Don’t worry, it’s the Netherlands

361 Capital Market Commentary | April 8, 2019

Windmills don’t cause cancer. But for many farmers and industrial workers, waiting for the Chinese, North American, European and Japanese trade deals has increased stress, depression and unhealthy living that will increase the incidence of cancer in these industries. While there have been many promises by the White House about progress on global trade agreements, American workers are still without one signing agreement. But rest assured that there will be another positive statement out tomorrow.

While U.S. sales continue to be lost, U.S. Gross Domestic Product is about to take another hit from the delay in Boeing’s 737 Max production change. The company was supposed to ramp production 20% this year but on Friday the company flipped a 180 to slow production by 20% so that they could give customers assurances that there would be no more accidental crashes. This 40% swing in production will impact hundreds of suppliers and tens of thousands of aviation employees. It will also keep the White House from hitting its lofty 4% GDP goal this year. (A number starting with a ‘2’ is a much better guesstimate.)

Along with your ‘Game of Thrones’ final season, corporate earnings are also coming this week. The first quarter reports will be a mess because of the trade wars, the Government shutdown and the brutal weather, so the focus will be on the 2nd half of 2019 and the outlooks into 2020. Sales will be lighter than expected while the focus will be on margins and cost pressures. Hopefully lots of share repurchases at January prices will help many bottom lines. So strap into your Iron Throne and check the volume on your earnings call phone speaker. One more thing, the battle for the throne on Pennsylvania Avenue begins in less than 10 months as the Iowa caucus and New Hampshire primary hit in February.

Because you were wondering, the Netherlands does not lead the world in cancer per population…

 

Cancer per Population(WorldCancerResearchFund)

The pullback in Wage growth on Friday gave the Fed room to enjoy its more dovish stance…

 

US Average Hourly Earnings

And it didn’t take long for the puppet master to send his signals to the Fed…

 

Trump calls for Fed to adopt quantitative easing after jobs report

(MarketWatch)

Listen, the Fed is going to repeat itself. Let’s hope that history does not follow…

 

Appendix I: The Fed policy mistake of 1966-1968

• The Fed tightened throughout 1966 due to rising core inflation and falling unemployment
• The stock market fell by 21% through Oct ‘66 and was still down 13% in Dec ‘66
• Fed paused tightening and cut rates in Mar 1967, in part due to its underestimation of NAIRU (noninflationary rate of unemployment)
• Deficits rose due to Vietnam War, unemployment kept falling and inflation remained at 3.5%
• Fed reversed course again, tightening in Nov ’67 and hiking the Funds rate to 6.1% by May 1968
• This marked the beginning of a terrible decade for the Fed during which it lost control over inflation

(EYE ON THE MARKET / MICHAEL CEMBALEST / J.P. MORGAN)

Federal funds effective rate

Share repurchases have added 260bp to earnings growth the last 4 years. But if the Government bans repos the bigger effect will be felt on the largest buyer of stocks leaving the market.

 

Reduce demand for shares: Without company buybacks, demand for shares would fall dramatically. Repurchases have consistently been the largest source of US equity demand. Since 2010, corporate demand for shares has far exceeded demand from all other investor categories combined. Net buybacks for all US equities averaged $420 billion annually during the past nine years. In contrast, during this period, average annual equity demand from households, mutual funds, pension funds, and foreign investors was less than $10 billion for each category – despite the fact these categories collectively own 83% of corporate equities.

Buybacks represented the largest source of equity demand in 2018 (Exhibit 4). According to the Federal Reserve’s most recent Financial Accounts quarterly report, corporate demand for stocks, measured as gross repurchases minus share issuance plus M&A, totaled $509 billion last year. Households were the only other net buyer of stocks (+$191 billion). Pensions, mutual funds, and foreign investors sold $243 billion, $124 billion, and $94 billion of equities in 2018, respectively.

(Goldman Sachs)

Corporations are the largest source of equity demand


Corporate buybacks helped rescue the stock market from oversold in Q4…

 

SP 500 50 Day Moving Avg Spread
(@bespokeinvest)

A quick valuation check shows that we are back above the 25-year average forward P/E multiple…

 

SP 500 Index Forward PE Ratio
(JPMorgan)

Here come the Q1 earnings reports…

 

The trickle begins this week. Then a full fire hose of reports in two and three weeks.

Earning Release 04-08-19
(@eWhispers)

For the week, risk was bought perfectly across the board with only Gold and Govt Bonds losing money…

 

Returns 04-05-19
(4/5/2019)


Wow. The appetite for Junk Bonds continues its recovery…

 

Bloomberg Barclays US Corporate High Yield To Worst

And here comes China’s stock market…

 

Chinas Shanghai Composite

Just as China’s upward turn in Manufacturing PMI helps all of the Emerging Markets to overtake the Developed Markets…

 

Manufacturing PMI - EM v DM

Among sectors, risk was also perfectly bought last week with only Staples and Utilities underperforming…

 

Sector 04-15-19
(4/5/2019)

Interesting that credit card companies have raised rates so sharply…

 

Part of it is due to the increase in short-term funding costs. But, I would bet that the companies are also using price to raise their credit risk targets.

Commercial bank interest rate: credit cards, accounts assessed interest

In the other direction, mortgage rates are falling which is helping housing to its strongest start in 9 years…

 

MBA Purchase Index NSA

If only San Francisco would take a page from the Tokyo housing playbook, they might be able to save their city…

 

In the past two decades, home prices in some leading North American and European cities have skyrocketed. In Tokyo, however, they’ve flatlined.So why no affordable-housing crisis in Japan? A big factor, experts say, is the country’s relatively deregulated housing policies, which have allowed housing supply to keep up with demand in the 21st century.

With no rent controls and fewer restrictions on height and density, Tokyo appears to be a city where the market is under control—where supply is keeping home prices from rising as drastically as they have in many other major world cities.

“A reason why housing prices in Japan are not rising as fast as in New York, for example, is the large number of housing starts,” says Masahiro Kobayashi, a director general at the Japan Housing Finance Agency, a state-run entity which supports the housing market by purchasing home loans.

Over the past decade, Japan has consistently built almost 1 million new homes and apartments each year, according to official statistics. In the U.S., where the population is more than double Japan’s, 1.25 million new homes were built in 2018.

(WSJ)

Japan Home Prices

The Piper Jaffray teenager survey is always a good read…

 

Teenagers on average are spending $2,600 annually on food and clothes, favoring retailers Lululemon, Ulta, Amazon and Vans, along with fast-food chains like Chick-fil-A and Chipotle, according to a new survey.Piper Jaffray asked 8,000 teens, with the average age 16, across the U.S. where they were spending money; 54% of respondents were male and 46% were female…

Overall, the favorite apparel brand among teens remains Nike, followed by American Eagle, Adidas, Forever 21, Hollister, PacSun, Urban Outfitters, Lululemon, Victoria’s Secret and H&M.

For shoes, VF Corp.-owned Vans took the most market share, or 20 percent, that Piper Jaffray said it’s ever recorded for the brand, which puts it still second to Nike with 41 percent of teens saying Nike is their favorite retailer to shop for sneakers.

(CNBC)

U.S. farmers are now in one of the worst farm economies of this century…

 

Americas troubled farm economy

Your hypocritical future Fed puppet read of the week…

 

Now, which of the many Herman Cain (the inflation hawk) editorials should I put in this space next week?

Why Trump's protectionist ways will hurt the economy
(CNBC)

America’s hottest black market is about to collapse…

 

You know that there have been many Benjamins trading hands at the loading docks of Whole Foods Markets trying to acquire this contraband. Financial tip for U.S. farmers, plant more oats. It is a great rotational crop and you can make some bonus coin as milk production ramps.

Shortages of oat milk at U.S. coffee shops may soon be a thing of the past.Oatly Inc. expects to begin operations at a new plant in Millville, New Jersey, later this month, according to Sara Fletcher, a spokeswoman for the Malmo, Sweden-based company. The factory will increase volume as much as tenfold.

The dairy alternative has seen shortages in the past year as baristas adopted it in upscale coffee shops, some of which couldn’t get a hold of products for weeks while others were on waiting lists. Last month, Starbucks Corp. began selling Elmhurst barista edition oat milk in five of its U.S. cafes.

(Bloomberg)

Oat Milk

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