February 20, 2018

Our focus was torn last week between the sight of healthy young people excelling at the Olympics and healthy young people fleeing from their school in terror.  One of these should not have happened.  A great majority of Americans favor sensible gun control; now we just need to convince Congress that children’s lives are more important than campaign contributions.  End of soapbox oration.

If you were watching the markets two to three weeks ago, you were no doubt alarmed by a couple of thousand-point down days and the announcement by pundits that we had entered a market correction.  But you may not have watched last week’s market results, where stocks were up five days in a row and the S&P 500 recovered by almost 6%.  That was equally deserving of attention.  The reason we advocate AGAINST selling into a down market is not because stocks will rebound eventually, but because stocks will often rebound quickly.  Not always, but often enough that it’s worth noting.

Also worth noting is that the CEO of Uber (still a private company!) has announced that he foresees commercialization of flying car taxis within five to ten years.  Isn’t that what we’ve all been asking for?  Isn’t that the only thing we really really need?  Flying Ubers?  So that now they can wait on the wrong street corner and make me hike to them AND THEN JUMP?!  Plus, they probably won’t have drivers, which means the robots will have to be helicopter pilots as well.  I foresee no problems.  None at all.

The Trump Administration revealed its infrastructure plan last week.  Infrastructure deals are often approved with bipartisan support, but this one might be different.  The entire plan will cost $1.5 trillion, only $200 billion of which is proposed to come from the federal government.  Normally infrastructure projects are 80% funded by the federal government, except for highway projects which are usually 50/50 federal/state.  In order to provide the local spending portion of the bill, state governments will have to sell more bonds at the same time that the Treasury will be selling more bonds to fund federal spending.  Both actions will put upward pressure on bond yields and inflation.

And speaking of inflation, the Consumer-Price Index rose by 0.5% in January, up 2.1% for the trailing 12 months.  With the Federal Reserve hoping to see inflation at 2%, it seems likely that we will see a rate hike in March.  Inflation is a funny thing when it comes to stocks.  For one thing, stock prices also inflate (the rising tide lifts all boats theory).  But at the same time, companies have to pay more to borrow, and have to compete with better-yielding bonds for investor money.  Lots of moving parts, which we are carefully watching.

Credit Karma, the free credit-monitoring service, is now offering tax filing to individuals.  And of the first 250,000 people who filed their 2017 return with Credit Karma, fewer than 100 reported a cryptocurrency transaction.  But research from Qualtrics indicates that 57% of Americans surveyed said they had realized some gains from cryptocurrencies.  Hmmmmmm.  First thought: this is why the government will regulate Bitcoin sooner rather than later.  Second thought: Credit Karma may be free to you, but they are clearly selling their data.  Remember, if you’re not the customer, you’re the product.

Russian nuclear scientists were arrested for trying to use one of Russia’s most powerful supercomputers to mine Bitcoin.  Now, it seems to me that that is a far more productive use of their time than making nuclear weapons, but they were easily caught when the computer, which was designed to work off-line in order to keep its secrets, suddenly went online in order to mine cryptocurrencies.  So, good idea, bad execution.

Legendary short seller Jim Chanos (full disclosure: he has valued my advice since college.  NO WAIT, what I meant to say was we once had acquaintances in common) is saying that we are at the end of a once-in-a-lifetime period of low interest rates.  And he points to the fact that the U.S. two-year Treasury is paying more than the Greek equivalent to show that interest rates are wonky these days.  And the man who first realized the precariousness of Baldwin United (you’re too young to remember the debacle) AND the precariousness of Enron, is now pointing to Tesla as a hollow man.  He says that Elon Musk’s long history of exaggerating what he will do (in addition to planning to go to Mars and tunnel under Los Angeles) makes his stock ripe for shorting.  (Note: we do not advocate shorting Tesla or any other stock because shorting stocks has UNLIMITED loss potential.  Jim Chanos is an extraordinary risk-taker.)  And Chanos points out that the vaunted $30,000 Tesla is actually selling closer to $60,000.  Damn you, Iron Man!

Know those pills that make you feel better?  Well, turns out they also make fish feel better.  And if you’ve been worrying about depressed fish, this is wonderful news.  But if you’ve been worrying about clean water, maybe not so much.  Fish in the Niagara River, which connects Lake Erie to Lake Ontario, are testing positive for antidepressants.  That’s because if you take antidepressants, you also pee them out, plus hormones are found in contraceptive pills and some grooming products and inevitably end up running off into our water supplies.  The not-so-weird thing is that the fish are exhibiting new behaviors like greater happiness and less risk-aversion.  This makes them more likely to be caught and eaten.  Which probably means that WE are more likely to be caught and eaten, but spend less time hanging out with our natural predators than fish do.  In any case, biologists are warning that whole species of fish could be wiped out, along with their ecosystems.  (The fish are also facing slow killers like heavy metals and other toxins.)  The bad news is that the fish have 20 times higher levels of antidepressants in their brains than in the water around them.  The good news is that we rarely eat fish brains.  But that’s pretty thin good news. 

Did you know that the South Koreans asked for volunteers to watch Olympic events and cheer for athletes who had no cheering sections of their own?  And people volunteered in droves.  The South Koreans are very nice people.

For the week ending February 16th, the Standard & Poor’s 500 closed at 2,732, the Dow Jones Industrials at 25,219, and the Nasdaq Composite Index at 7,239.  The yield on the ten-year Treasury Note finished at 2.87%.  Crude oil cost $61.55 per barrel, gold cost $1,353.20 per ounce, and one Euro was worth $1.2404.

Elizabeth E. Cook

News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including The New York Times, The Wall Street Journal, Barron’s, The Economist, BBC, Bloomberg, businessinsider.com, CNBC, and Reuters.  If you have any questions, please call us at 203.458.5220 or reply to this email.  Thank you for your attention.
February 26, 2018

Last week, markets were jostled by two events, but then recovered and attained modest gains overall.  The first thing that happened was that Walmart’s holiday internet sales fell sharply from from the prior quarter.  They are blaming inventory-control issues for the drop, but investors wondered if Amazon was the culprit.  (Walmart stock fell while Amazon gained.)  The second thing that happened was that interest rates on the ten-year Treasury approached 3% - the magic level at which stock investors might look to bonds for total return.  Other than that, things were smooth sailing!

And speaking of Treasuries, it turns out that Warren Buffett’s Berkshire Hathaway is keeping more than $100 billion in cash equivalents - basically short Treasury Bills.  Every Monday, Berkshire rolls about $4 billion in T-bills at the Treasury auction.  This accounts for 4% of the total auction value!  Berkshire says two factors influence its large cash position.  First, they are having trouble finding well-priced companies in which to invest.  And second, they want to have a large cash position to spend when the market dips.  Maybe that’s really just two sides to the same reason.

Feeling sniffly?  The Japanese have just approved a new flu medication that purports to kill the flu virus in 24 hours.  It is taken in one dose, versus ten doses over five days needed with Tamiflu, and is supposed to be more effective.  Sadly, it won’t hit the market until this flu season ends.  Pricing for the drug has not been announced.  The drug is called Xofluza, which name is meant to sound like a sneeze.  I might have made up that last part.

General Electric is going to restate its last two years of earnings and is expected to cut adjusted earnings by 15%.  GE is the last remaining of the original Dow Jones Industrials stocks, but has been having issues lately.

China’s President Xi Jinping is expected to begin his second term shortly.  It USED to be that the President could only serve two terms, but Xi and the ruling (read: only) Communist Party have recently eliminated that term limit.  So, will the popular Xi serve in perpetuity?  Investors in China are betting yes.  Investment is ballooning in stocks that contain the word “Emperor” in their company names.

Last Thursday, Kylie Jenner (full disclosure: somebody had to explain to me who she is) announced that she didn’t use Snapchat anymore.  The stock immediately fell more than 8%.  Short sellers in parent company Snap made more than $163 million on that stock move in one day.  A short seller is someone who has sold a stock he doesn’t own, thereby betting that the stock will fall in price and he will be able to buy it back and “cover” his short.  Profit!  But what happens if the stock rises in price instead?  Bad things.  Very bad things.

Meanwhile, in other Snap news, the company’s founder Evan Spiegel received $638 million in compensation in 2017, making him one of the most highly paid CEOs in America.  Oops.

Saudi Arabia has a General Entertainment Authority (remember: the country is basically owned by one family) which has pledged to invest $64 billion in entertainment over the next ten years.  That is part of Crown Prince Mohammed bin Salman’s plan to diversify the country’s economy away from dependence on oil production by developing other industries, including tourism.  Really?  Tourism?  While Saudi Arabia has many awesome religious and cultural attractions, women have to wear the hijab and abaya on the beach, and every single woman in the country is a new driver.  (Full disclosure: I am a woman who drives.)

Our weekly Tesla story is combined with our weekly Amazon story in the news that Tesla’s Amazon Web Services account was hacked to mine cryptocurrency.  This is a problem for Tesla, which is defending itself by saying that its CARS weren’t hacked, just its data storage.  And that’s better?  It turns out that Tesla pays outsiders actual money to find vulnerabilities in its systems, and a company named RedLock found the hack, which was shut down within hours.  So that’s good.

In a fascinating mergers & acquisitions story (yes, there is such a thing), we turn back to 2015 when Hewlett-Packard acquired Aruba Networks.  Yawn.  But wait….  The price per share of Aruba at the time was $17.13, but HP paid $24.67.  And yet, some Aruba shareholders sued, alleging that they should have been paid more.  Like over $30.  They requested an appraisal of Aruba.  But the judge recently hearing the case ruled that the market price of a stock is exactly what it is worth at any time, and took money away from the litigants.  In fact, he left them with $17.13 per share.  So - ha ha ha ha ha ha!?  Maybe they should have accepted their windfall and left it alone?  This will no doubt dampen future M&A litigation, as perhaps it should.

For the week ending February 23rd, the Standard & Poor’s 500 closed at 2,747, the Dow Jones Industrials at 25,309, and the Nasdaq Composite at 7,337.  The yield on the ten-year Treasury Note was down slightly (from Wednesday’s high) at 2.87%.  Crude oil cost $63.55 per barrel, Gold cost $1,328.20 per ounce, and one Euro was worth $1.2294.

Apologies for excess snarkiness in this Comment.  Too many opportunities to resist!

Elizabeth E. Cook

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, Forbes, Fortune, Bloomberg, businessinsider.com, and Reuters.  If you have questions, please call us at 203.458.5220 or reply to this email.  Thank you for your attention.

March 5, 2018

Tariffs, tariffs, tariffs.

The President has proposed a 25% tariff on imported steel and 10% on imported aluminum.  This will make the imports more expensive, and will encourage domestic producers to increase output.  Or so the thinking goes.  In fact, since the tariffs can be achieved (and repealed) by Executive Order, it is unlikely that foundries will bet on their continuing enough to build new plants.  And even if they do, they are likely to be fully mechanized and will not create jobs.  The jobs that will be affected are those in industries that USE steel and aluminum, like auto manufacturing.  For every steel-making job that is “saved”, there are 30-40 steel-using jobs that are put in jeopardy.

The U.S. imports steel, NOT from China and Russia, but from close allies Canada, South Korea, and Mexico.  And our trade deficit with Canada is minimal, since we export and import roughly the same amount of goods.  But Canada, Europe, and other countries have already announced that if we put a surtax on steel and aluminum, they will put a surtax on goods that we export, like liquor, wine, motorcycles, cars, and Levi’s.

As with the coal industry, there is really no bringing steel back.  We hope that this tariff idea will be abandoned, or at least greatly modified, before it is enacted.  There are only Pyrrhic victories in trade wars.

The current administration has already put a 20% tariff on Canadian lumber imports, which is directly affecting the U.S. home-building industry.  Canada supplies one third of lumber used in America, and has appealed the tariff to the World Trade Organization.  Home-builders are reluctant to stock up on lumber at inflated prices and say that the increased cost, which is being passed along to home buyers, amounts to $3,000 - $9,000 per mid-sized home.  Builders say that the cost of raw materials, along with labor shortages, are their current main concerns.

Facebook and Mark Zuckerberg reached a $35 million-dollar settlement with shareholders last week.  The shareholders claimed that Facebook hid concerns about future growth right before it went public in 2012.  Facebook shares stayed below the initial offering price of $38 for a year after its IPO, but now trade around $180.  The strongest evidence brought by the shareholders were the panicked texts that CEO Zuckerberg sent to his wife Priscilla Chan right before the IPO, in which he states that he might cancel the offering.

The International Energy Agency has announced that the U.S. will soon be the world’s largest oil producer.  The U.S. passed Saudi Arabia (the top oil exporter) last year, and will surpass Russia, which produces just under 11 million barrels per day, this year or next.  U.S. oil producers are benefitting from a production cut engineered by OPEC and Russia that is stabilizing oil prices.  And U.S. imports of oil have fallen below four million barrels per day - versus a record-high 12.5 million bpd reached in 2005.

New Federal Reserve Chairman Jerome Powell testified before Congress last week, saying, “My personal outlook for the economy has strengthened since December.”  Powell’s rosy outlook worried investors who began to imagine that the Fed would increase rates four times this year instead of the predicted three times.  With interest rates rising, and the cost of everyday goods (and cars) expected to rise with tariffs (see above), it seems clear that we can expect inflation to pick up.  But will worker salaries keep pace?

Note to investors: the thought of inflation makes markets uncomfortable, but the fact of inflation is usually good for stock prices.

Amazon is acquiring Ring, which makes smart doorbells with video cameras.  Business rumors value the deal at more than one billion dollars, which makes it one of Amazon’s priciest moves.  The purchase of Whole Foods cost $13.7 billion in 2017, and the purchase of Zappo’s online shoe business was worth $1.2 billion in 2009.  No doubt Amazon will attach the Ring products to its Echo line of smart-speakers and try again to get consumers to let Amazon delivery people into their homes when no one is there.

India’s economy has overtaken China’s as the world’s fastest growing.  China’s GDP grew by an annualized 6.8% in the fourth quarter, while India’s GDP rose by 7.2%.  India is the largest democracy in the world, although beset with corruption, while China is the world’s leading authoritarian state (whose economic numbers thereby can neither be confirmed nor quite trusted).

The Securities and Exchange Commission is looking into regulating initial coin offerings (ICOs) in which new coins are brought to market and sold to suckers, I mean investors.  If the SEC gets involved in regulating ICOs, it will bring some consumer protection to those markets.  In recent months we have seen Venezuela issue its own cryptocurrency, the Petro, while Disney has released the Dragonchain.  Other countries and companies will no doubt follow suit.  All cryptocurrencies use blockchain technology, which is anonymous and open-source.  But currency exchanges seem easy to hack, and once stolen, your cryptocurrency is probably gone for good.

Bitcoin was invented by Satoshi Nakamoto, the pseudonym of the genius behind blockchain.  No one has every figured out who it is, UNTIL NOW!  Australian Craig Wright is claiming to be Nakamoto, at the same time as he is being sued for stealing his mining-partner’s bitcoin.  (Bitcoin is “mined” by people who solve mathematical problems on server farms.  It uses a lot of electricity!)  He has offered no proof of his identity OR his genius.  He is also being investigated for tax fraud in Australia.

For the week ending March 2nd, the Standard & Poor’s 500 closed at 2,691, the Dow Jones Industrials at 24,538, and the Nasdaq Composite Index at 7,257.  The yield on the ten-year Treasury Note finished at 2.87%.  Crude oil cost $61.25 per barrel, gold cost $1,321.10 per ounce, and one Euro was worth $1.2329.

Elizabeth E. Cook

News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including The New York Times, The Wall Street Journal, Barron’s, Bloomberg, The Economist, and businessinsider.com.  If you have any questions, please call us at 203.458.5220 or reply to this email.  Thank you for your attention.
March 12, 2018
Last week we celebrated the 9th anniversary of the current bull market. The market exhibited the increased volatility that has become the norm this year. Early in the week the market retreated, reacting to concerns that the pending steel and aluminum tariffs could trigger a broader trade war. Then, surprising news of a possible summit between the U.S. and North Korea followed by a strong February jobs report sent the market higher. For the week, the S&P 500 gained 3.59% and the Nasdaq increased 4.20%, notching a new all-time high on Friday.
The market was buoyed by the February jobs report which signaled that the labor market remains strong and will keep driving economic growth for the foreseeable future. Payrolls rose 313,000 compared to a consensus estimate of 205,000 new jobs, representing the strongest monthly hiring since mid-2016. The unemployment rate held constant at 4.1%.
In February, wages increased 2.6% compared to a year earlier, lower than January's wage increase, muting investor concerns that inflations pressures could cause the Federal Reserve to raise interest rates faster than expected. Three, and possibly four, rate increases are still expected in 2018, with the first projected for later this month after the Fed's March 20-21 meeting.
President Trump enacted the 25% tariff on steel imports and 10% tariff on aluminum last week. Imports from Canada and Mexico were exempted. Economists do not expect the tariffs to have a big impact on the broader U.S. economy, as steel and aluminum account for less than 2% of total imports and only a fraction of a percent of total U.S. economic output.
Rather, the market volatility last week created by the pending tariffs is due to concerns that a trade war could escalate, which could slow the economic growth we are currently enjoying. Europe, for example, is threatening to slap retaliatory tariffs on imports of iconic American brands, including Harley Davidson and Levis.
In the final analysis, the tariffs may be a more politically, than economically, motivated action by the President, as he is keen to follow through on a campaign promise and he attempts to shore-up support for the Republican candidate in a closer-than-expected House of Representatives special election in a steel-country district in western Pennsylvania. Hopefully, tariff actions will be reconsidered after Tuesday's election.
At Diastole, we are taking advantage of the positive market conditions to raise cash where appropriate to ensure that clients who rely on their investment portfolios for income are adequately positioned with three to five years' cash reserves to weather an eventual market downturn. Part of our job is to ensure that you do not need to sell equities in a down market, as your portfolio will struggle to regain its pre-crash level.
In lighter news, the 90th Academy Awards gala was held last week. The Shape of Water, which I did not see, won Best Picture. The movie is about a woman who falls in love with an ocean creature that she rescues from a 1960's government laboratory. I did watch, and highly recommend, the superhero blockbuster, Black Panther, that topped $1 billion in box office sales this past weekend.
And, in the "it's too good to be true" news, we can now binge on that entire pint of ice cream without feeling tremendously guilty. While eating a pint of your favorite Haagen Dazs or Ben and Jerry's has more than 1,100 calories, there are three new brands of ice cream (or frozen dessert) that are under 400 calories: Enlightened, Halo Top, and Arctic Zero. Halo Top, in particular, is attracting ice cream lovers by the pint-full. Sales over the past year increased by 555% to $363 million.
Here at the Diastole office Nancy Ellyn Nussbaum is organizing a 4-Week Healthy Eating Challenge.
No chips or fries
No soda or juice
No ice cream (Halo Top doesn't count)
No fast food
No fried food
No white bread
No cakes or donuts
No cookies
No candy
While we acknowledge that finding anything appealing to eat over the next month could be difficult, please join us in this challenge if you are motivated to swing into Spring on a healthier note.
For the week ending March 9th, the Standard & Poor's 500 closed at 2,787, the Dow Jones Industrials at 25,336, and the Nasdaq Composite Index at 7,561. The yield on the ten-year Treasury Note finished at 2.90%. Crude oil cost $62.05 per barrel, gold cost $1,321 per ounce, and one Euro was worth $1.23.

Ted Reagle
Financial Advisor
News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including The New York Times, The Wall Street Journal, The Financial Times, Bloomberg, The Economist, and businessinsider.com. If you have any questions, please call us at 203.458.5220 or reply to this email. Thank you for your attention.