DIASTOLE ECONOMIC AND MARKET COMMENT
February 25, 2019

This not being a leap year, there will be no February 29th on Friday.  Instead, it will be March 1st, the day that we impose huge new tariffs on….

No, wait.  The President has declared that trade talks with China are proceeding and he will postpone additional tariffs to give time for the talks to work.  (China’s stock market rose more than 5% upon the announcement, its best one-day gain in almost four years.  The Shanghai Composite Index is up 14% in February.)

But it will be the day of the next Brexit….  No, wait, not that either.  Britain’s Prime Minister Theresa May has postponed the next vote on her Brexit deal until March 12th - just 17 days before the Brexit date of March 27th.  Mrs. May says she can still meet the deadline, but it seems to be a game of European chicken.

So what IS happening this week?  President Trump will meet with North Korea’s leader Kim Jung-Un in Vietnam to discuss North Korea’s possible denuclearization along with a potential peace treaty and trade normalization.  The President is flying to Vietnam on Air Force One, while Kim is taking a 3 1/2 day train ride across China.  Why?  Rumor has it that he has no plane which can travel that far.  Or maybe he’s just afraid of flying.  In advance of the summit, Vietnam has expelled a Kim impersonator, while a local barber is offering free haircuts as long as you pick either the “Trump” or the “Kim”.

Kraft Heinz ran into big trouble last week, as it posted a $12.6 billion loss for the fourth quarter of 2018.  But wait, there’s more.  It also took a balance sheet write-down of $15.4 billion (on goodwill and intangibles like trademarks).  And it reported that the SEC has placed the company under investigation.  AND it cut its dividend.  The stock fell by 27.5%.  Kraft Heinz is run by 3G Capital, a Brazilian investment firm that bought KH ten years ago and proceeded with drastic cost-cutting.  Investors like Berkshire Hathaway and William Ackman approved of the measures, but it appears that 3G didn’t do enough on the spending side, and failed to explore new healthy-eating trends and products.  Full disclosure, I am clearly not eating enough mac and cheese.

U.S. home sales fell 8.5% over the past 12 months, including a drop of 1.2% in January alone.  Many factors are influencing the drop, including lack of inventory, which drives prices higher, a rise in mortgage rates which pushes monthly payments higher, and the fact that potential first-time home buyers are already saddled with student debt and have to wait longer for their own homes.

In a related story, the Federal Reserve Bank of New York reported that seven million Americans have fallen more than 90 days behind on their car-loan payments, even though the overall pool of car loans is more creditworthy than at any time since the financial crisis.   Delinquencies are rising sharply among borrowers in their twenties.

The Federal Reserve Board’s Open Market Committee, which directs the Fed’s interest-rate policy, met last week and decided not to raise rates.  This came as a surprise to no one.  Comments after the meeting reinforced the Fed’s recent decision to remain responsive to the markets, which investors took to mean that rates would stay low.  In addition, the Fed is considering ending the reduction of its portfolio of bonds in the second half of this year. 

But remaining responsive to the markets is not so easy.  What we’ve seen recently is stock prices rising (economic optimism) while bond prices also rise (economic pessimism).  Usually these two major investment choices move in opposite directions, for instance when money comes out of stock and goes into bonds in a desire for more safety, or vice versa in a desire for more growth.  When bond prices rise, yields on bonds fall.  And we’ve seen this lately, as the yield on the ten-year Treasury Note has fallen from 3.23% to 2.65% in just three months.  If money is flowing into both stocks and bonds at the same time, it means that the pie is getting larger and we’re not in a zero-sum investment game.  It also might mean that corporations are buying back their own stock, driving those prices upward, while individual investors are actually more bearish and are buying bonds.  Or we’re not in Kansas anymore, you choose.

And speaking of Berkshire Hathaway (weren’t we?), Warren Buffett has just released his annual letter to shareholders.  In it he said that BH would be looking to buy back its own stock “at prices above book value but below our estimate of intrinsic value.”  Berkshire posted a fourth-quarter net loss of $25 billion, even though operating profits rose.  Three billion of the loss was directly related to the problems at Kraft Heinz.  One issue NOT addressed in Buffett’s letter was the question of who will run Berkshire Hathaway next.  Buffett himself is now 88 years old, while his second-in-command Charlie Munger is 95.

Which may be why people older than 65 now outnumber those younger than five - for the first time ever, according to Deutsche Bank’s work with the United Nations and Haver Analytics.  Declining global fertility and birth rates are leading to an aging population, which itself will ultimately lead to holes in government safety nets, loss of productivity, increased inflation, and even lower rates of home ownership.

For the week ending on February 22nd, the Standard & Poor’s 500 closed at 2,792, the Dow Jones Industrials at 26,031, and the Nasdaq Composite Index at 7,527.  The yield on the ten-year Treasury Note finished at 2.65%.  U.S. crude oil sold for $57.26 per barrel, while N.Y. gold cost $1,329.20 per ounce.  One Euro was worth $1.1331.

Elizabeth E. Cook
Partner

News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including CNBC, The Wall Street Journal, The New York Times, Bloomberg, The Economist, Barron’s, Business Insider, Reuters, and The Associated Press.  If you have questions, please call us at 203.458.5220 or reply to this email.  Alert: CVS is now offering Valentine’s Day and Easter candy.  AT THE SAME TIME.  Run, don’t walk.  It won’t be this good again until Halloween overlaps with Christmas.
DIASTOLE ECONOMIC AND MARKET COMMENT
March 3, 2019

It seems like a lifetime ago, but it’s really only been the blink of an eye since February 2018.  Especially if you’re Congress.  When our legislators passed a bill last February to eliminate the debt ceiling, they gave it one year before the ceiling came crashing down again.  Can you hear the sound of breaking drywall?

Now the government cannot add to the country’s total debt until the ceiling is raised again.  Let the finagling begin!  Treasury Secretary Steven Mnuchin is expected to work his magic for a few months, robbing Peter to pay Paul, until there is no money left anywhere in the sofa cushions and Congress must act.  See the footnote for more debt/deficit geekery!

Newly-released government data shows that our economy grew at an annualized 2.6% in the fourth quarter of last year.  Earlier in the year we briefly reached the 4% marker, but for the entire year, the average was between 2.9% and 3.1% - and still open to revision.

In other news, farm-loan delinquencies hit a nine-year high, with 19% of Farm Service Agency loans delinquent in January, versus 16% a year earlier.  Some of this is surely due to tariffs (especially on China) which have caused foreign buyers to reduce their orders, causing commodity prices to fall.  But the government is hinting that it is nearing a trade deal with China, which is encouraging news for farmers and investors alike.  Overall debt for farmers is now over $400 billion - the highest level since the 1980s.

Internet-messaging companies like Facebook, Telegram, and Signal are planning to release their own cryptocurrencies, which will allow people to send funds over their messaging services.  One advantage is that the cryptocurrencies may be acceptable for international transfers.  One disadvantage is that you would have to own the cryptocurrencies in order to spend them.  And for people who think that cryptocurrencies are anonymous, remember that we’re talking Facebook here.  Do you really think they wouldn’t know if you were paying off your bookie?  (Figure of speech.  I’m not sure anyone has a bookie any more.)

Let’s talk some more about Facebook.  No, not the usual steal-your-identity Facebook story, but the interesting news that Facebook is working on designing special earphones that will vibrate inside your ears, using “cartilage-conduction” to help you hear what you’re listening to without having to block ambient noise.  They would work not unlike a cochlear implant.  Cool? 

But also there is the steal-your-identity story that Facebook nags users to submit a phone number if they want two-party authentication on their accounts, but then allows people to look them up by that phone number!  Hah, Facebook!  Caught you at it again!

Just as the idea of legal cannabis is reaching the mainstream, Martha Stewart is here to wrap it in cellophane and add a big beautiful bow.  The lifestyle diva is teaming up with Canadian company Canopy Growth Corporation to offer hemp-based CBD products for people and their pets.  CBD is cannabidiol, which is pot without the psychoactive effects.  Many people find CBD calming, and it apparently reduces seizures in some sufferers.  It’s a good thing.

Five years ago, a French man found a dirty, old, water-stained canvas in his attic and called an auctioneer friend.  This week that painting, a lost Caravaggio, goes on sale in London.  It is expected to sell around $170 million.  So now we know what’s wrong with America - our attics aren’t old enough!

For the week ending March 1st, the Standard & Poor’s 500 closed at 2,803, the Dow Jones Industrials at 26,026, and the Nasdaq Composite Index at 7,595.  The yield on the ten-year Treasury finished at 2.76%.  U.S. crude oil cost $55.80 per barrel, N.Y. gold cost $1,296.40, and one Euro was worth $1.1364.  (By contrast, one dollar was worth .88 Euros - which sounds worse, somehow.)

Elizabeth E. Cook
Partner

FOOTNOTE: Our federal debt is considered in two pieces: first, the amount of money that we are short in this current year (the budget deficit), and then the total amount of money that the government owes (the sum of many years of budget deficits), which is the total debt.  The budget deficit for fiscal year 2018 reached $779 billion, while the federal debt now totals $22 trillion.  That is more than $156,000 per taxpayer, or $67,000 per citizen.

Of the $22 trillion in total U.S. debt, $16.2 trillion is in the form of Treasurys (deliberate misspelling which is common usage to differentiate… oh, who cares), which are held by foreign governments and individuals who trust the government enough to loan it money in exchange for future interest payments and principal repayment.  $5.8 trillion is in intragovernmental lending (i.e. the government borrows from Social Security).

When people talk about a balanced budget, they mean an annual budget in which inflows and outflows match.  The advantage to that is that total debt is not increased, except by the interest payments the government owes.  The U.S. has had two presidents who balanced their budgets (and in fact ran surpluses): Andrew Jackson and Bill Clinton.

News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including Business Insider, The Wall Street Journal, The New York Times, Barron’s, The Economist, Bloomberg, The Associated Press, Reuters, and Wikipedia.  If you have questions, please call us at 203.458.5220 or reply to this email.  Enjoy your final two weeks of winter!
DIASTOLE ECONOMIC AND MARKET COMMENT
March 11, 2019

Markets were down to flattish last week based on a bunch of news.  It was announced that Chinese exports fell by 20% in February, feeding worries about slowing global growth.  Likewise the declaration by the European Central Bank that it would not raise rates this year.  The February jobs report was disappointing, but still positive, and crude oil prices slid in anticipation of a global slowdown (and the resulting lower demand for oil).  By contrast, January’s housing starts (which, as the name implies, indicates how many new houses were begun) were strongly higher, and wage gains grew by a higher-than-expected 3.4% (annualized).

We learned last week that the U.S. trade deficit rose by 12.5% in 2018.  In general, a trade deficit (more imports than exports) implies that our economy is strong, and that people can afford imported goods.  And even though our domestic economy is no longer based on manufacturing, exports of goods and services increased, just not as much as imports.

The federal government deficit (spending minus income) for the first three months of fiscal 2019 (aka the last three months of calendar 2018) rose by 77% over the same period in 2018.  The deficit hit $310 billion, implying an annual deficit of at least $1.2 trillion.  During the period, tax revenues dropped by 2% while spending increased by 9%.  Increased deficit spending will lead to more borrowing, which will ultimately send interest rates higher.

The bull market turned ten on March 6th.  Ten years ago, the S&P 500 sank briefly to 666 (insert your own Satan joke here).  Since then, $30 trillion has been created in the stock market and the Standard & Poor’s 500 has grown by 300%.

The Federal Reserve Board’s Quantitative Easing program was also launched in March of 2009, startling the markets out of their struggle and beginning the current bull market.  The Fed ended QE in October of 2014.

Some of the best stock performers since that day ten years ago include Ulta Beauty, which is up over 9,000%, Exact Sciences (maker of Cologuard tests) which is up over 11,000%, and Sleep Number (maker of beds!) which is higher by almost 23,000%.  And even though those results are spectacular, you would have been foolish to put all of your money into any of them at that time.  Why?  Because it could so easily have turned out to be a loser.  Instead of Ulta, you might have chosen Avon, which has lost 85% in the past ten years.  And instead of Nexstar Broadcasting (up 25,600%) you might have chosen Frontier Communications, down 97%.  It’s all about asset-allocation!

The U.S. is about to become the world’s leader in exporting energy for the first time ever, surpassing Saudi Arabia and Russia.  How is this possible?  Shale oil and natural gas!  Thanks to new drilling techniques (we mean you, fracking) the U.S. has doubled oil production over the past ten years.  And if you, like I, worry that the whole country is going to sink as all of the oil is pumped out, remember that in fracking, the oil is drawn out as water is pumped in.  Boy, I guess the price of water is going to go crazy!

Have you been to a Blockbuster lately?  Neither has anyone else, it turns out.  The last Blockbuster store on earth is located in Bend, Oregon, and says it does a brisk business, especially in older movies that the streaming services don’t carry.  Of course, it says that.  But do you even have a DVD player?  Nope.

In the past few days, Elon Musk has gotten into trouble with the SEC for (again) tweeting market-related and misleading info.  And he also declared that Tesla would close its physical stores.  But then landlords objected and today the decision was (mostly) rescinded, and a price increase of 3% was imposed on Tesla automobiles instead.  Tesla employees say company morale is bad.

Last week also marked International Women’s Day on the 8th.  In celebration, Adidas has announced that it will match women’s World Cup bonuses to the bonuses men receive.  The Economist published its glass-ceiling index, which reveals which countries treat their women equal to men at work.  Sweden is number one, while the U.S. is number twenty.  The research indicates that the worldwide pay gap remains stuck at 14%, while women hold only 32% of management jobs.  Meanwhile, a World Bank report gave six nations perfect scores for achieving gender equality under the law.  Sweden and France were top five on both lists.

And finally, if you wanted this job, it’s now too late.  Over 100 people have applied to become Sri Lanka’s new hangman.  The President of Sri Lanka plans to reinstitute hangings for drug dealers - and 20 current convicts could be in line for this punishment.  The prior official hangman quit his job, citing stress, despite the fact that he was never called on to perform his duties.  Funny/not funny.

For the week ending March 8th, the S&P 500 finished at 2,743, the Dow Jones Industrials at 25,450, and the Nasdaq Composite Index at 7,408.  The yield on the ten-year Treasury Note was lower at 2.63%.  U.S. crude oil cost $56.07 per barrel, N.Y. gold cost $1,297.00 per ounce, and one Euro was worth $1.1230.

I am writing to you today from the exclusive Barbie suite at the Hilton Mexico City.  (No, I am not, but I wish I were.)  The news is the same here, but everything is pink, so it seems better.

Elizabeth E. Cook
Partner

News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including The Economist, Bloomberg, The New York Times, The Wall Street Journal, Barron’s, Business Insider, CNBC, and the Associated Press.  If you have questions, please call us at 203.458.5220 or reply to this email.  Also, if you receive two copies of this Comment in your inbox today, it is because Nancy is off (Happy Birthday, Nancy!) and I am doing the upload and probably screwing it up.  Things will be better next week!
Diastole Economic and Market Comment
March 18, 2019

In a relatively quiet week for financial news, markets were up again, continuing the upward trend we have enjoyed through the first months of 2019. Last week’s gains appear to have been driven by the positive commentary that a trade deal with China could be finalized soon and the confirmation from the British Parliament that the UK would not entertain a “hard Brexit”, meaning leaving the European Union without a negotiated settlement. The S&P 500 is now up 13% for the year.

While the British Parliament voted down the “hard Brexit”, it also defeated the government’s Brexit plan last week. This leaves Britain with no clear path forward and a deadline to exit the European Union only two weeks away. The main issue of contention in the Brexit plan for many in the Prime Minister’s own party is the unconvincing language intended to ensure that an open border between Ireland and Northern Ireland would be preserved in the event that post-Brexit negotiations on trade issues stall between the UK and Europe.

While Prime Minister Theresa May is still negotiating with unsupportive members of her coalition to support her plan in the final hours, it looks more probable that the UK government will request from the European Union an extension of the March 29th exit deadline to allow more time for further negotiation. 

Democrat folk-hero Beto O’Rourke officially entered the 2020 presidential race this past week.  His top-tier status among the crowded Democratic contenders was substantiated by his raising more than $6 million within the first 24 hours following the announcement of his candidacy.  In comparison, Bernie Sanders raised $5.9 million in the first day. Other announced candidates raised far less. 

The college-admissions cheating scandal captivated the attention of America this past week. The public reaction has been so strong, I think, because while we acknowledge that the wealthiest among us have inherent economic and social advantages that makes the road to success and achievement easier, for these rich and famous parents to blatantly and illegally rig the system further in their favor, at the expense of other well-deserving young people, leaves a very sour taste in our mouths.

There was a second airplane crash involving the new, fuel-efficient Boeing 737 Max 8 jet when an Ethiopian Airlines flight bound for Kenya went down with 157 people on board. The similarities between this accident and the previous one involving a Lion Air (Indonesia) flight suggest that defects in an automated, anti-stall system that pushes the nose of the aircraft downward to help it recover from a stall could be responsible.  Consequently, all 350 of the Boeing aircraft in operation globally have been grounded, including the 75 in service in the United States.

Boeing’s market value declined by more than $26 billion last week.  The 737 Max planes are Boeing’s most important product, with more than 4,600 planes on order, representing $550 billion in sales. While Lion Air cancelled a $20 billion order after their crash, analysts do not believe that Boeing will face wide-spread order cancellations because competitor Airbus also has an extensive backorder for its similar plane, the A320neo. Hence, timelines for delivery for airlines that cancel their Boeing orders could be too lengthy. The potentially disturbing ancillary issue that is starting to be investigated is the relationship between the FAA and Boeing that permitted the Boeing 737 Max aircraft to be certified for regulatory compliance in the first place.

For the week ending March 15th, the S&P 500 finished at 2,822, the Dow Jones Industrials at 25,489, and the NASDAQ Composite Index at 7,689.  The yield on the ten-year Treasury Note was lower at 2.59%.  U.S. crude oil increased slightly to $58.51 per barrel, N.Y. gold cost $1,304.00 per ounce, and one Euro was worth $1.13.

We are finally seeing hints of Spring warmth here in southern New England, and hope that you are, too, in your neck of the woods.
Ted Reagle
Financial Advisor

News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including The Economist, Bloomberg, The New York Times, The Wall Street Journal, CNBC, BBC, and Barron’s.  If you have questions, please call us 203.458.5220 or reply to this email.