Americans are out of the labor force and have given up looking for work. Wage growth has largely been anemic over the last eight years, although low inflation has helped mask the lack of wage growth. Too many people are working part-time jobs out of necessity rather than choice. All that said, from my point of view, the labor market has remained remarkably consistent over the last eight years. Job growth continues at a rate faster than population growth, but the headline numbers can overstate the true strength of the labor market.

Treasury Rates – I’ve been writing over the last couple months about the different messages the stock and bond markets were sending. The 10-yr Treasury rate, which is the rate the US government can borrow at for a 10-yr term, approached 2.1% just a few weeks ago. At that level, it’s hard to believe the economy can growth at anything approaching 3% a year. In the last 1-2 weeks, however, the 10-yr yield has spiked to 2.38%. That is still a very low level historically, but the sharp move suggests the bond market is not as pessimistic as it was. The stock market has largely moved sideways over the last month or more, so the optimism appears to be slowing in that market. I think we’re starting to see a consensus building that economic growth is likely to be similar to what it’s been over the last few years. Namely, a lackluster 2%-ish growth.

Oil reversed course this week, decreasing 4.0% to close at $44.35/barrel. The yield on the 10-yr Treasury moved higher again, closing at 2.38% from 2.30% a week ago. The average rate on a 30-yr fixed rate moved higher this week, to 3.96% from 3.88% last week.

Close Weekly YTD
Dow Jones 21,414.34 0.3% 8.4%
S&P 500 2,425.18 0.1% 8.3%
Oil 44.35 (4.0%) (17.7%)
10-yr Treasury (∆ in bps) 2.38 9 (6)

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6/30/17 – Stocks Lower in Great Week for Warren Buffett

Stocks finished down in the last week of June, but up for the month and the 2nd quarter. On the week, the Dow declined 0.2% while the S&P 500 declined 0.6%. Next week, markets are closed on Tuesday for the 4th of July holiday, but we will get some important news at the end of the week with the June jobs reports. We’ve had mixed reports the last few months and investors will be focused on the strength of the labor market and what that means for interest rate policy and economic growth. Have a Happy 4th of July Weekend!

Warren Buffett – Six years ago Bank of America was in trouble. It was still reeling from the financial crisis and needed a capital injection. While a risky investment at the time, Warren Buffett’s Berkshire Hathaway invested $5 billion in BoA in return for preferred shares that paid a 6% dividend and gave him an option to convert the shares into Bank of America stock at a price of just over $7/share. The preferred shares paid him $300 million annually in dividends and gave him until 2021 to convert to regular stock. As banks have strengthened, Bank of America announced it would increase its dividend. With the increase, the total dividends on the shares Buffett could convert exceed the $300 million he’s currently receiving. Additionally, Bank of America stock is now over $24/share. So, Buffett converts the shares, continues collecting $300+ million a year and now his $5 billion investment has a market value of $17 billion. Pretty good week for the Oracle of Omaha. It’s also a great lesson in staying the course. He is so good at ignoring the ups and downs of the market and investing heavily when he thinks the price is right. Read More

Illinois Bankruptcy – States can’t technically file bankruptcy like a company or municipality can. The situation in Illinois though is getting lawmakers attention and could lead to changes in bankruptcy law that would allow for a state filing. Illinois hasn’t had a budget in three years, it has $15 billion of unpaid bills and a staggering $251 billion in unfunded pension liabilities. The unfunded pension liability is almost five times the state’s annual spending.

The state pension is only 40% funded, a level many analysts believe is not possible to recover from. 25% of the state’s budget is going into pensions and it’s barely denting the problem. One issue from being so underfunded is the assets essentially can’t grow as fast as the liabilities because the asset base is so small. Even a relatively strong market this year is of minimal help. If the fund is earning a reasonable return, it’s still missing out on so much potential earnings because the fund is only 40% funded. However, future pension obligations keeps growing at the full rate.

Illinois’ state constitution prevents reducing pension benefits which gives the state limited flexibility in addressing the problem. As someone once told me, “If the law says one thing and the math says another, the math is eventually going to win.” That seems to be where Illinois is heading. Large pension cuts and pension reform is the only way this situation gets resolved. This highlights a point I’ve made here numerous times over the years. If you have the option to take a lump sum payment from a pension plan, especially a government pension plan, you should look closely at that offer. Read More

Oil broke a 5-week losing streak, increasing 7.2% to close at $46.20/barrel. The yield on the 10-yr Treasury moved sharply higher, closing at 2.30% from 2.15% a week ago. The average rate on a 30-yr fixed rate moved lower this week, to 3.88% from 3.90% last week.

Close Weekly YTD
Dow Jones 21,349.63 (0.2%) 8.0%
S&P 500 2,423.41 (0.6%) 8.2%
Oil 46.20 7.2% (14.3%)
10-yr Treasury (∆ in bps) 2.30 15 (15)

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6/23/17 – Stocks Essentially Unchanged in Light News Week

Stocks were essentially unchanged this week in a relatively quiet week. There were no major economic releases or corporate earnings reports and trading was pretty calm all week. The Dow gained 10 points on the week, which rounds to a 0.0% change. The S&P 500 increased 0.2%.

Cord Cutting – A growing trend in the cable TV industry the last couple of years has been customers cancelling their service, aka ‘cord cutting.’ A new study out this week says Hulu users are 16% more likely to cut the cord and cancel cable than Netflix users. People who had both Hulu and Netflix were 32% more likely to cut cable than non-subscribers to those services. We recently dropped our Comcast cable in favor of internet TV. The cost difference was significant and while the internet TV isn’t perfect, it’s plenty good for our use. We never watch scripted shows live anymore, which is probably why Hulu users are so happy to cut cable. Broadband internet will continue to fuel companies like Comcast for a while, but I have to think in the coming years there will be realistic internet alternatives that are fast and cost effective. So far, cable stocks have held up nicely, but it seems to be a industry facing a long-term secular change from consumer preference. Read More

Commercial Real Estate – One of the more interesting aspects of the changing retail landscape to me is what to do with all the malls we have. Apparently, we might have a solution. Given how much retail sales have shifted to e-commerce, the US is lacking warehouse space. Investment firm Jefferies estimates that e-commerce retailers require three times the warehouse square footage as brick and mortar companies. We could starting seeing struggling malls converted in e-commerce warehouses in the coming years. Amazon on its own has increased warehouse square footage at a 35% annualized rate over the last 10 years. Read More

Oil kept moving lower this week, decreasing another 3.6% to close at $43.11/barrel. The yield on the 10-yr Treasury moved slightly lower, closing at 2.15% from 2.16% a week ago. The average rate on a 30-yr fixed rate ticked lower this week, to 3.90% from 3.91% last week. Mortgage rates have essentially been flat for three consecutive weeks.

Close Weekly YTD
Dow Jones 21,394.76 0.0% 8.3%
S&P 500 2,438.30 0.2% 8.9%
Oil 43.11 (3.6%) (20.0%)
10-yr Treasury (∆ in bps) 2.15 (1) (30)

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6/16/17 – Amazon Shakes Up Grocery Sector

Amazon Throws Wrench in Grocery Sector, Stocks Slightly Higher

Stocks moved slightly higher in a busy news week. The Fed increased interest rates as expected on Wednesday. The big news, however, came out today as Amazon announced it agreed to acquire upscale grocery chain Whole Foods. On the week, the Dow gained 0.5% while the S&P 500 increased 0.1%.

Grocery Sector – Amazon made waves this morning announcing it agreed to buy Whole Foods for $13.7 billion. Amazon has slowly been opening some retail stores and this will immediately give the company ~450 stores nationwide. The reaction for competing grocers was severe. SuperValu closed down more than 14% while Kroger, Walmart, Target, and Costco all declined between 5-10%. The sell-off was driven by fears of what Amazon will do to grocery profits in an industry that already operates on thin margins.

Amazon stock increased on the news. Typically the acquiring company will see its stock decline after a merger announcement, but Amazon increased 2.5% today. That equates to a gain in total value of over $11 billion. Amazon essentially paid for the Whole Foods acquisition just with the move in it stock.

I think the down move in the grocery sector seems overdone, especially for Walmart and Costco. Costco makes most of its money from membership fees. I don’t see Amazon owning Whole Foods changing that dynamic. Walmart has a very different customer base from Whole Foods and is already the low cost provider on essentially everything it sells. That said, Amazon will likely put margin pressure on grocery stores, many of whom operate on very thin profit margins already.

Federal Reserve – As expected the Fed raised short-term interest rates this week by 0.25%. The new target range for the Fed Funds rate is 1.00 – 1.25%. While the Fed increased short-term rates, longer-term rates continue to move lower. This is called a flattening of the yield curve and often happens when the bond market expects economic growth to slow. I’ve written about this over the last few weeks and it remains interesting to me the difference we’re seeing in the bond market versus the stock market. The bond market is telling a much more negative story about future economic growth than the stock market. The bond market is notoriously pessimistic, but it is a trend that is worth following.

Oil kept moving lower this week, decreasing another 2.6% to close at $44.70/barrel. The yield on the 10-yr Treasury moved lower, closing at 2.16% from 2.20% a week ago. The average rate on a 30-yr fixed rate moved higher this week, to 3.91% from 3.89% last week.

Close Weekly YTD
Dow Jones 21,384.28 0.5% 8.2%
S&P 500 2,433.15 0.1% 8.7%
Oil 44.70 (2.6%) (17.1%)
10-yr Treasury (∆ in bps) 2.16 (4) (29)

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6/9 – Tech Tanks Today, Stocks Mixed for Week

Stocks Mixed in Busy Week, Tech Tanks Today

In a busy week for political headlines, stocks finished only moderately changed. The James Comey testimony produced little concerning revelations and markets shrugged off Theresa May losing a majority in British Parliamentary elections. For the week, the Dow gained 0.3% while the S&P 500 declined 0.3%.

Politics – It’s often said that stock climb a wall of worry. That mantra seems to be holding this year. While there’s a lot of political turmoil, investors have largely shrugged off any concern. This suggests investors view the situations as political and not economic in nature. This week, everyone was watching the Comey testimony and the British Parliamentary Elections. While all sides have commented on whether the Comey testimony helped or hurt Trump, from my view, nothing new was stated that changed the current perception of the investigation. Comey said there was no evidence any Trump officials colluded with Russia, would not say that Trump obstructed justice and said Trump wasn’t under investigation. Impeachment still seems highly unlikely to me, but politically these distractions slow the implementation of some of the Trump’s economic activity. Read More

In Britain, Prime Minister Theresa May says she will not resign following the disappointing election for her Conservative Party. This was viewed as an important election as the country begins Brexit negotiations on the 19th. May said she will create a governing majority by working with a small pro-Brexit party that won 10 seats. Coupled with the Conservative Party’s 318 seats, that gives May a slim majority in the 650-seat body. The market seems ho-hum on the issue. I think most people now believe that whether Brexit happens or not, European and UK trade will continue at comparable levels to the current situation, so it’s not the large economic issue some feared after the Brexit vote. Read More

Tech’s Friday Sell-off – The tech sector sold off sharply today with names such as a Apple, Google, Amazon, Netflix and others declining more than 3%. The sector had been a top performer this year, but this sharp move today is forcing investors to ask whether this is a short-term blip or the beginning of a trend. I think there could be some more weakness, but overall, I still believe tech, and some of the larger cap names mentioned above, are well-positioned for future stock growth. There are outliers on valuation, but overall valuation is well below the 2000 tech bubble. These companies generate significant cash flow and remain some of the few companies with significant revenue growth potential. Over the last six years or so we’ve seen numerous market, or sector, declines that lasted a few days or weeks, but the fundamentals remained in place and stocks quickly recovered. This seems the most likely outcome to me.

Oil moved lower again this week, decreasing 3.9% to close at $45.90/barrel. The yield on the 10-yr Treasury moved higher, closing at 2.20% from 2.15% a week ago. The average rate on a 30-yr fixed rate moved lower this week, to 3.89% from 3.94% last week.

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Stock Rally Continues in Holiday-Shortened Week

Stocks Post Another Strong Week

Stocks rallied in the holiday-shortened week, in spite of today’s underwhelming jobs report. General optimism and strong corporate earnings continue to fuel the market. The Dow gained 0.6% this week while the S&P 500 added 1.0%.

May Jobs Report – There was a lot of optimism heading into today’s report after a strong April and a good reading in the less-influential ADP jobs report yesterday. However, that optimism was unfounded and the May jobs report disappointed on several levels. The economy added only 138k net new jobs in the month, below the estimate of 184k. Additionally, the estimates for March and April were revised down by 66k total jobs. The unemployment rate did decline, to 4.3%, the lowest level since 2001. We haven’t seen much wage growth, but at this level of unemployment, wage growth has to start increasing unless people start coming back into the labor force. Read More

Retail Continues to Struggle – Names such as Michael Kors and Restoration Hardware disappointed investors this week and saw their stocks decline sharply. Retail and apparel companies are struggling to adapt to a rapidly changing retail landscape. A report from Swiss bank Credit Suisse this week estimated that 20-25% of malls could close over the next five years. Beyond the financial pain to retailers, the companies that own malls are going to struggle going forward as well. As stores close, there simply aren’t enough new tenants to fill malls. Highly populated areas, or popular destinations, will remain viable, but many typical American malls won’t be able to survive. This will create millions of square feet of available and unused real estate. It will be fascinating to watch how this changes the commercial real estate market. Read More

Oil moved sharply lower this week, decreasing 4.2% to close at $47.78/barrel. The yield on the 10-yr Treasury moved lower, closing at 2.15% from 2.25% a week ago. The average rate on a 30-yr fixed rate ticked lower this week, to 3.94% from 3.95% last week.

Close Weekly YTD
Dow Jones 21,206.29 0.6% 7.3%
S&P 500 2,439.07 1.0% 8.9%
Oil 47.78 (4.2%) (11.3%)
10-yr Treasury (∆ in bps) 2.15 (10) (30)

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5/26/17 – Stocks Rise Ahead of Holiday Weekend

Happy Memorial Day Weekend!

Stocks had a great week heading into the holiday weekend. Some positive earnings and economic data coupled with minimal political headlines fueled the rally. On the week, the Dow gained 1.3% while the S&P 500 increased 1.4%. The stock market will be closed on Monday.

US GDP Growth – The second estimate for first quarter economic growth was revised higher today to 1.2% from the prior 0.7% estimate. While still a pedestrian figure, the first quarter is often seasonally weak and this revision will support the view that growth will bounce back during the current quarter. Many analysts are expecting 2nd quarter growth in the 3% range. The 3% growth rate is a critical level for much of the Trump economic agenda. The tax and budget plans are based on 3% annualized growth, yet we haven’t grown faster than 3% in any year since 2005.

Jobs Report – The May jobs report will be released next Friday. Investors will be closely watching to see if last month’s strength carries through to May. The jobs report will also give clues about the GDP growth discussed above. The current consensus estimate is for 170k net new jobs being created this month.

Oil moved lower this week, decreasing 1.1% to close at $49.87/barrel. The yield on the 10-yr Treasury moved slightly higher, closing at 2.25% from 2.24% a week ago. The average rate on a 30-yr fixed rate mortgage dropped below 4% this week, to 3.95% from 4.02% last week.

I hope you have a great Memorial Day weekend and take some time to remember the brave men and women who made the ultimate sacrifice for our freedom.

Close Weekly YTD
Dow Jones 21,080.28 1.3% 6.7%
S&P 500 2,415.82 1.4% 7.9%
Oil 49.87 (1.1%) (7.5%)
10-yr Treasury (∆ in bps) 2.25 1 (20)

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5/19/17 – Political Headlines Drive Volatile Week

Volatile Week Ends On A Positive Note

Wednesday saw stocks suffer their worst day since September, with the Dow declining over 370 points, or almost 2%. However, strong rally today reversed most of the week’s losses. The Dow and S&P 500 each declined 0.4% on the week.

Special Prosecutor – Growing concerns about Trump’s ties to Russia and potential obstruction of justice charges surrounding the hiring/firing of Michael Flynn and the firing of FBI Director James Comey spooked markets Wednesday. The view was an investigation could derail the Trump economic agenda that some argue has helped propel stocks since the election. There are two main views of what has driven the relatively strong market this year. First, market expectations of a corporate tax cut and deregulation has increased future earnings’ outlooks for companies. That in turn has pushed stock prices higher. Second, corporate earnings are experiencing strong growth this year regardless of future tax/regulatory policy and that is the primary cause of higher prices. I think it’s more of the latter, but both have been important.

Corporate earnings have been strong and corporate forecasts have generally been better than expected this year. This is true earnings growth and that growth supports the higher stock market. If we get corporate tax reform, that will be another large boost to corporate earnings, but current analyst estimates aren’t based on a lower corporate tax rate. From that viewpoint, the sell-off Wednesday seemed overdone. If something does happen with Trump, markets still have a reasonable expectation of corporate tax reform with a President Pence. Read More

US GDP Growth – For basically the last 16 years, the US economy has grown at an underwhelming ~2% annual rate, on average. From the end of WWII through 2000, the average was 3.1%. A key piece of Trump’s economic and tax plan in based on getting growth back to 3%. Right now, the bond market isn’t buying the rosy growth projections. The 10-year Treasury bond is yielding ~2.2% currently, down about half a percentage point from December. This tells me the bond market doesn’t think there’s any chance growth will reach 3% in the coming years. It’s worth noting, the bond market is notoriously pessimistic. There’s an old joke that the bond market has correctly predicted nine of the last five recessions. Meaning it often fears recessions that never happen. It is interesting though to see the divergence in expectations between the equity and bond markets.

Oil moved sharply higher this week, increasing 5.3% to close at $50.41/barrel. The yield on the 10-yr Treasury decreased, closing at 2.24% from 2.33% a week ago. The average rate on a 30-yr fixed rate mortgage ticked lower to 4.02% from 4.05% last week.

Close Weekly YTD
Dow Jones 20,804.84 (0.4%) 5.3%
S&P 500 2,381.73 (0.4%) 6.4%
Oil 50.41 5.3% (6.5%)
10-yr Treasury (∆ in bps) 2.24 (9) (21)

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5/12/17 – Stocks Down, Retail Hit Hard

Stocks Decline Slightly, Retail Punished

After three positive weeks, stocks retreated in the second week of May. Retail earnings dominated the financial headlines and most of those disappointed investors. For the week, the Dow and S&P 500 decreased 0.5% and 0.3%, respectively.

Retail Demise – Most of the major department stores reported earnings this week and the stocks sold of sharply as a result. Even in an environment where people are pretty negative on brick and mortar retail, the results pushed names like Nordstrom, Kohl’s and Macy’s down approximately 20% this week. This downward move is huge considering we weren’t talking about the holiday shopping season. Declining same-store sales seemed to be the major concern. Many retailers have too many stores and most haven’t yet figured out how to effectively run their online sales. While online sales don’t have the costs of a physical store, the fulfillment cost is very high on a per-order basis. Instead of shipping large crates to individual stores, they must ship thousands of individual orders. Traditional retail needs to figure out how to effectively and profitably make the transition. We will continue to see a large shift in the retail sector over the coming years as stores close and online shopping continues to grow. Read More

French Elections – Emmanuel Macron won the French Presidential election on Sunday as expected. Markets initially reacted positively, but quickly moderated as the result was essentially priced-in over the prior two weeks. It will interesting to see how Macron will govern. Given that he started a new political party, he doesn’t have a built-in coalition. He says he will have candidates in Parliamentary elections next months, but it’s unclear how many will be elected. Either way, he will need to quickly build a governing coalition to start implementing his policy ideas. Read More

Ransomware Hack – Late Friday news broke of a large-scale ransomware attack affecting hospitals in the UK and companies around the world, including FedEx. A ransomware attack shuts down a computer network then attempts to get a ransom payment to ‘unlock’ the system. It’s a high-tech form of piracy. This is a growing problem and one companies will have to be vigilant in protecting themselves from going forward. Read More

Oil rebounded this week, increasing 3.4% to close at $47.89/barrel. The yield on the 10-yr Treasury decreased, closing at 2.33% from 2.35% a week ago. The average rate on a 30-yr fixed rate mortgage ticked higher to 4.05% from 4.02% last week.

Close Weekly YTD
Dow Jones 20,896.61 (0.5%) 5.7%
S&P 500 2,390.90 (0.3%) 6.8%
Oil 47.89 3.4% (11.1%)
10-yr Treasury (∆ in bps) 2.33 (2) (12)

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5/5/17 – Stocks Up Again On Jobs Report

Stocks Rise is Busy News Week

Stocks continued on an upward trajectory this week amid strong earnings, the Federal Reserve holding interest rates steady, a good jobs report today and the expectation that Emmanuel Macron will win the French election on Sunday. For the week, the Dow increased 0.3% while the S&P 500 added 0.6%. The Dow closed above 21,000 for the first time since March 3rd and only the 4th time ever.

April Jobs Report – There was a lot of focus on today’s jobs report after the March report disappointed investors. The US economy added 211k net new jobs in April and the unemployment rate declined to 4.4%. Through the first four months of the year, we’ve averaged 185k new jobs a month, essentially identical to the 183k average in the first four months of last year. This reports follows last week’s disappointing US economic growth and suggests the economy is stronger than some had feared. Read More

French Elections – In the latest polls, Emmanuel Macron holds a 20+ point lead over Marine Le Pen. Most business leaders favor Macron because he has supported reducing labor laws and remaining in the EU. The election takes place on Sunday and the market is fully expecting a Macron victory, so a Le Pen shock would like cause volatility next week. However, it seems the populist wave hitting many parts of the West won’t continue in France this weekend.

Federal Reserve – The Federal Reserve voted this week to keep interest rates unchanged while saying conditions remain positive for future rate increases. I think we’ll see two additional rate increases this year which will be a good development for savers. We could all benefit from higher interest rates in savings accounts and other fixed income investments. Any slowdown in the economy could delay rate increases, but at this point we are tracking in a good direction for higher rates. The Fed meets again in June and I expect we’ll see a 0.25% increase in the Fed Funds rate.  Read More

Oil moved sharply lower, decreasing 5.9% to close at $46.30/barrel. The OPEC production cuts expires later this month and OPEC is meeting on May 25th to discuss whether to continue, increase or end the production caps. The yield on the 10-yr Treasury increased, closing at 2.35% from 2.28% a week ago. The average rate on a 30-yr fixed rate mortgage ticked lower to 4.02% from 4.03% last week.

Close Weekly YTD
Dow Jones 21,006.94 0.3% 6.3%
S&P 500 2,399.29 0.6% 7.2%
Oil 46.30 (5.9%) (14.1%)
10-yr Treasury (∆ in bps) 2.35 7 (10)

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