DIASTOLE ECONOMIC AND MARKET COMMENT
October 22, 2018

Last week the stock markets jumped around enthusiastically and then finished just about where they started.  Kind of like when I walk on my treadmill, going up and down imaginary hills but ending up still inside my spare room.  Well, maybe not exactly like that.  Bond prices fell, forcing yields higher (bond yields and bond prices move in opposite directions), which may further entice shareholders out of stocks and into bonds.

In the Federal Reserve Board minutes that were released last week, the Federal Open Market Committee (FOMC) discussed the strong likelihood of its raising interest rates again in December as well as three times next year.  The FOMC is not trying to lead interest rates higher, but to reflect interest rates that are rising anyway.  For the first eight years during and after the Great Recession, the FOMC carefully cut rates, encouraging people to buy stocks, and helping the stock markets to recover.  Without the ammunition of lower rates, how much longer can markets rise?

The markets are also responding to the ongoing trade wars, especially with China.  The government of China is supporting its stock markets, which have fallen of late, also due to the trade war.  And the Chinese yuan is trading at a 21-month low, which makes Chinese goods more attractive to American buyers, and helps, at least in part, to overcome the added cost of the tariffs that we have imposed on Chinese imports.

Home sales fell for the sixth month in a row, largely because of high house prices and higher interest rates.  Because most people buy homes based on what they can afford to pay monthly, this has caused first a correction in luxury homes, and now falling prices in formerly-affordable homes.  In addition, the tax bill that passed last December limited the amount of home-mortgage interest and property taxes that could be deducted.  Rent, anyone?

That tax bill, which reduced tax revenues to the federal government, therefore increased the federal deficit (how much more money the government spends than it takes in, for the year) by 17% in the fiscal year just ended in September.    It is anticipated that next year’s deficit will approach one trillion dollars.  The federal debt (all the money that the government owes) is now over $21 trillion dollars - which is about $65,000 for each American citizen.  Government debt per person is $90,000 in Japan but about $3700 in Estonia.  U.S. gross domestic product (GDP) is about 19 trillion dollars.

Have you bought your lottery tickets yet?

Recreational marijuana is now legal in all of Canada.  Who benefits, besides hippies and those in chronic pain?  Girl scouts!  Cookie sales are booming!

Walmart announced that it will save $200 million over time by switching from fluorescent light bulbs to LED bulbs.  It will also save $20 million per year by using a different floor wax.  Last year, Walmart saved $27 million by skimpifying its plastic bags and shortening register receipts.  CVS, are you listening?

Boxer Canelo Alvarez signed a five-year 11-fight contract that will pay him at least $365 million, making him the highest-paid athlete of all time.  Given what we now know about concussions and brain damage, would you make this deal?

Marie Antoinette’s jewels will be for sale at Sotheby’s this fall.  The jewels have remained in her family since her death by guillotine in the French Revolution in 1793.  Her husband, the king, died before her, and her sons died in prison, but she had one daughter who survived three years in solitary confinement and eventually recovered the jewels, which had been kept safe by her cousin, the Austrian Emperor.  The collection is currently on display (for the first time ever) in New York, before traveling to London, Singapore, and Taipei.  The auction is scheduled for November 14th and is expected to raise millions.  Have you bought your lottery tickets yet?

Tesla is now selling a $45,000 version of its Model 3 sedan.  It is less powerful and has a shorter battery range than the full-priced version (whose base price is $65,000), but federal- and state-tax rebates will help bring the cost down even further.  Shares of Tesla fell on the news of its availability.

Traditional communication between Earth and satellites has always been by radio.  But the airwaves are crowded.  Scientists are now researching lasers for communication, because they can apparently transmit more data than radio waves.  Do not ask me for an explanation of the science.  One problem with lasers is that they are foiled by the water droplets in clouds.  But recent experiments have shown that a high-intensity low-energy beam can cut through clouds, clearing a path for data-bearing lasers to pass through undisturbed.  Sounds like light sabers to me.

Amazon received a patent last week for new technology to be used with its Alexa system.  The new features will allow Alexa to respond emotionally to users’ signals.  Are you coughing?  Alexa will ask you if she should order cough drops.  Are you crying?  Alexa may ask what’s wrong.  Is this creepy?  Alexa says no, not at all.

You already know that Elon Musk’s SpaceX and Jeff Bezos’s Blue Origin are planning to build rockets to colonize space.  But Mark Cuban’s Relativity Space is thinking one step ahead.  It is designing 3-D printers to work in zero- and low-gravity to help space colonists build whatever they want - like houses and greenhouses and whatever else Matt Damon needs on Mars.  Maybe a rocket in which to fly home?

For the week ending October 19th, the Standard & Poor’s 500 finished at 2,767, the Dow Jones Industrials at 25,444, and the Nasdaq Composite Index at 7,449.  The yield on the ten-year Treasury Note ended higher at 3.2%.  Crude oil was lower at $69.12, while gold cost $1,225.30.  One Euro was worth $1.1506.

Elizabeth E. Cook
Partner

News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including the Associated Press, Reuters, businessinsider.com, Bloomberg, Barron’s, The Economist, The New York Times, The Wall Street Journal, and CNBC.  If you have any questions, please call us at 203.458.5220 or reply to this email.  Thank you for your time and attention.
DIASTOLE ECONOMIC AND MARKET COMMENT
October 29, 2018

The markets had a rough time last week, with strong volatility both up and down.  For the week in total, the U.S. markets dropped by 3-4%.  But it’s important to put that in context.  Markets are still up almost 300% in the current bull market, which began after the Great Recession.  Stocks need to test their prices - in other words, sometimes they must sell-off until buyers enter the market, so that investors know where “support” is.  When there aren’t enough buyers, stocks go on sale!

It is also important to remember that the trend of stock prices is ever upward, even though short-term results may be poor.  That’s why we so strongly discourage selling in a rocky market.  Those prices WILL recover, and if you leave the market, will you have the courage to get back in?

Factors causing investor nervousness these days include rising interest rates, rising federal deficits and debt, and geopolitical uncertainty (Brexit, tariffs, trade wars, slowing global economies).  One factor directly affecting stock prices is the blackout period before earnings are reported (during which companies cannot buy back their own stock).  It is a timely reminder that the current phase of our bull market rests substantially on the corporate tax cut from last year, which has funded companies buying their own stock on the open market.  Those tax-cut savings have not been used to increase wages, but to increase stock prices.

Companies reporting earnings for the third quarter last week include several manufacturing firms, whose complaints about tariff-induced headwinds caused Wednesday’s market tumble, and tech stocks like Amazon and Alphabet (parent company of Google), whose good-but-not-good-enough reports caused Friday’s decline.

Last year was a stellar one in the markets, and they can’t all be that good.  The Standard and Poor’s 500 rose by almost 22% in 2017.  If markets remain flat this year, the average of the two years will still be above average.  Right?

The first print of third quarter GDP was released at 3.5% (annualized, versus the same period last year).  This figure will be revised at least twice more in coming weeks/months.  Second quarter GDP now stands at 4.2% (annualized growth rate).  The Federal Reserve Board is predicting that GDP growth will slow in the rest of this year and years to come.  The Fed expects 2019 GDP to be 2.5%, 2020 GDP to be 2.0%, and 2021 GDP to be 1.8%.  The main drag on the economy moving forward is rising interest rates fueled by the increasing federal debt.  (As the government needs to sell more bonds to fund our budget deficits, we must increase the yields we pay in order to attract more buyers, especially when we are in trade wars with many of our usual investors.)

Speaking of which, India is poised to impose tariffs on $241 million in U.S. imported goods in response to American tariffs on steel and aluminum, and also pressure from the U.S. for India to stop importing Iranian oil.  Affected products will include almonds and apples.

Got a lot of student loan debt?  Enjoy cold beaches?  The state of Maine has a deal for you!  If you move to Maine, the state will let you deduct the cost of repaying your student loans from your state income tax.  If you are a STEM major (science/technology/engineering/math) they may even pay you back the difference if your loan payments exceed your tax owed.  Even if every Mainer college graduate stays and works there, there are still not enough people in the state to fill their available jobs.

The 27 richest people in the world own as much wealth (about $1.4 trillion) as the bottom HALF of the entire global population.  But over the past two years, the gap has stopped widening in many countries, including the U.S., and even shrunk in some places, like Britain and Germany.  Still, income inequality is an enormous problem.  The median family-of-four income here in America is now $59,039.  Jeff Bezos, head of Amazon, makes that much money every 19 seconds.  His workers’ median pay is $28,000 per year.

Now hear this!  We are in the annual enrollment period for Medicare Supplemental plans, which runs from October 15th through December 7th.  All insurance companies which sell “medigap” insurance must use the same letter labels so that plans can be compared.  A is the least expensive and offers the least coverage, while B through N offer various benefits to fill different gaps in your Medicare coverage.  K and L are higher-deductible plans for healthy seniors.

We are also approaching the annual Affordable Care Act enrollment period, which runs from November 1st through December 15th.  Information and contact information on state plans can be accessed through healthcare.gov.

Moving on to more delicious topics….  Have you eaten candy corn yet this year?  You had better get on it, because Halloween is Wednesday.  70% of all candy corn is consumed at Halloween, and the other 30% is consumed in secret after it goes stale.  Like Peeps, but weirdly tooth-shaped.

An exact replica of the Titanic is being built.  Well, maybe there are a couple of improvements being made, like more lifeboats, and a welded, rather than riveted, hull… sonar, radar, stuff like that.  The ship will begin its maiden voyage in Dubai in 2022, and will sail to Southampton, England and then on to New York, following the route of the original Titanic, which sank in the North Atlantic in 1912 after hitting an iceberg.  The new ship will boast the same decor and three classes of travel.  Are you up for steerage?  Or is that down?  Can a Dwayne Johnson movie be far behind?

For the week ending October 26th, the S&P 500 finished at 2,658, the Dow Jones Industrials at 24,688, and the Nasdaq Composite Index at 7,167.  The yield on the ten-year Treasury Note ended the week lower at 3.08%.  Crude oil cost $67.59 per barrel, gold cost $1,232.50 per ounce, and one Euro was worth $1.1407.

Elizabeth E. Cook
Partner

News and information presented here was gathered from sources believed, but not guaranteed, to be accurate, including The Wall Street Journal, The New York Times, Barron’s, Bloomberg, The Economist, businessinsider.com, CNBC, Reuters, and the Associated Press.  If you have questions, please call us at 203.458.5220 or reply to this email.  Thank you for reading!
DIASTOLE ECONOMIC AND MARKET COMMENT
November 5, 2018

Tomorrow is voting day.  Please vote!  Whether you’re wrong or you agree with me, it is perhaps the most important act we can take as citizens to promote democracy.

The stock market was volatile again last week, due to the usual suspects: rising interest rates and trade fears.  There was good news in employment, though, with 250,000 new jobs created in October.  The unemployment rate stayed at 3.7%, and wages were higher by 3.1% versus a year earlier.  For the trailing 12 months, job creation has averaged 210,000 new positions per month.  October was the 97th straight month of job growth.

Stocks were higher by about 2% for the week, but the Standard & Poor’s 500 finished the month down 6.94% - its worst performance since 2011.

And as for trade-war fears, the President tweeted that progress was being made in negotiations with China, and that he hoped to speak with President Xi later this month.  If a trade agreement is not reached, the administration is prepared to add tariffs to everything we import from China that has not been tariffed yet - probably in January.

U.S. imports reached a record high in September, and the U.S. trade deficit with China also attained a historic high.  (For those who care, I no longer use the article “an” before an aspirated “H”, but continue to use it for unaspirated Hs - as in “an heirloom”.)  Our trade gap with China expanded to a record $40.2 billion.  Although it sounds bad, it isn’t.  It is in fact a sign of economic strength that we continue to crave and afford foreign goods.

One of the most important reasons that we expect interest rates to continue upward is not that the Federal Reserve Board has said it will keep hiking rates - because it tracks rate movements in the markets instead of creating them.  No - it is the rising U.S. debt.  The Treasury Department has projected that the federal government will issue $1.34 trillion of new debt in 2018, a 146% jump from 2017.  As the U.S. funds its budget shortages by selling bonds, it must attract new buyers by offering yields high enough to lure investors away from other opportunities.  The biggest drivers of the current annual deficit (the budget shortfall in one year) are the tax law passed last December and the budget agreement passed in February.  The federal debt (as opposed to the annual deficit) is the total amount owed by the government.  Picture all of those annual deficits rolled together.

New sanctions against Iran go into effect today.  The sanctions coincide with the threat of U.S. action against any country that continues to buy Iranian oil.  But eight countries are exempt from this provision: Japan, China, India, Italy, Greece, South Korea, Taiwan, and Turkey.  China is Iran's largest oil customer, followed by India, South Korea, Turkey, and then Italy.  So perhaps this threat is mostly bluster, primarily affecting countries that aren’t big Iranian oil producers anyway.  Still, in Iran, 80% of tax revenue comes from oil.

And while you might expect that a partial shutdown of the Iranian oil spigot would cause oil shortages and price hikes, you would be wrong!  In fact, oil production is so hearty around the world that oil prices are actually falling.

Apple was a big drag on the indices last week, as its stock price fell 7% in the wake of an announcement that iPhone sales were slowing.  The company also declared that it will not announce iPhone sales totals any more.  But it will tell us how it’s doing in its services business, which grew 17% in the most recent quarter.  (Think iCloud.)  Apple also revealed that it has sold more than 44 million iPads, making the iPad the most popular computer in the world.  Total profits for Apple rose 31%.

Last year the birth rate in the U.S. dropped to its lowest level in 30 years.  Now the average number of children that an American woman can expect to have in her lifetime is down to 1.76 - below the rate needed to keep the population stable.  There are social-engineering solutions available to encourage more children: more paid parental leave and publicly-funded daycare, but the solution Japan is exploring to combat its contracting population is greater immigration.  Given that the federal government keeps “borrowing” our Social Security surplus, retirees are dependent on current wage earners to keep benefits coming.  We simply can’t afford to let the population shrink

Didn’t win the lottery?  Maybe it’s time to put on your Indiana Jones hat and go to Zambia.  An emerald that weighed more than two pounds (5,655 carats) was just dug up there.

And speaking of stones, geologists have just discovered a part of the Grand Canyon in Tasmania, Australia.  We didn’t know it was missing!  Studies of the strata of the rock, as reported in the journal Geology, showed that hundreds of millions of years ago Tasmania was part of a mega continent called Rodinia, which included the southwest United States (about 8,000 miles distant, today).  We have a tendency to think that continental drift is something that happened in the past, but in fact it continues.  Slow and steady!

For the week ending November 2nd, the S&P 500 finished at 2,723, the Dow Industrials at 25,270, and the Nasdaq Composite Index at 7,356.  The yield on the ten-year Treasury closed the week at 3.22%.  Crude oil cost $63.14 per barrel, gold cost $1,230.90 per ounce, and one Euro was worth $1.1394, weaker for the week against the dollar.

Remember to vote!

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, Bloomberg, businessinsider.com, 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 time!
DIASTOLE ECONOMIC AND MARKET COMMENT
November 12, 2018 - Veteran’s Day

Veteran’s Day was yesterday, the 11th day of the 11th month, but it is being observed today.  Thank you to all of the veterans who served their countries in the eternal quest for peace and justice, including our fathers and brothers and mothers and sisters and children (my father was in the Navy and the Air Force).  On such a solemn occasion, we remember all who considered it an honor to fight for the highest ideals of humanity.

There was an important mid-term election last week, and leaders on both sides of the aisle claimed victory.  We will see what difference it all makes when the new electees take their seats in January.

The Federal Reserve Open Market Committee (FOMC) met last week, and to no one’s surprise it kept interest rates unchanged.  We expect the next rate hike at the FOMC mid-December meeting.

Fires are burning out of control in California, which has experienced three years in a row of extreme-drought conditions.  So far 31 people have died, and 228 are still missing.  The Northern-California Camp Fire started on Thursday and spread at a rate of 80 football fields per minute, catching people as they tried to escape.  Strong winds and low humidity are making a hard job even harder for firefighters.

It’s tough to pivot to the markets after that news, but we will try.  Volatility continued last week as weak economic data from China pulled technology and internet shares lower.  Oil prices entered a bear market (down 20% in October) as the expected sanctions against Iran affected fewer Iran-oil buyers than expected, and oil stockpiles around the world grew.  Saudi Arabia and Russia met to discuss production goals, and (as expected) Saudi Arabia proposed cutting its oil production while Russia decided to stay full steam ahead.

But despite all the news and market swings, the Dow Jones Industrial Average finished the week up 2.8%.  For the past two weeks, the Dow is up 5.3%, but that follows a loss of 5.1% in October.

Tobacco companies’ stocks fell after the FDA announced that it will pursue a ban on menthol cigarettes, even though it could take a couple of years before a ban is approved and implemented.  Menthol cigarettes are considered a gateway to traditional cigarettes, because they are less harsh for smokers.  At the same time, Juul decided to pull delicious candy-flavored e-cigarettes from stores because they entice teens to smoke.  The attractive flavors will remain available on the internet.  One fifth of high-school students polled had smoked e-cigarettes in the past month.

While Amazon has not made its announcement, it appears that it has chosen not one, but two locations for its second (and third) headquarters.  Betting on HQ2 now favors Crystal City, Virginia (Washington, D.C. area) and Long Island City, New York (across the East River from Manhattan).  25,000 new jobs are expected in each new location.  And Alphabet (parent company of Google) will add 12,000 new jobs in New York City.

Alibaba (the Amazon - but bigger - of China) reported record sales of $30.8 BILLION on Singles Day (November 11th) this year.  Singles Day is a made-up Alibaba holiday when single people are encouraged to console themselves by buying things.  What we call Monday!  It is the biggest online shopping day of the year.

South-East Asia’s largest-ever shopping mall opened last week in Bangkok, Thailand.  It is as big as 105 soccer pitches (which are themselves bigger than football fields).  150,000 shoppers per day are expected to visit the center, which will use more electricity than some of Thailand’s poor provinces.  According to MasterCard, Bangkok was the world’s most visited city last year.

While we rightly worry about the U.S. annual deficit and overall debt (which stands at about 100% of our gross domestic product (GDP), Japan is in even worse shape.  Its government debt has reached 200% of GDP.  Japan faced decades of recession, which it only recently escaped due to government spending and economic stimulus.  The Bank of Japan is keeping interest rates artificially low to help the government make its interest payments (sound familiar?)  The government now forecasts that it will return to budgetary surplus in 2025, although it has pushed back this date several times in the past.  While the long recession had many causes, the most important of them may have been the strong Japanese yen, which depressed exports.

The Department of Agriculture last week lowered its projections for soybean exports by 160 million bushels  to 1.9 billion bushels for the 2018-2019 marketing year.  China, previously the number-one foreign buyer of American soybeans, is now turning to South America and other regions for its soybean supplies.  Soybean farmers are receiving government subsidies totaling about $3.6 billion to reimburse them for trade lost due to retaliatory tariffs.  That means that instead of selling their soybeans to China, farmers are losing market share while they receive a subsidy, which is paid for by sales of U.S. Treasury bonds (including to China).

The British government under Prime Minister Theresa May is now saying a “hard-Brexit” may be necessary (meaning Britain would leave the Eurozone with no agreement for continuing trade deals nor for the free movement of citizens), while a new poll shows that 54% of Britons wish they could stay in the European Union.

Credit Suisse has announced its rankings of the world’s richest countries.  But a lot depends on how you sort the data.  If you consider total wealth divided by the number of adults (average wealth per grown-up), the U.S. ranks third, after Switzerland and Australia.  But if you look at median wealth per adult (meaning the level at which half the people have more and half have less) the U.S. ranks 18th.  It is another sign of growing income-inequality here in America.  Canada, for instance, ranks 7th by the first metric, and 6th by the second.

For the week ending November 9th, the Standard & Poor’s 500 finished at 2,781, the Dow at 25,989, and the Nasdaq Composite Index at 7,406.  The yield on the ten-year Treasury Note was 3.19%.  Crude oil cost $60.19 per barrel, gold cost $1,207.70 per ounce, and one Euro was worth $1.1336.

Elizabeth E. Cook
Partner

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