DIASTOLE ECONOMIC AND MARKET COMMENT
October 29, 2018

The markets had a rough time last week, with strong volatility both up and down.  For the week in total, the U.S. markets dropped by 3-4%.  But it’s important to put that in context.  Markets are still up almost 300% in the current bull market, which began after the Great Recession.  Stocks need to test their prices - in other words, sometimes they must sell-off until buyers enter the market, so that investors know where “support” is.  When there aren’t enough buyers, stocks go on sale!

It is also important to remember that the trend of stock prices is ever upward, even though short-term results may be poor.  That’s why we so strongly discourage selling in a rocky market.  Those prices WILL recover, and if you leave the market, will you have the courage to get back in?

Factors causing investor nervousness these days include rising interest rates, rising federal deficits and debt, and geopolitical uncertainty (Brexit, tariffs, trade wars, slowing global economies).  One factor directly affecting stock prices is the blackout period before earnings are reported (during which companies cannot buy back their own stock).  It is a timely reminder that the current phase of our bull market rests substantially on the corporate tax cut from last year, which has funded companies buying their own stock on the open market.  Those tax-cut savings have not been used to increase wages, but to increase stock prices.

Companies reporting earnings for the third quarter last week include several manufacturing firms, whose complaints about tariff-induced headwinds caused Wednesday’s market tumble, and tech stocks like Amazon and Alphabet (parent company of Google), whose good-but-not-good-enough reports caused Friday’s decline.

Last year was a stellar one in the markets, and they can’t all be that good.  The Standard and Poor’s 500 rose by almost 22% in 2017.  If markets remain flat this year, the average of the two years will still be above average.  Right?

The first print of third quarter GDP was released at 3.5% (annualized, versus the same period last year).  This figure will be revised at least twice more in coming weeks/months.  Second quarter GDP now stands at 4.2% (annualized growth rate).  The Federal Reserve Board is predicting that GDP growth will slow in the rest of this year and years to come.  The Fed expects 2019 GDP to be 2.5%, 2020 GDP to be 2.0%, and 2021 GDP to be 1.8%.  The main drag on the economy moving forward is rising interest rates fueled by the increasing federal debt.  (As the government needs to sell more bonds to fund our budget deficits, we must increase the yields we pay in order to attract more buyers, especially when we are in trade wars with many of our usual investors.)

Speaking of which, India is poised to impose tariffs on $241 million in U.S. imported goods in response to American tariffs on steel and aluminum, and also pressure from the U.S. for India to stop importing Iranian oil.  Affected products will include almonds and apples.

Got a lot of student loan debt?  Enjoy cold beaches?  The state of Maine has a deal for you!  If you move to Maine, the state will let you deduct the cost of repaying your student loans from your state income tax.  If you are a STEM major (science/technology/engineering/math) they may even pay you back the difference if your loan payments exceed your tax owed.  Even if every Mainer college graduate stays and works there, there are still not enough people in the state to fill their available jobs.

The 27 richest people in the world own as much wealth (about $1.4 trillion) as the bottom HALF of the entire global population.  But over the past two years, the gap has stopped widening in many countries, including the U.S., and even shrunk in some places, like Britain and Germany.  Still, income inequality is an enormous problem.  The median family-of-four income here in America is now $59,039.  Jeff Bezos, head of Amazon, makes that much money every 19 seconds.  His workers’ median pay is $28,000 per year.

Now hear this!  We are in the annual enrollment period for Medicare Supplemental plans, which runs from October 15th through December 7th.  All insurance companies which sell “medigap” insurance must use the same letter labels so that plans can be compared.  A is the least expensive and offers the least coverage, while B through N offer various benefits to fill different gaps in your Medicare coverage.  K and L are higher-deductible plans for healthy seniors.

We are also approaching the annual Affordable Care Act enrollment period, which runs from November 1st through December 15th.  Information and contact information on state plans can be accessed through healthcare.gov.

Moving on to more delicious topics….  Have you eaten candy corn yet this year?  You had better get on it, because Halloween is Wednesday.  70% of all candy corn is consumed at Halloween, and the other 30% is consumed in secret after it goes stale.  Like Peeps, but weirdly tooth-shaped.

An exact replica of the Titanic is being built.  Well, maybe there are a couple of improvements being made, like more lifeboats, and a welded, rather than riveted, hull… sonar, radar, stuff like that.  The ship will begin its maiden voyage in Dubai in 2022, and will sail to Southampton, England and then on to New York, following the route of the original Titanic, which sank in the North Atlantic in 1912 after hitting an iceberg.  The new ship will boast the same decor and three classes of travel.  Are you up for steerage?  Or is that down?  Can a Dwayne Johnson movie be far behind?

For the week ending October 26th, the S&P 500 finished at 2,658, the Dow Jones Industrials at 24,688, and the Nasdaq Composite Index at 7,167.  The yield on the ten-year Treasury Note ended the week lower at 3.08%.  Crude oil cost $67.59 per barrel, gold cost $1,232.50 per ounce, and one Euro was worth $1.1407.

Elizabeth E. Cook
Partner

News and information presented here was gathered from sources believed, but not guaranteed, to be accurate, including The Wall Street Journal, The New York Times, Barron’s, Bloomberg, The Economist, businessinsider.com, CNBC, Reuters, and the Associated Press.  If you have questions, please call us at 203.458.5220 or reply to this email.  Thank you for reading!
DIASTOLE ECONOMIC AND MARKET COMMENT
November 5, 2018

Tomorrow is voting day.  Please vote!  Whether you’re wrong or you agree with me, it is perhaps the most important act we can take as citizens to promote democracy.

The stock market was volatile again last week, due to the usual suspects: rising interest rates and trade fears.  There was good news in employment, though, with 250,000 new jobs created in October.  The unemployment rate stayed at 3.7%, and wages were higher by 3.1% versus a year earlier.  For the trailing 12 months, job creation has averaged 210,000 new positions per month.  October was the 97th straight month of job growth.

Stocks were higher by about 2% for the week, but the Standard & Poor’s 500 finished the month down 6.94% - its worst performance since 2011.

And as for trade-war fears, the President tweeted that progress was being made in negotiations with China, and that he hoped to speak with President Xi later this month.  If a trade agreement is not reached, the administration is prepared to add tariffs to everything we import from China that has not been tariffed yet - probably in January.

U.S. imports reached a record high in September, and the U.S. trade deficit with China also attained a historic high.  (For those who care, I no longer use the article “an” before an aspirated “H”, but continue to use it for unaspirated Hs - as in “an heirloom”.)  Our trade gap with China expanded to a record $40.2 billion.  Although it sounds bad, it isn’t.  It is in fact a sign of economic strength that we continue to crave and afford foreign goods.

One of the most important reasons that we expect interest rates to continue upward is not that the Federal Reserve Board has said it will keep hiking rates - because it tracks rate movements in the markets instead of creating them.  No - it is the rising U.S. debt.  The Treasury Department has projected that the federal government will issue $1.34 trillion of new debt in 2018, a 146% jump from 2017.  As the U.S. funds its budget shortages by selling bonds, it must attract new buyers by offering yields high enough to lure investors away from other opportunities.  The biggest drivers of the current annual deficit (the budget shortfall in one year) are the tax law passed last December and the budget agreement passed in February.  The federal debt (as opposed to the annual deficit) is the total amount owed by the government.  Picture all of those annual deficits rolled together.

New sanctions against Iran go into effect today.  The sanctions coincide with the threat of U.S. action against any country that continues to buy Iranian oil.  But eight countries are exempt from this provision: Japan, China, India, Italy, Greece, South Korea, Taiwan, and Turkey.  China is Iran's largest oil customer, followed by India, South Korea, Turkey, and then Italy.  So perhaps this threat is mostly bluster, primarily affecting countries that aren’t big Iranian oil producers anyway.  Still, in Iran, 80% of tax revenue comes from oil.

And while you might expect that a partial shutdown of the Iranian oil spigot would cause oil shortages and price hikes, you would be wrong!  In fact, oil production is so hearty around the world that oil prices are actually falling.

Apple was a big drag on the indices last week, as its stock price fell 7% in the wake of an announcement that iPhone sales were slowing.  The company also declared that it will not announce iPhone sales totals any more.  But it will tell us how it’s doing in its services business, which grew 17% in the most recent quarter.  (Think iCloud.)  Apple also revealed that it has sold more than 44 million iPads, making the iPad the most popular computer in the world.  Total profits for Apple rose 31%.

Last year the birth rate in the U.S. dropped to its lowest level in 30 years.  Now the average number of children that an American woman can expect to have in her lifetime is down to 1.76 - below the rate needed to keep the population stable.  There are social-engineering solutions available to encourage more children: more paid parental leave and publicly-funded daycare, but the solution Japan is exploring to combat its contracting population is greater immigration.  Given that the federal government keeps “borrowing” our Social Security surplus, retirees are dependent on current wage earners to keep benefits coming.  We simply can’t afford to let the population shrink

Didn’t win the lottery?  Maybe it’s time to put on your Indiana Jones hat and go to Zambia.  An emerald that weighed more than two pounds (5,655 carats) was just dug up there.

And speaking of stones, geologists have just discovered a part of the Grand Canyon in Tasmania, Australia.  We didn’t know it was missing!  Studies of the strata of the rock, as reported in the journal Geology, showed that hundreds of millions of years ago Tasmania was part of a mega continent called Rodinia, which included the southwest United States (about 8,000 miles distant, today).  We have a tendency to think that continental drift is something that happened in the past, but in fact it continues.  Slow and steady!

For the week ending November 2nd, the S&P 500 finished at 2,723, the Dow Industrials at 25,270, and the Nasdaq Composite Index at 7,356.  The yield on the ten-year Treasury closed the week at 3.22%.  Crude oil cost $63.14 per barrel, gold cost $1,230.90 per ounce, and one Euro was worth $1.1394, weaker for the week against the dollar.

Remember to vote!

Elizabeth E. Cook
Partner

News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including The Wall Street Journal, The New York Times, Barron’s, The Economist, Bloomberg, businessinsider.com, Reuters, and the Associated Press.  If you have questions, please call us at 203.458.5220 or reply to this email.  Thank you for your time!
DIASTOLE ECONOMIC AND MARKET COMMENT
November 12, 2018 - Veteran’s Day

Veteran’s Day was yesterday, the 11th day of the 11th month, but it is being observed today.  Thank you to all of the veterans who served their countries in the eternal quest for peace and justice, including our fathers and brothers and mothers and sisters and children (my father was in the Navy and the Air Force).  On such a solemn occasion, we remember all who considered it an honor to fight for the highest ideals of humanity.

There was an important mid-term election last week, and leaders on both sides of the aisle claimed victory.  We will see what difference it all makes when the new electees take their seats in January.

The Federal Reserve Open Market Committee (FOMC) met last week, and to no one’s surprise it kept interest rates unchanged.  We expect the next rate hike at the FOMC mid-December meeting.

Fires are burning out of control in California, which has experienced three years in a row of extreme-drought conditions.  So far 31 people have died, and 228 are still missing.  The Northern-California Camp Fire started on Thursday and spread at a rate of 80 football fields per minute, catching people as they tried to escape.  Strong winds and low humidity are making a hard job even harder for firefighters.

It’s tough to pivot to the markets after that news, but we will try.  Volatility continued last week as weak economic data from China pulled technology and internet shares lower.  Oil prices entered a bear market (down 20% in October) as the expected sanctions against Iran affected fewer Iran-oil buyers than expected, and oil stockpiles around the world grew.  Saudi Arabia and Russia met to discuss production goals, and (as expected) Saudi Arabia proposed cutting its oil production while Russia decided to stay full steam ahead.

But despite all the news and market swings, the Dow Jones Industrial Average finished the week up 2.8%.  For the past two weeks, the Dow is up 5.3%, but that follows a loss of 5.1% in October.

Tobacco companies’ stocks fell after the FDA announced that it will pursue a ban on menthol cigarettes, even though it could take a couple of years before a ban is approved and implemented.  Menthol cigarettes are considered a gateway to traditional cigarettes, because they are less harsh for smokers.  At the same time, Juul decided to pull delicious candy-flavored e-cigarettes from stores because they entice teens to smoke.  The attractive flavors will remain available on the internet.  One fifth of high-school students polled had smoked e-cigarettes in the past month.

While Amazon has not made its announcement, it appears that it has chosen not one, but two locations for its second (and third) headquarters.  Betting on HQ2 now favors Crystal City, Virginia (Washington, D.C. area) and Long Island City, New York (across the East River from Manhattan).  25,000 new jobs are expected in each new location.  And Alphabet (parent company of Google) will add 12,000 new jobs in New York City.

Alibaba (the Amazon - but bigger - of China) reported record sales of $30.8 BILLION on Singles Day (November 11th) this year.  Singles Day is a made-up Alibaba holiday when single people are encouraged to console themselves by buying things.  What we call Monday!  It is the biggest online shopping day of the year.

South-East Asia’s largest-ever shopping mall opened last week in Bangkok, Thailand.  It is as big as 105 soccer pitches (which are themselves bigger than football fields).  150,000 shoppers per day are expected to visit the center, which will use more electricity than some of Thailand’s poor provinces.  According to MasterCard, Bangkok was the world’s most visited city last year.

While we rightly worry about the U.S. annual deficit and overall debt (which stands at about 100% of our gross domestic product (GDP), Japan is in even worse shape.  Its government debt has reached 200% of GDP.  Japan faced decades of recession, which it only recently escaped due to government spending and economic stimulus.  The Bank of Japan is keeping interest rates artificially low to help the government make its interest payments (sound familiar?)  The government now forecasts that it will return to budgetary surplus in 2025, although it has pushed back this date several times in the past.  While the long recession had many causes, the most important of them may have been the strong Japanese yen, which depressed exports.

The Department of Agriculture last week lowered its projections for soybean exports by 160 million bushels  to 1.9 billion bushels for the 2018-2019 marketing year.  China, previously the number-one foreign buyer of American soybeans, is now turning to South America and other regions for its soybean supplies.  Soybean farmers are receiving government subsidies totaling about $3.6 billion to reimburse them for trade lost due to retaliatory tariffs.  That means that instead of selling their soybeans to China, farmers are losing market share while they receive a subsidy, which is paid for by sales of U.S. Treasury bonds (including to China).

The British government under Prime Minister Theresa May is now saying a “hard-Brexit” may be necessary (meaning Britain would leave the Eurozone with no agreement for continuing trade deals nor for the free movement of citizens), while a new poll shows that 54% of Britons wish they could stay in the European Union.

Credit Suisse has announced its rankings of the world’s richest countries.  But a lot depends on how you sort the data.  If you consider total wealth divided by the number of adults (average wealth per grown-up), the U.S. ranks third, after Switzerland and Australia.  But if you look at median wealth per adult (meaning the level at which half the people have more and half have less) the U.S. ranks 18th.  It is another sign of growing income-inequality here in America.  Canada, for instance, ranks 7th by the first metric, and 6th by the second.

For the week ending November 9th, the Standard & Poor’s 500 finished at 2,781, the Dow at 25,989, and the Nasdaq Composite Index at 7,406.  The yield on the ten-year Treasury Note was 3.19%.  Crude oil cost $60.19 per barrel, gold cost $1,207.70 per ounce, and one Euro was worth $1.1336.

Elizabeth E. Cook
Partner

News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including Bloomberg, the Wall Street Journal, the New York Times, Barron’s, businessinsider.com, The Economist, Reuters, and the Associated Press.  If you have any questions, please call us at 203.458.5220 or reply to this email.  Thank you for your time!
DIASTOLE ECONOMIC AND MARKET COMMENT
November 19, 2018
The Camp Fire in California has been burning for more than ten days, and Cal Fire (the state’s fire protection agency) anticipates it won’t be fully contained for another ten days.  So far at least 77 lives have been lost and hundreds are still missing.  If you want to help, go online to find a list of charities that are actively involved with survivors; the Red Cross is always a good place to start.

The Pacific Gas & Electric Company (called PG&E, but with symbol PCG) has said that it could be responsible for the fire, because it had problems with transmission lines in the area when the fire started.  Furthermore, the utility company has already exhausted its three-billion-dollar revolving line of credit to pay for a fire-related liability.  Worries that PG&E would go bankrupt under the cost of the fire caused the stock price to fall in half last week.  But California’s Public Utilities Commission President Michael Picker said that he couldn’t imagine letting the utility company go under, and instead the Commission would implement a strategy through which the costs of the fire would be passed along to all consumers.  The stock price regained 45% on Friday.

Meanwhile the Woolsey Fire has burned almost 100,000 acres in Los Angeles and Ventura Counties.  Some residents of especially tony neighborhoods have saved their houses with private fire-fighting teams (we’re looking at you, Kim and Kanye).  It turns out that this is not unusual, and that often the private firefighters are paid for by homeowner’s-insurance companies who would rather pay for that service than pay for the loss of a mega-multi-million dollar house.  Extra, extra, extra premiums are charged for policies that pay for private fire-fighting.

As interest rates gradually rise, we are beginning to see the side-effects of more expensive money.  And even though many of those effects can be anticipated, it doesn’t make them any less troublesome.  The International Monetary Fund (IMF) is now warning about the “leveraged-loan” market.  There is about $1.3 TRILLION in below-investment-grade loans held by investors who were attracted by the higher yields paid by the riskier issues.  During the past ten years, as interest rates have been held artificially low by the Federal Reserve Board, investors have accepted risk levels they would previously have avoided, in order to gain more interest income.  The IMF says, “It is not only the sheer volume of debt that is causing concern.  Underwriting standards and credit quality have deteriorated.”

With rising rates, corporations are borrowing less.  And banks which are dependent on those loans, and hope to loan more as rates rise, are instead facing having to lower their borrower standards in order to make their loan quotas.

What happens when rates rise as underwriting standards fall?  Don’t look now, but does housing bubble ring a bell?  There is no reason to think that mortgages are unusually vulnerable right now, but there will no doubt be adjustments in the market as interest rates reach a level at which banks WANT to loan but the best qualified borrowers step back.  And meanwhile, the Federal Housing Administration (FHA) is warning that it may hold inflated home appraisals in both its reverse-mortgage and traditional-mortgage portfolios.  The FHA insures 11% of all single-family residential mortgages in America, and is on the hook for gaps between appraised values and selling prices.  (Mortgage insurance protects the lender, not the buyer.)

Before the Great Recession, China produced 6% of world GDP.  Now it produces 16%.  The Chinese government responded to the financial crisis with a massive stimulus package - as did the U.S.  Now both countries are debt-laden in an era of rising rates.

Washington and Beijing have resumed trade talks.  Currently, the U.S. has a 10% tariff (rising to 25% in January) on $200 billion of Chinese goods, and 25% on another $50 billion in Chinese imports.  China has retaliated with duties on $110 billion of U.S. products.  China has also offered some trade concessions, but the president has said, “It’s not acceptable to me yet.”  The U.S. and other Chinese trade partners are concerned about Chinese trade practices, especially the theft of intellectual property.  The world’s biggest shipping company, AP Moller-Maersk announced a third quarter profit, but said that global container trade was occurring at “a much slower pace of growth”.  It blamed tariffs, and added that the U.S.-Chinese trade war could reduce container trade by up to 2% in 2019.

Levi Strauss & Company is planning to go public in the first quarter of next year!  You probably haven’t given it much thought, but the company has been in the hands of the Strauss family and descendants since Levi himself died in 1902 and left his company to his four nephews.  (Levi’s has a Japanese affiliate that is already publicly traded in Japan.)  The company is expecting to raise about five billion dollars with its initial public offering (IPO).

NASA is building a super-heavy-lift rocket to take astronauts back to the moon.  But it is also saying that if SpaceX (Elon Musk) or Blue Origin (Jeff Bezos) can safely launch their own  heavy-duty rockets, it might stop building.  What is it about billionaires and rockets?

A pearl pendant which once belonged to Marie Antoinette sold for $36 million at Sotheby’s, after having been valued at $2 million.  You will remember that Marie Antoinette smuggled her jewels to her family in Austria before losing her head in the French Revolution.  Her only surviving child, a daughter, reclaimed the jewels in 1796.  This is the first time that they have been for sale.

Pilots at Japan Airlines (JAL) will now be breathalyzed before flying.  Previously, pilots were only tested if they exhibited signs of drunkenness.  19 JAL pilots failed breathalyzers in the past 15 months.  Raise your hand if you thought this was already being done for EVERY SINGLE PILOT before EVERY SINGLE FLIGHT!  Note to self: fly JAL.

A recent poll reported which news hosts we most and least trust.  Most trusted: Lester Holt.  Least trusted: Sean Hannity.  In general, anchors from traditional networks were trusted more than anchors from cable outlets.  But Anderson Cooper appears on both lists!

For the week ending November 16th, the Standard & Poor’s 500 finished at 2,736, the Dow Jones Industrials at 25,413, and the Nasdaq Composite Index at 7,247.  The yield on the ten-year Treasury Note ended the week at 3.11%.  Gold cost $1,220.80 per ounce, Oil was down at $56.83 per barrel, and one Euro was worth $1.1414.

Happy Thanksgiving!  May this week be the beginning of a wonderful holiday season for you and yours.

Elizabeth E. Cook
Partner

News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including businessinsider.com, The Wall Street Journal, The New York Times, Barron’s, The Economist, Bloomberg, The Associated Press, and Reuters.  If you have any questions, please call us at 203.458.5220 or reply to this email.  Thank you for your time!  (Gobble, gobble!)