DIASTOLE ECONOMIC AND MARKET COMMENT
December 26, 2017

Last week, as Hanukkah ended and Christmas loomed, the markets scrabbled to (barely) new highs, seemingly indifferent to the new tax bill that was zooming through Congress.  The president signed it on Friday, and we are all just finding out what’s in it.  Late surprises included the ability of those with 529 plans for their children’s college educations to use the money for elementary or secondary school tuitions instead.  Also there is a complicated provision for real-estate developers to deduct more of their profits and pay less in tax on pass-through income.  The much vaunted $1,000 middle-class tax cut will amount to about $19.23 per family per week in tax savings - or a little less than 10% of their Comcast bill.

At the same time, Congress (multi-tasking!) passed another Continuing Resolution to fund the government for four more weeks, from December 22nd to January 19th.  Wow.  Way to commit.

If you were a millennial, you would be excited about the million new ways you have of connecting to the internet, playing games on the internet, talking to the internet… well, you get the idea.  But it’s only fun until someone puts an eye out.  And the eye-poker is apparently the My Friend Cayla doll.  She listens, she talks!  So cute!  So lovable!  So hackable!  The German Federal Network Agency has judged Cayla to be “an illegal espionage apparatus” and has recommended that parents destroy her.  Her ability to listen and respond is apparently quite vulnerable to hackers who would like to use her microphone, speaker, and camera to interact with little girls to find out where they are, when they’re alone, and then tell them what to do (like be nice to strangers).  The doll is now being internet dis-abled before being put back on the market.  But it’s not just Germany that has this problem.  Here in the States, we have an internet-capable Star Wars ‘droid, an internet-tethered Furby, child-centric smart watches, and innumerable other toys that are vulnerable to hackers.  It is no longer just your Roomba and Alexa that are spying in your home, and it’s no longer just you in whom they’re interested.

Moving from spying to corruption, we have the pitiful case of Saudi Prince al-Waleed bin Talal, a 62-year-old billionaire who has been in detention at the Riyadh Ritz Carlton for months, at the order of Prince Mohammed bin Salman (MBS), the new and dynamic heir to the throne.  The Saudi government is asking for $6 billion in fines (ransom?) from Prince al-Waleed, the charges against whom are vague.  He is countering with an offer of a portion of his business holdings, but no admission of guilt.

In the past thirty years, Arctic sea ice has declined in area by one half, and in volume by three quarters.  It seems that soon there will be no Arctic sea ice at all in the summers.  Environmentalists are growing increasingly concerned that less ice means more shipping, which raises the specter of oil spills destroying fragile Arctic ecosystems.  The U.S. and Canada are attempting to ban heavy fuel oil in the region, but rising temperatures are the real enemy.

Apple finally admitted that it deliberately slows down older iPhones (i.e. the ones that you and I carry), but denies that it is because newer iPhones are available.  In fact, if you ask Apple, they are doing you a favor!  They are helping you conserve battery life as your battery ages!  They are prolonging the life of your phone!  They care about you!?  No doubt you are grateful.  And Verizon has new iPhones in stock.

An interesting analysis of bitcoin by Jordan Rochester from Nomura is that Bitcoin is not yet considered a risk to our financial system, but just might be a risk to the coal market in China.  Huh?  Turns out that China is the largest consumer and producer of coal, AND hosts more than half of the bitcoin mining in the world.  The huge amount of energy required to mine bitcoin is therefore correlated to the Chinese coal market.  A runaway bitcoin could result in greater alternative-energy initiatives, while a faltering bitcoin could cause coal to crash.

Here’s a return to the tax bill to round out the week’s news.  We all know that the corporate tax rate is being cut to 21% and there will be a tax advantage to those companies which repatriate overseas cash.  Congressional supporters of the bill believe that corporations will use their money to hire workers and give raises, but a Bank of America Merrill Lynch survey shows that 65% plan to buy down debt and 46% plan to buy back stock.  Other top uses for the money are mergers & acquisitions, capital expenditures, and dividend payments.  Remember that stock buybacks and dividend payments benefit current shareholders, approximately 40% of whom are foreign nationals.

And in this week’s genius-idea category, Ford Motor Company in Spain has designed a crib that simulates a car ride, to put your baby to sleep.  The crib, which was created for an ad campaign, features engine sounds, a gentle traffic-like movement, and LED lights that imitate traffic signals.  The prototype is being given away in a raffle, but Ford is considering putting the crib into production.

For the week ending December 22nd, the Standard & Poor’s 500 finished at 2,684, the Dow Jones Industrials at 24,782, and the Nasdaq Composite Index at 6,965.  The yield on the ten-year Treasury Note was higher at 2.48%.  Oil cost $58.36 per barrel, gold cost $1,267.20 per ounce, and one Euro was worth $1.1875.

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, businessinsider.com, and Reuters.  If you have any questions, please call us at 203.458.5220 or reply to this email.  Thank you for your attention.
DIASTOLE ECONOMIC AND MARKET COMMENT
January 2, 2018

Happy New Year!

A quick review of last year:

market performance was great!

Moving on.

Retail sales over the holidays were up 4.9% versus the previous year.  That’s the highest rate of growth since 2011.  Online sales alone were higher by 18%.  Black Friday and the Saturday before Christmas (Super Saturday) were the biggest sale days.  At the same time, we are headed into another year of brick-and-mortar store closures, as the internet takes over our lives.

And one way the internet rules us is through listening devices that we voluntarily place in our homes.  On Christmas Day, the number one app download for Android and iPhones was Amazon’s Alexa.  Amazon says that they have sold “tens of millions” of Alexa-enabled devices worldwide.  The point of these devices is that they LISTEN TO YOU and send your messages to data collection centers somewhere in the cloud.  And the messages never ever ever go away.  Which is find if you’re just ordering detergent.  But what if you think you’re having a private conversation?

And in a similar vein, there are about one thousand phone games and other phone apps that carry Alphonso software embedded in them.  What does it do?  So glad you asked!  It listens to you, and to the ambient noise around you - EVEN WHEN YOU’RE NOT PLAYING THE GAME.  Your phone microphone hears the television shows you're watching, and ads you listen to, and correlates what it hears with your purchasing behavior and where you go.  Then it targets ads specifically to you.  And, of course, it collects data on you and sends it to the cloud, and it never ever ever goes away.  Your window for committing serious crimes is closing!

If all of this creeps you out, then concentrate on the good news: recreational marijuana use is now legal in California!  It won’t make you forget, but it will make you care less.  And eat more.  Pizza.  Lots of pizza.  (Recreational marijuana use is also legal in Alaska, Colorado, Maine, Massachusetts, Nevada, Oregon, Washington, and Washington, D.C.)

And you can count your lucky stars that you are not a Bitcoin tycoon.  Of course, it’s sad that you haven’t made billions by speculating on the volatile and un-backed currency, but since a Ukrainian Bitcoin tycoon was just kidnapped off the street and forced to pay a million-dollar plus ransom for his release, we can assume that these kinds of crimes will increase, and we should be grateful that we don’t have Bitcoin targets painted on our backs.

Perhaps instead we should buy lottery tickets.  After all, the Powerball is expected to be worth more than $440 million by Wednesday’s drawing, and the Mega Millions should be worth more than $343 million.  But, if you haven’t been paying attention, you should know that in October Mega Millions changed the number of numbers you can choose to bet on, lowering your odds of winning from 1 in 258.9 million to 1 in 302.6 million.  The Powerball did a similar thing two years ago, lowering the odds of winning from 1 in 175 million to 1 in 292 million.  The chance of winning both games together is one in 88 quadrillion.  Those are loooooooong odds.  Maybe you should save your money to buy that pizza.

With the new tax bill signed into law, the government is now expecting American companies with foreign profits to begin repatriating that money to the U.S.   But foreign countries have something to say about that.  China, for one, has announced a temporary tax exemption for foreign companies in China, hoping to keep their profits in China.  One caveat: the money must be reinvested in the economic sectors that are promoted by the Chinese government.  We will keep an eye on this tug of war.

The new tax law is expected to add from $500 billion to $2 trillion to the U.S. debt, depending on how rosy a scenario you believe.  For comparison, the 2009 stimulus bill, which dragged us out of a depression into a recession, cost $1 trillion. BEFORE that sum is added to our books, our gross government debt equals 108% of our gross domestic product (GDP).  Among developed economies, the U.S. ranks fifth in the world in government debt, per the International Monetary Fund (IMF).  Japan has the most debt (240% of GDP), Greece is second (180%), followed by Italy (133%) and Portugal (125%).

In other tax-related news, a reminder that second-mortgage interest may no longer be deductible beginning in 2018.  Those of you who have home-equity loans should consider rolling them into a first mortgage.  Interest on first mortgages may remain deductible for mortgages under $750,000.  Please check with your accountant.

Other highlights of last week: Apple stock fell on reports that demand for the iPhone X is lower than expected.  Oil rose after an explosion on a crude pipeline in Libya, and then dropped back after repairs were made.  Tesla CEO Elon Musk announced that he will begin building an electric pick-up truck after Tesla gets its Model Y SUV online in 2019 or 2020.

For the investment year ending December 29th, 2017, the Standard & Poor’s 500 was up over 19% at 2,673.  The Dow Jones Industrials rose 25% to 24,719.  The yield on the ten-year Treasury Note was essentially unchanged at 2.4%.  Crude oil rose 12% to close at $60.42 per barrel, and Bitcoin was priced at $14,610.71 - up 1,401% for the year.

Elizabeth E. Cook
Partner

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, Barron’s, businessinsider.com, Reuters, and CNBC.  If you have questions, please call us at 203.458.5220 or reply to this email.  Thank you for your attention.

DIASTOLE ECONOMIC AND MARKET COMMENT
January 8, 2017

I don’t really think we can call it Snowmageddon when it happens every year. 
By definition, it’s not apocalyptic if it is expected.  Nonetheless, it was the biggest thing that happened last week, except for the Dow crossing 25,000 for the first time ever.  That was news.

And, as always, when we hit a milestone, we have to ask ourselves if this seemingly-endless bull market will end.  We do not see market euphoria, in which investors go all in, believing that the market cannot correct (which always signals a correction).  Instead, we see cautious optimism, based on real information.  The global economy is humming along, and the new tax law should benefit corporations.  They will take the extra money and buy back their own shares (which will push values and prices higher), they will retire debt (which will make corporate debt harder to find, pushing prices on bonds higher and yields lower), and they will take advantage of the new deductibility rules to invest in capital expenditures (equipment, especially automation equipment).  So, while we sit at full employment (4.1%), we may not see the wage increases that usually follow.  Machines are replacing workers.

Not everything is in a bull market.  Oil, for instance, is gradually increasing in price, but is nowhere near historic highs.  Two years ago, oil bottomed at $26.21 per barrel, but 9 1/2 years ago it topped out at $145.29.  On Friday it closed at $61.44.  Real estate, which led us into the Great Recession when the sub-prime mortgage bubble burst, is due for a correction in high-tax states, where the new caps on mortgage-interest deductibility and state-and-local tax deductibility will hit especially hard.

Friday January 19th will be the next barely-averted federal government shut-down.  That is the current deadline for Congress to pass a continuing resolution to fund the government.  Pray for no snow on Thursday evening!

In Britain, journalists called last Thursday “Fat Cat Thursday” because it is the day by which bosses at big publicly-traded companies will have earned more in the new year than the typical worker can expect for the whole year.  Last Thursday was January 4th.  It is expected that soon Theresa May’s government will require listed companies to publish the ratios between their highest and lowest paid workers.

For the week ending January 5th, 2018, the Standard & Poor’s 500 finished at 2,743.  The Dow Jones Industrials finished at 25,295, and the Nasdaq Composite Index was at 7,136.  The yield on the ten-year Treasury Note closed at 2.48%.  Gold was worth $1,320.30 per ounce while one Euro cost $1.2041.

Elizabeth E. Cook
Partner

News and information presented here, no matter how boring, 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, and Reuters.  If you have any questions about what you’ve read, please call us at 203.458.5220 or reply to this email.  Thanks for your attention!
DIASTOLE ECONOMIC AND MARKET COMMENT
January 15, 2018

It is fitting, on this anniversary of Dr. Martin Luther King’s birthday, that a discussion of race dominates our conversations.  We hope to arrive at a day when race is irrelevant.  And it may also be not unexpected, in this era of casual mega-weapons, that a false report terrorized more than a million people in Hawaii.  We hope the day will come when ballistic missiles carrying nuclear warheads is a concern of the past only.  May you spend today in peace.

Kind of hard to segue after that, but let me try.  The markets at record highs is only our third most important story of the week.  And we must remember that “the markets” are not the entire economy, and that the economy itself does not treat everyone equally.  Nonetheless, some news….

North and South Korea, sitting down for talks for the first time in two years, have agreed that the North should send a team of athletes (and cheerleaders) to the forthcoming Winter Olympic Games in Seoul.  There is even talk of a joint North/South women’s ice hockey team.  Athletes from all over the world should be relieved that the presence of North Koreans seems to obviate the possibility of any North Korean shenanigans (threats) during the Games.  In addition, a cross-border military hotline was reestablished between the two countries, and military talks are planned.  North and South have been technically at war since 1950.

The South Korean government is making noises about shutting down cryptocurrency exchanges.  Most Bitcoin transactions are completed in Asia, but South Korea is unique in that it doesn’t allow foreigners to trade there.  As a result, Bitcoin buyers in South Korea are paying up to a 30% premium when they buy the currency.  South Korean speculators in all digital currencies are worried now about what value their holdings will retain if the exchanges close.

At the same time, Merrill Lynch has just banned its financial advisers and clients from trading in Bitcoin.  The ban applies firmwide and covers self-directed accounts and fee-based accounts.  The trading ban is for the currency and for derivative products like funds and ETFs.

JPMorgan’s Jamie Dimon is taking back his comment that Bitcoin is a fraud.  He recently said, “I regret [making the statement]….  The blockchain is real.”

And among its other uses (follow a peach from tree to mouth!) blockchain technology is now being used by Kodak to create a rights-management service designed to help photographers get paid for the use of their images.  If you’ve ever accessed Google Images, you know that paying for photographs is currently an honor system (or an I-hate-that-watermark-and-will-look-elsewhere system.)  The blockchain may allow artists to track their work to the end user and demand payment.  This will no doubt show up soon on music sites, since music is being widely pirated and only the most successful artists are getting paid.

Facebook is making changes to its algorithms to emphasize family and friend posts on individual newsfeeds, and de-emphasize news and product placements (Mahabi slippers, anyone?).  This move is problematic in that Facebook is supported by those ads, and by those of us who click on them.  (Are Mahabi slippers really still $100?)  Facebook has two billion users worldwide, and has been a fertile source of business for digital publishers, who may now need to enhance their own sites and advertising.  The move comes among reports that Facebook socially alienates users.  Facebook CEO Mark Zuckerberg said the firm felt a responsibility for people’s “well-being”.  Facebook stock fell over 4% on Friday, but remains up 48% over the past year.

T. Boone Pickens, famous oilman and alternative energy supporter, is closing the energy-based hedge fund he has run for more than 20 years.  The 89-year-old has suffered a series of strokes in the past year, as well as a bad fall.  He says that, at his age, “trading oil is not as intriguing to me as it once was.”

Nonetheless, oil prices continue to creep upward, with U.S. crude worth $64.30 per barrel as of Friday.  Moving these markets are recent pipeline leaks/accidents, which OPEC is in no hurry to fix, as well as unrest in Iran and the threat of new U.S. sanctions on that country.

An American spy satellite, worth billions of dollars, was written off after it failed to separate from the SpaceX rocket carrying it and reach orbit.  Details from SpaceX and spies were scanty.  In additional Elon Musk news, the Tesla Model 3 failed to reach its production goals for 2017.  By a wide, large, gaping margin.  Tesla was supposed to produce 20,000 Model 3s in December, but instead delivered just 1,550 of the cars during the whole fourth quarter.  Production goals for 2018 have been revised downward to 2,500 per week by the end of March, and 5,000 per week by June.

While our current bull market in stocks is more than eight years old, bonds have been enjoying a bull market for more than 30 years.  (Does anyone else remember mortgage rates above 14% in the 1980s?)  As bond yields have fallen, bond prices have risen.  That bullish scenario may be ending.  For one thing, how much lower could yields go?  And for another thing, the Federal Reserve Board has been raising rates, hoping to incite just a little inflation, and it seems to be catching on.  Bill Gross, once the legendary manager of the world’s biggest bond fund (Pimco), and now portfolio manager at Janus Funds, said on Tuesday that the bull market in bonds is already over.  He noted that 25-year trend lines for both five- and ten-year Treasuries had been crossed.

Bloomberg News reported that Chinese authorities were considering slowing or stopping their investments in U.S. Treasury debt, but China denied the news.  Beijing has over $3 trillion in foreign currency reserves, much of it in U.S. Treasury bonds, which are considered safe and liquid.  If China were to actually stop buying our debt, interest rates would have to rise dramatically to entice them back or find substitute buyers.  That would increase the cost to the government (all of us) to service the nation’s debt.

General Motors plans to mass produce self-driving cars that lack steering wheels and pedals by 2019.  The car will be a variation of the all-electric Chevrolet Bolt and is expected to make up a ride-hailing fleet in several large cities.  Soon we will have to choose which is safer: computer drivers or people like us!

For the week ending January 12th, the Standard & Poor’s 500 closed at 2,786, the Dow Jones Industrials at 25,803, and the Nasdaq Composite Index at 7,261.  The yield on the ten-year Treasury was up at 2.55%.  Crude oil cost $64.30 per barrel, gold cost $1,333.40 per ounce, and one Euro was worth $1.2181.

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, Barron’s, The New York Times, The Economist, businessinsider.com, and Reuters.  If you have any questions, please call us at 203.458.5220 or reply to this email.  Thank you so much for your attention.  Please be well.