December 31, 2018

Do you have market whiplash?  Do yourself a favor and take tomorrow off!  No, really.  Markets will be closed for New Year’s Day, and presumably by Wednesday everyone will be back from vacation and orderly markets will resume.  Presumably.

One of the reasons for the recent volatility in markets is obvious.  Markets crave predictability and it has been in short supply.  We don’t know when the partial government shutdown will be resolved.  We don’t know how trade talks with China are progressing, or whether new tariffs will be imposed in the future.  We don’t know what the Fed will do about interest rates in the new year, although clearly the most recent Fed rate hike added to market volatility.  And oil prices continue to fall, which delights individual consumers but hurts energy producers and their stocks.

A week ago, Treasury Secretary Steven Mnuchin announced that he had initiated phone calls with the CEOs of the six largest U.S. banks and was happy to report that they had “ample liquidity”.  While he no doubt intended his remarks to calm the markets, they had the opposite effect, making investors wonder what concerns had prompted his calls in the first place.  Kind of like when the police say, “move along, nothing to see here”.

Other factors are entirely predictable but added to market uncertainty anyway.  Investors who were short shares (meaning that they borrowed stock in order to sell it, figuring the stock price would fall and they could buy it back cheaper) were thrilled when the markets dropped sharply, and rushed in to cover their shorts, driving prices higher.  There was also tax-loss selling, and mutual-fund portfolio rebalancing.  And all of those active managers who were taking time off during the holiday left the field open to computer-driven trading and the passive managers who blindly follow.  (Passive managers don’t make investment decisions in an attempt to beat the market, they mirror existing stock indices and therefore reap the same returns.)

New and existing home sales have both fallen this year.  With interest rates rising, mortgages are more expensive.  The average rate on a 30-year mortgage was 4.87% recently, versus 4.03% in January.  Rates are still historically low, but consumers who were burned in the Great Recession, and then spoiled by artificially low interest rates during the recovery, still view current rates as steep.  And house prices need to fall as interest rates rise, in order to make monthly payments on home purchases affordable.  Those pressures are working their way through housing markets.

With the government in partial shutdown, approximately 380,000 federal employees have been placed on furlough, without pay.  An additional roughly 420,000 workers are deemed essential, and are working without pay.  Usually after a shutdown, these workers will receive their back pay.  But there are also hundreds of thousands of subcontracted workers, like custodial and cafeteria staffs, who are not working and will not receive back pay when the government comes back online.  In addition to the hardships faced by unpaid workers, the government closures cost more taxpayer money than the government at work, and contribute to a temporary slowing of the economy.

Although many of the figures have not yet been released, from all anecdotal reports the 2018 holiday season was strong for retail.  Amazon, of course, announced that it had “record-breaking”  sales.  It also said that it shipped more than one billion items through its Prime service (no more than half to me, at most).  And Mastercard SpendingPulse, which tracks retail spending trends, said that holiday sales increased 5.1% to more than $850 billion this year.  Online sales were up 19.1% versus 2017.

As Americans become more educated, and while the unemployment rate sits at a record low, firms are finding it harder to attract blue-collar workers than white-collar ones.  This may lead to increasing wages for manual laborers in the short run, but may also lead to increasing automation and the use of robotics in the long run.  Hiring in the transportation, construction, manufacturing and mining sectors grew twice as fast as other private employment this year, and if wages increase, profitability may shrink.

The Russian firm Rosatom is experimenting with nuclear reactors on barges.  What could go wrong?  Rosatom expects to move two nuclear reactors into place off the Siberian coast in the spring of 2019.  It’s not as crazy as it sounds, since some ships and submarines have been nuclear powered since 1954.  The reactors will be moored behind tsunami-resistant breakwaters and will provide power to the area around Pevek, a town in the harsh Siberian countrywise.  Cost for the floating reactors has reached $500 million apiece.  Rosatom, which hopes to attract foreign buyers to the idea, has yet to sell one.

The Royal Statistical Society announced that 90.5% of all plastic ever produced has not been recycled.  That’s the equivalent of 7.2 trillion grocery bags full of plastic.  That much plastic would climb to the moon and back over 5,700 times.  Each of those grocery bags would be worth about one dollar in plastic, meaning that all of the unrecycled plastic has a worth of $7.2 trillion - enough to buy Apple, Amazon, Google, Microsoft, Walmart, Exxon, G.M. AT&T, Facebook, Bank of America and all of the professional football and baseball teams.  Remember when recycling that your plastic grocery bags and bubble wrap must be returned to a grocery store for recycling, NOT placed in your recycling bin.  And light bulbs are not currently recyclable.

We have a morbid fascination with hyperinflation, which luckily we do not face.  But in Venezuela, prices rose by 109% in just November.  By contrast, in the worst month of postwar hyperinflation, Hungary’s prices rose by 41,900,000,000,000,000%.  Just consider the consequences of inflation run amok, and you may have a greater appreciation for the Federal Reserve Board which is charged with keeping inflation under control, keeping prices stable, and keeping us at full employment.

And now it’s time to write down your New Year’s resolutions.  Mine?  More cookies, more economic growth, and more readers.  Remember that we are happy to add your friends to our mailing list.  And if you know people who are concerned about volatile markets, please have them call us.  As you are aware, we do not charge for consultations or financial plans.

For the week ending December 28th, 2018, the Standard & Poor’s 500 closed at 2,485, the Dow Jones Industrial Average at 23,062, and the Nasdaq Composite Index at 6,584.  The yield on the ten-year Treasury Note finished at 2.72%.  U.S. crude oil cost $45.33 per barrel, New York gold cost $1,279.90 per ounce, and one Euro was worth $1.1440.  (Which can also be represented by one dollar being worth .8741 Euro.)

Plus, we heartily advocate against gambling, but tonight’s Mega Millions drawing is expected to be worth more than $415 million.  Whatever you do, don’t buy a ticket!

Happy New Year!

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, businessinsider.com, The Economist, Bloomberg, 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 attention.
January 7, 2019

At Diastole, we have a regular Monday morning meeting at which we discuss all kinds of things, especially the economy and the markets.  Today we talked about how much investors dislike uncertainty, and how uncertainty is pretty much all that is on offer around the world right now.

We remain in a trade war with China, although trade talks are happening today and tomorrow in Beijing.  Our hiatus on imposing sanctions on Chinese goods expires on March 1st.  And meanwhile, last week we learned that the rate of economic growth in China is slowing.  Apparently the Chinese consumer is becoming more frugal.  The Chinese government is trying to stimulate growth by reducing the amount of money that banks need to keep on reserve.  Their slowing economy hurts U.S. companies like Apple, who depend on growth in the Chinese market.  Apple had a meltdown last week when CEO Tim Cook announced that sales and earnings would be lower than expected.  He blamed tariffs.  The Chinese government is also discontinuing buying U.S. Treasuries.  Their portfolio of American bonds has dropped in value from $1.3 trillion (2013) to $1.1 trillion (2018) and is expected to fall further.  In what looks like a retaliatory measure, the U.S. government has issued a travel advisory for China.

Whether or not the Federal Reserve Board raises interest rates again this year, interest rates are bound to creep higher in order to entice new buyers to fund our increasing national debt.  We are already seeing the effect of rising rates in real estate prices, which are slipping.  (If you figure that your monthly mortgage payment is determined by the price of your home and the rate on your loan, it makes sense that as rates rise, prices must fall in order for houses to remain affordable.)  The median sales price of apartments sold in Manhattan fell more than 5% in the fourth quarter of 2018 - to $999,000.  Foreign buyers are also scarcer than they used to be.

Our government remains in a partial shutdown - now more than two weeks old.  Furloughed workers (staying home) and essential workers (reporting for duty) are not being paid, but can expect to receive their missing salaries when the government gets back to work.  Contract workers will not be reimbursed.  Included in the shutdown are the IRS (no refunds), and the TSA (many employees are required to work without pay, but many are also calling in sick in protest).  Food stamps have already been issued for January, but if the government remains on shutdown, the February distribution may not happen.

British Prime Minister Theresa May is expected to call for a Parliamentary vote on Brexit next week.  It is not at all certain that she has the votes she needs in order to pass her Brexit deal, and the clamor against a “no-deal” Brexit is growing.  The current agreement between England the the European Union calls for actual Brexit to occur on or before March 29th.  The E.U., which does not want Britain to leave, may not be willing to extend that date.

We received good jobs numbers on Friday.  Non-farm payrolls increased by 312,000 in December.  Economic analysts had been expecting fewer than 200,000.  Wages rose by 3.2% versus a year earlier and 0.4% over November.  This is the fastest rate of wage growth since 2009.  The unemployment rate rose to 3.9% as more people started looking for jobs.

Also on Friday, at some conference or another, Past Fed Chairmen Ben Bernanke and Janet Yellen, as well as current Fed Chairman Jerome Powell, got together and discussed what the Fed is and should be doing, and on what data the Fed will make its decisions to raise rates (or not) in 2019.  Powell’s comments that the two anticipated 2019 rate hikes are not going to be automatic, and that market conditions will factor into Fed decisions, soothed the markets and helped Friday be a powerful up day for stocks.
We can now look at the whole of 2018 with some perspective.  For the year, the Dow Jones Industrials lost 5.63% versus a gain of 25.08% in 2017.  The Standard & Poor’s 500 lost 6.24% in 2018 versus a gain of 19.42% in 2017.  And the Nasdaq Composite Index lost 3.88% last year versus a 2017 gain of 28.24%.  It is critically important to look at market and portfolio returns in a broader context instead of just one year, one quarter, one month, or one day at a time.  That having been said, however, markets are up so far in 2019.

And finally, on New Year’s Day, a Japanese restaurant owner paid a record $3.1 million for a single Pacific bluefin tuna (an almost endangered species).  This surpasses the previous record, which was held by the same man, Kiyoshi Kumura.  I cannot imagine how expensive the ensuing sushi will be in order to support this expense, but it doesn’t matter.  I don’t like sushi!

For the week ending January 4th 2019, the S&P 500 closed at 2,531, the Dow at 23,433, and the Nasdaq at 6,738.  The yield on the ten-year Treasury Note finished at 2.67%.  U.S. oil cost $47.96 per barrel, N.Y. gold cost $1,282.70 per ounce, and one Euro was worth $1.1401 (or, conversely, one dollar was worth .8771 Euro).

Elizabeth E. Cook

News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including Barron’s, Bloomberg, The Economist, The Wall Street Journal, The New York Times, businessinsider.com, Reuters, and The Associated Press.  If you have any questions, please call us at 203.458.5220 or reply to this email.  Happy New Year!
January 14, 2019

Markets were up last week by about 2.5%, largely on the news that the U.S. and China were participating in trade talks, extending trade talks, and scheduling new trade talks.  Also, we received a really great jobs and wages report.  Also, Fed Chairman Powell indicated that the Fed would be sensitive to the markets when evaluating future interest rate hikes.  All good!

But other news from China was not as rosy.  New data releases show that Chinese exports in December fell more than 4% from a year earlier, and imports fell 7.6%.  (Analysts were expecting a gain of 5%.)  The Chinese trade surplus with the world dropped to its lowest level since 2013 ($351 billion), but its surplus with the U.S. rose to a record $323 billion.  A trade surplus is the value of goods exported minus the value of goods imported.  (A trade deficit means that imports exceed exports.)  You will notice that most of China’s trade surplus is with us, meaning that it doesn’t import American goods at nearly the same rate that it exports to us.  Some of that is due to China’s ending American soybean imports - a subject that is part of the current trade talks.

The U.S. Treasury is now experiencing falling interest in buying its bonds and notes.  The Treasury department sells U.S. debt, which is a promise by our government to pay interest and repay principal on a predetermined schedule.  In exchange for this promise, the government receives cash from the buyer.  This is how we fund our annual federal budget deficit, and our overall government debt.  So what happens if not enough people are interested in buying our debt?  Interest rates paid on those bonds must rise to attract investors.  Since the bonds are auctioned off, this fluctuation in rates occurs organically through the bids that investors place.

If the interest that the Treasury must pay is rising, it will cost more to service our debt.  And this is happening at the same time that we are also issuing more debt to cover our large and growing budget deficits.  Our annual budget deficit is approaching ONE TRILLION DOLLARS this year.  Picture a struggling family, fully borrowed up (and then some) on variable-rate credit cards.  What happens when rates go up?  It is a vicious cycle, because our overwhelming debt causes some investors (think foreign countries) not to want to own our bonds, just when we need them the most.  Two bond-rating firms, Moody’s and Fitch, have warned the U.S. that increasing debt issuance may imperil our current AAA rating.

A team of Bank of America economists is examining recent stock-market volatility in relation to news reports from Bloomberg, and it has found that five factors are most correlated with market drops: trade, the Federal Reserve Board’s actions, weaker U.S. growth data, the drop in oil prices, and negative international news.  The Bank of America believes that these five factors have reduced stock markets by as much as 14% since the S&P’s record high of September 21st.  In the same period, the ten-year Treasury Note has lost .22% of yield as a result of money flowing into bonds for the safety they provide.  If this seems contrary to what we’ve already discussed about prices having to rise to attract buyers, it is.  Sometimes more than one thing is happening!  Ugh!

The U.S. government remains in a partial shutdown.  About 25% of government employees are either not working and not being paid, or working and not being paid.  The affected departments include the TSA, which is responsible for airport security, the FDA, which is responsible for food security, and Homeland Security, which is responsible for the safety of our borders and everything in between.  Nursing homes are not receiving HUD funds for their subsidized residents, and are being told to use their emergency funds to stay open.  The pressure is building to resolve the situation, which we hope happens soon.  And the union which represents air-traffic controllers (who are working without pay) has sued the government over the situation, while air-traffic controllers in Canada have sent hundreds of pizzas to their American counterparts in a gesture of solidarity (and delicious cheesiness).

The U.S. is not making enough babies!  Our current fertility rate is 1765.5 children per 1,000 women - about 16% below what it needs to be to keep our population steady.  In 2017, 3.8 million Americans were born - the lowest number of births in 30 years.  Remembering that our social safety net requires young workers to support retirees (for many reasons, including that the federal government has borrowed money from Social Security, but also that most retirees receive benefits far larger than what they paid into the system) - we will have to address this issue.  In Japan, which is facing an even more serious version of this problem, there is consideration of a new program that would actively promote skilled worker immigration.

You may not know that the U.S. has 13 national securities exchanges.  And of these, 12 are owned by one of three public companies: the Intercontinental Exchange, Nasdaq, and Cboe Global Markets.  Frustrated by this tri-opoly structure, several Wall Street firms are preparing to create their own stock market, the Members Exchange, or MEMX, to compete directly with the New York Stock Exchange and Nasdaq.  Presumably this new, 14th, market will put the needs of member firms and their customers first.  Presumably.

It’s time again for The Economist’s Big Mac Index.  In this, the magazine evaluates what a Big Mac costs in over 100 countries, and uses the data to determine which currencies are over- or under-valued.  The dollar is the starting point.  A Big Mac in the U.S. costs $5.58 on average.  In Russia the burger costs 110 rubles ($1.65).  So - the ruble is undervalued versus the dollar.  Also undervalued are the Euro, the British Pound, and the Japanese yen.  But there are some currencies that are overvalued, notably the Swiss franc.  If the Euro is cheap versus the dollar, it’s time to go to Europe!  Oh wait, TSA agents are unpaid and cranky, while air-traffic controllers are suing.  Maybe Europe can wait.

For the week ending January 11th, the Standard & Poor’s 500 closed at 2,596, the Dow Jones Industrial Average at 23,995, and the Nasdaq Composite Index at 6,971.  The yield on the ten-year Treasury Note finished at 2.70%.  U.S. crude oil cost $51.59 per barrel, N.Y. gold cost $1,287.10 per ounce, and one Euro was worth $1.1461.

Elizabeth E. Cook

News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including The Economist, The Wall Street Journal, The New York Times, Barron’s, Bloomberg, business insider, Reuters, and The Associated Press.  Also some random websites, but not for big things!  Thank you for your time and attention.
January 22, 2019

Remember when the market only went up?  And then a couple of times a year it would bounce around just to remind us that there were other possibilities?  And then we would forget again?  That was fun!  But it’s not now.

Last week the markets had a couple of sunny days, mostly caused by rumors that China and the U.S. were making progress in trade talks.  Such progress has not yet materialized, and in the interim, we have heard from the International Monetary Fund (IMF), which lowered its global growth forecast for 2019 from 3.7% to 3.5%.  The forecast for 2020 was revised downward from 3.8% to 3.6%.

We also heard from Standard & Poor’s Global that fallout from the partial government shutdown could cost annual U.S. Gross Domestic Product about $1.2 billion per week.  As we are now on day 32, with no end in sight, we are looking at upward of $6 billion in lost production by the end of this week.  (GDP is the total of the prices of all final goods and services produced in an economy over a specific period of time.)

China reported its fourth quarter GDP yesterday: 6.4% (annualized).  And full-year GDP was announced at 6.6% - China’s lowest reading since 1990.  And because China is the world’s second largest economy (after us, yay!) AND has double the growth of the rest of us, its numbers have an outsized effect on global growth.

Furthermore, South Korea announced that exports fell sharply in the first 20 days of 2019 - down 14.6% versus an increase of 1% in the same period last year.  This confirms to bears (those who think that stocks are overvalued) that the world economy is slowing.

Is there any good news, you ask?  Why yes.  Chinese stocks actually rose on the news of slowing GDP growth, because investors now think that the Chinese government will initiate new stimulus efforts.  Stimulus, you’ll remember, generally means that the government will spend more money, lower interest rates, reduce reserve requirements for banks, or some combination of these.  Those kinds of stimuli helped the U.S. climb out of the financial crisis of 2008-2009, and led to the bull market we have enjoyed ever since.  Until lately.

British Prime Minister Theresa May lost (badly) the battle to get her Brexit agreement approved by Parliament.  But this doesn’t settle anything.  The date at which Britain must leave the European Union is unchanged (Friday, March 29th).  Lots of ideas are floating around: a new referendum on the whole idea, cancelling Article 50 (which required Brexit in the first place), extending the deadline (which would require EU agreement).  None of them is easy.  PM May barely won a vote of no-confidence which her opposition brought last week.  One must wonder if she would have rather lost.

Apple stock has had a couple of tough weeks, following CEO Tim Cook’s announcement that it was lowering forecasts for future sales and growth.  Then Apple said that it would buy fewer batteries and other phone parts as it cut production.  In some ways, Apple and other smartphone makers are the victims of their own successes.  Their phones are so good, with so many bells and whistles (and cameras), that new models are barely differentiated from what is already in your pocket.  So there’s not much incentive for people to replace their iPhone 6s or 7s with a new X.

The Saudi Arabian government has made an important decision: women whose husbands divorce them must now be notified of the divorce.  Yes, you read that correctly.  Apparently women whose husbands divorced them were previously NOT notified.  Is Saudi Arabia even living in the 21st century?  You judge.  Women will be notified of their divorces by text message.

What do you say about the richest husband and wife in the world, who are now getting a divorce?  You say: what is going to happen to their stock?  Amazon founder Jeff Bezos, and his wife Mackenzie, who has been with him since before the beginning, announced that they are amicably splitting after 25 years of marriage and no prenuptial agreement.  Will she get voting shares?  Will she get a text message when the divorce is final?

For the week ending January 18th, the S&P 500 finished at 2,670, the Dow Jones Industrials at 24,706, and the Nasdaq Composite Index at 7,157.  The yield on the ten-year Treasury Note closed at 2.79%.  U.S. crude oil cost $53.80 per barrel, New York gold cost $1,281.30 per ounce, and one Euro was worth $1.1363.

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, The Economist, Business Insider, Bloomberg, Reuters, The Associated Press, and Spark Notes.  If you have questions, please call us at 203.458.5220 or reply to this email.  Happy Tuesday!