DIASTOLE ECONOMIC AND MARKET COMMENT
December 30, 2019

Happy Almost New Year!

Markets hit new highs last week, but just barely.  However, the Nasdaq Composite Index rose above 9,000 for the first time - a significant break point.  Good news about the holiday shopping season (people spent a lot) contributed to equity performance, along with the idea that a “phase one” trade deal with China has been reached.  (Details to follow, apparently.)  Ongoing low interest rates continue to help corporations, as do the tax breaks they first received two years ago.

The bottom 25% of American earners’ salaries grew by 4.5% over the past year, while salaries for the top 25% of earners grew by 2.9%.  This is a sign that our full employment is finally having an effect, and that workers are harder to find and have to be paid more to lure them to new jobs.  Can inflation be far behind?

British Prime Minister Boris Johnson has finally succeeded in pushing his agenda through Parliament.  Brexit must now be completed by the end of January, with all transitional negotiations finished by the end of 2020.  The quick turnaround may involve a “no deal” Brexit.  (Details to follow, apparently.)  The House of Lords will soon weigh in on the issue.

Retail sales on Super Saturday, the Saturday before Christmas, were the highest ever for one day: $34.4 billion. Despite the big shopping (and shipping) season, FedEx reported a 39% reduction in quarterly income.  How can this be?  Well, Amazon is blackballing FedEx among its third-party vendors, who cannot afford to incur the ire of Amazon and are therefore using other shippers.  FedEx stock has fallen over 7%, and the company says it faces “significant challenges and changes”.

The United Nations usually revises its global population forecasts higher, but is now bucking that trend and announcing that global population growth will be slower than previously predicted.  Birth rates are falling in many developing countries, and are below replacement rate in some western nations.  Most people in the world are living longer, but the opioid epidemic is hitting hard in the United States.  The chance of a 15-year-old boy dying by the age of 50 is higher in America than in Bangladesh.

Boeing, under intense scrutiny for the procedures that allowed its 737 Max jetliner to ship with software problems, has stopped production of the plane.  Orders have fallen, and Boeing has a backlog.  There are currently no estimates of when the jet will fly again and if or when it will go back into production.  Meanwhile, Boeing’s Starliner spacecraft was sent on a mission to the International Space Station but failed to rendezvous and dock because of a timing error.  The craft returned safely to earth.  Boeing stock has fallen by more than 25% since March, although it remains above its year-end 2018 level.  CEO Dennis Mullenburg has been fired.

Tesla borrowed $1.3 billion from Chinese banks in order to build its new Shanghai factory (which cost $2 billion).  The plant was up and running in one year, and has just produced its first Model 3 electric cars for the domestic Chinese market.  By building in China, Tesla avoids automobile tariffs.  The stock is trading at record highs.

Speaking of cars, American borrowers now hold $1.3 trillion in auto-related debt.  Just ten years ago, that figure was $740 million.  Does everyone have five cars?  (Full disclosure, I own one car plus a 2001 pickup truck that I no longer drive because mice live in it.  So, really, it’s a 2001 mouse habitat.)

In desultory news, Bill Gates was one lucky Reddit user’s Secret Santa.  He sent 81 pounds of valuable and personal gifts.  My question: what is Reddit?

According to Forbes, eight-year-old Ryan Kaji is the highest-paid YouTube star of 2019.  Kaji made $26 million by evaluating toys on camera.

Virgin Atlantic is upgrading the seat of the oldest passenger on each of its flights between Christmas Eve and New Year’s Day.  Sorry, I have to hurry to the airport now.

For the week ending December 27th, the Standard & Poor’s 500 finished at 3,240, the Dow Jones Industrials at 28,645, and the Nasdaq at 9,006.  The yield on the ten-year Treasury Note closed at 1.89%.  U.S. crude oil cost $61.72 per barrel, N.Y. gold cost $1,513.80 per ounce, and one Euro was worth $1.1174.

Elizabeth E. Cook
Partner

News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including Business Insider, The New York Times, The Wall Street Journal, Barron’s, Bloomberg, The Economist, Reuters and The Associated Press.  If you have any questions, please call us at 203.458.5220 or reply to this email.  See you next year!
DIASTOLE ECONOMIC AND MARKET COMMENT
January 6, 2020

So much has happened that it’s hard to believe that 2020 is only six days old.  U.S. air strikes in Iraq targeted and killed Iran’s military leader Qassam Soleimani, considered Iran’s second-most-important public figure, after the Supreme Leader Ali Khamenei.  Iran has responded by threatening U.S. interests and vowing to disregard all of the measures agreed to in the JCPOA Iran nuclear deal (from which the U.S. has withdrawn, but which our allies are trying to keep in force).  Iraq has passed a ceremonial measure ordering all U.S. troops to leave that country.  The President has announced that he will respond to counterattacks with military force and sanctions.

So - what has this geopolitical-military uncertainty done to our markets?  Because Iran and Oman control the Strait of Hormuz, through which about one third of the world’s seaborne oil is shipped, oil supplies are in danger of Iranian meddling, and the price of oil is rising.  Companies that use a lot of oil, like airlines, are falling, while oil companies’ shares, which are poised to profit, are up.  Always pragmatic, the markets are also seeing a rise in defense industries’ stocks.

Individual investors are not always pragmatic, and so we watched markets in general slide on Friday, as equities were sold and money moved to “safe” assets like gold (at its highest price since 2013) and government bonds.  As more people buy bonds, prices rise, and yields fall.

A couple of other big stories that slid onto the back burner are our “phase one” trade deal with China, and the impeachment of the President.  We don’t know what the details of phase one are, but apparently it will be signed on January 15th, after which, according to the White House, phase-two talks will begin.  And Speaker of the House Nancy Pelosi is still holding on to the House’s articles of impeachment while trying to influence the Senate on the particulars of the trial to come there.  Majority leader McConnell has said he will not start a trial until he receives the articles.

Manufacturing levels in the U.S. weakened in December, falling to the lowest levels since the Great Recession.  Analysts are blaming the various trade wars, as well as the strong dollar, which makes our exports more expensive to buyers in other countries.  Britain’s manufacturing confidence index also dropped, to its lowest level since 2012.

In other news, Daimler has announced the recall of about 750,000 Mercedes-Benzes built from 2001 to 2011, because their sunroofs have a defect that may cause them to detach and fly off.  So - if you are DRIVING the Mercedes, no problem, but if you are following one, WATCH OUT!

Boeing has identified an additional problem with its grounded 737 Max jets. Apparently there are two bundles of wiring, somewhere on the plane, that are close enough together that they might short out.  The FAA has called this situation potentially “catastrophic”, while Boeing spokesman Gordon Johndroe has said, “It would be premature to speculate as to whether this analysis will lead to any design changes.”  Would it also be premature to speculate as to whether any potential passenger, ever, will be willing to fly in this plane?

In a related story, Airbus delivered 863 planes to buyers in 2019, more than twice as many as Boeing.

Tesla built and delivered a record number of vehicles in the fourth quarter.  For the whole of 2019, Tesla built 367,500 cars, up 50% from 2018.  And Ford announced that it has already sold out (in pre-orders) its new electric Mustang, which is due to debut  this summer.  The style of the Mustang Mach E is based on the classic 1960s Mustang.

According to the Center for Public Integrity, a nonpartisan, nonprofit news organization, since massive corporate tax cuts were passed in 2017, twice as many large companies are now paying zero taxes.  But the budget deficit has soared, and tax revenues have been “anemic”.

The former head of Nissan, Carlos Ghosn, who faces charges for financial crimes in Japan, has escaped that country and turned up in Lebanon, where he has one of three citizenships (the others are France and Brazil).  He was apparently smuggled out of the Japan in a large empty musical instrument or amplifier case which had holes drilled in it.  The case was too large to run through a baggage scanner, and was loaded directly onto a private jet.  There was a plane change or refueling in Istanbul before Ghosn reached his final destination.  Lebanon does not extradite its citizens.  One factor that may have influenced Ghosn’s decision to flee: Japan has a 99% conviction rate in criminal trials.

Greta Thunberg turns 17 today.  She began her activism 18 months ago, and has changed the worldwide conversation on climate change.  Happy Birthday!

For the week ending January 3rd, the Standard & Poor’s 500 finished at 3,234, the Dow Jones Industrials at 28,634, and the Nasdaq Composite Index at 9,020.  The yield on the ten-year Treasury Note closed at 1.79%.  U.S. crude oil cost $63.05 per barrel, N.Y. gold cost $1,549.20 per ounce, and one Euro was worth $1.1160.

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,  Bloomberg, Business Insider, Barron’s, The Washington Post, The Economist, Reuters, and The Associated Press.  If you have questions, please call us at 203.458.5220 or reply to this email.  Today is Twelfth Night, or Epiphany, the day that marks the anniversary of the three wise men’s arrival in Bethlehem.  For Christians, this is known as the Day When the Tree Must Come Down.  Unless you are Queen Elizabeth II, who keeps her Christmas decorations up until the anniversary of her father’s death in February, to honor him.
DIASTOLE ECONOMIC AND MARKET COMMENT
January 13, 2020
 
Geopolitical news continued to dominate the markets for the first half of last week, but investors turned to other sources by Thursday.
 
The tragic shooting down of the Ukrainian airliner in Iran, resulting in the deaths of all aboard, was bad news for beleaguered Boeing (while Iranian officials blamed mechanical problems) and then bad news for Iran as it finally admitted what Canadian Prime Minister Trudeau had already declared - that Iran had shot down the plane in a horrible mistake.  Protests in the streets of Tehran changed from anti-American to anti-Ayatollah.
 
The conflict between Iran and the U.S. also caused oil prices to rise sharply.  Would oil production or oil shipping be curtailed?  But Iran is still under sanctions, and as international pressure seemed to ratchet down, markets rose to new highs on Thursday.
 
On Friday, the monthly jobs report was issued from the Department of Labor, indicating that 145,000 net new jobs were created in December (fewer than anticipated).  Jobs numbers from October and November were revised downward.  Markets slid.  As we near full employment, there are only so many new jobs we can squeeze out of the economy; right now there are more jobs than job-seekers.  The unemployment rate stayed steady at 3.5%.  Manufacturing jobs actually decreased during December, following a trend that is unlikely to reverse soon.  Manufacturing jobs are still leaving the country, and humans are still being replaced by robots.
 
Wages rose by just 0.1% in December, 2.9% higher than in December of 2018.  This is after ten years of job growth.  And for the first time in a decade, women held more jobs than men in the U.S.
 
The U.S. and China are scheduled to sign a phase-one trade agreement this week, although the details of the agreement have only been hinted at.  China is expected to agree to buy more American agricultural goods and steal less intellectual property (probably not phrased quite that way).  The U.S. is expected to hold off on new tariffs and possibly roll back some existing tariffs.  The White House has announced that talks will continue toward a phase-two agreement.
 
Facebook announced that it would make no changes in its policies about political advertising.  It will not police ads for truthfulness, and it will continue to allow political advertisers to micro-target small slices of the electorate.  So if you are a Russian troll wanting to contact just rust-belt workers who recently lost their jobs with lies about political candidates, well, DA, go ahead!
 
And speaking of the rust belt, recent studies have shown that opioid deaths are 85% higher in counties where an automobile manufacturing plant has closed, versus counties that still have an operating factory.
 
And speaking further of automobiles, Subaru is recalling almost 500,000 vehicles because the originally installed (and dangerous) Takata airbags were repaired with defective Takata parts.  Ouch.
 
And in our final, I promise, car story, Tesla stock is zooming upward as investors celebrate the success of Tesla’s record fourth quarter deliveries and its new Chinese factory.  Tesla’s market capitalization (number of outstanding shares times the current price per share) now hovers above $85 billion - greater than that of General Motors and Ford combined.  Elon Musk (FYI, father of five boys with his first wife and now expecting his sixth child) has never taken a paycheck from Tesla (he owns about $30 billion worth of its stock).  But if Tesla market cap rises above $100 billion, Musk is due to receive salary, bonuses, and additional shares that might push his personal net worth above that of Jeff Bezos.
 
The House of Commons voted in favor of Boris Johnson’s Brexit deal last week, which requires Britain to leave the European Union by the end of this month.  Prime Minister Johnson will have all of 2020 to sort out the trade issues that remain.  Interestingly, Johnson’s Brexit deal is not much different from the one that former Prime Minister Theresa May proposed again and again but could not get passed.
 
Publicly traded company Pier 1 is planning to close nearly half its stores in the face of falling sales.  Pier 1 has drafted a bankruptcy plan which was presented to creditors last month.  Borden Dairy (hi, Elsie the Cow!) has just filed for bankruptcy protection, from which it is expected to return, leaner and smaller.  Dean Foods, the country’s largest milk producer filed for bankruptcy in November.  Demand for milk and milk products is falling in the U.S. as alternates are available and more consumers go vegan.  But that doesn’t explain the fall in demand for scented candles and holiday tchotchkes!
 
Japan, which is hoping to get Carlos Ghosn (recently escaped former Nissan CEO) to return and face charges of financial misconduct, has issued an arrest warrant for his wife Carole Ghosn - probably in the hopes of using her as leverage.  She is not currently in Japan, but may be in a country with an extradition treaty.  Carlos is in Lebanon which will not extradite a citizen, which he is.
 
For the week ending January 10th, the Standard & Poor’s 500 finished at 3,265, the Dow Jones Industrials at 28,823, and the Nasdaq Composite Index at 9,178.  The yield on the ten-year Treasury Note closed at 1.82%.  U.S. crude oil cost $59.04 per barrel, N.Y. gold cost $1,557.50 per ounce, and one Euro was worth $1.1121.
 
Elizabeth E. Cook
Partner
 
News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including Business Insider, The New York Times, The Wall Street Journal, Bloomberg, Barron’s, CNBC, Reuters, and the Associated Press.  Our hearts go out to the people and animals suffering in Australian fires, and the people of Puerto Rico who are still experiencing life-threatening earthquakes, and of course the families of the victims of the downed UIA flight PS752.  So much tragic news.
DIASTOLE ECONOMIC AND MARKET COMMENT
January 21, 2020
 
What is a government that is now running annual deficits in excess of one trillion dollars to do? Borrow more money, of course. When the government sells Treasury bills, bonds, and notes (the different names are for different durations), the government is giving a promise to repay to the buyer, while the buyer gives cash to the government. The government needs the cash to help cover its budget shortfall and accumulating debt, and the bond buyer wants the safe income that Treasury instruments provide.
 
So - everybody is happy, right? Well… a government that needs to keep borrowing money will be adding to its overall debt every year, and will need to sell even more bonds. What if there are not enough buyers? The government can do a couple of things: it can pay a higher yield, hoping to attract new buyers/lenders. This just exacerbates the problem of paying back the bond buyers on time as the debt service (the amount of interest the government must pay to keep current on its debts) increases.
 
Another thing the government can do is what it just announced it WILL do, which is sell a new kind of debt, in this case 20-year bonds. Not since 1986 has the Treasury sold a 20-year bond. It was already selling bills (short term), notes (medium term, like the ten-year) and bonds (thirty-year). The Treasury wants to sell lots of long-term bonds at low rates, while buyers either want long-term bonds with high yields or short-term bonds (why lock up your money for a long time with a meager yield?).
 
The Treasury has also toyed with the idea of ultra-long bonds - like 50- and 100-year, but at current interest rates, who would buy them? Thus enters the 20-year bond into the equation. Will it attract buyers/lenders who would rather not purchase a 30-year? Will it attract buyers/lenders by paying a small amount more than the ten-year? We will see.
 
(One caveat here. Bond yields are actually set at auction. So the effective yield on a bond is an agreement between the Treasury (seller) about how much interest it will pay, and the buyer about how much interest she will accept. It is a little complicated; think orderly haggling.)
 
I know - TMI. And usually we discuss stocks, which are a little sexier. Sorry!
 
Net income for the stocks in the Standard & Poor’s 500 has fallen, year over year, for the past four quarters, while earnings per share (EPS) grew about 0.6% for all of last year, and were actually down in the fourth quarter. EPS grew by 23% in 2018, mostly due to the corporate tax cut enacted at the end of 2017. Corporations took their tax savings and bought their own shares, reducing the number of outstanding shares and raising their EPS.
 
So why did stocks perform so well last year? It certainly wasn’t because of earnings growth. Still, the S&P 500 rose about 29% in 2019. Of the stocks in the index, Apple and Microsoft were the highest flyers, rising 85% and 54% - more than the next eight index contributors combined.
 
Some analysts think the stock market moved primarily on optimistic sentiment. First the President imposed tariffs on China, starting a trade war, but later ratcheted it back by indicating that he had a “phase-one” deal. He took us out of the JCPOA Iran deal, killed Iran’s second-in-command, but then walked it back after Iran retaliated. Each time, the market ran higher. Is it possible to create problems, announce that they are solved, and push markets upward in relief?
 
2020 may be a tougher sell. Many analysts are calling for stock market growth of about 5% this year, and many are predicting a shift from growth stocks (higher price-earning multiples and often tech) to value stocks (lower P/Es, higher dividends, and slower growing). Your asset allocation should include both sectors.
 
Bank stocks deserve some special attention. The big banks (JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley) saved about $18 billion on taxes in 2019, after saving $14 billion in 2018. This money was meant to “trickle-down” to regular folks, but in fact the banks cut jobs, slowed their increase in lending, and raised dividends. The effective tax rate of these banks before the tax cut was about 30%. In 2019, they paid 18%.
 
I know, enough, your eyes are burning! So here’s some good news: housing starts in December reached a 13-year high. That is the result of low mortgage rates and warm weather, and is a strong sign of confidence in the economy. Also in December, retail sales rose by 0.3%, the third monthly increase in a row. Retail sales for all of 2019 were higher by 5.8%.
 
In a rare bipartisan agreement, the House and Senate have approved the U.S.-Mexico-Canada Agreement (USMCA) trade deal that replaces NAFTA. The President is expected to sign the deal. Mexico has already approved, and Canada is expected to.
 
Roger Federer will shortly become the first tennis-player billionaire. He has won a record 20 Grand Slam singles titles, but his wealth comes from lucrative endorsement deals with Rolex, Mercedes, and Uniqlo, among others. Federer’s current ranking is third in the world, after Rafael Nadal and Novak Djokovic. He is 38 years old.
 
For the week ending January 17th, the S&P 500 closed at 3,329, the Dow Jones Industrials at 29,348, and the Nasdaq Composite Index at 9,388 - all record highs. The yield on the ten-year Treasury Note finished at 1.83%. U.S. crude oil cost $58.54 per barrel, N.Y. gold cost $1,558.80 per ounce, and one Euro was worth $1.1091.
 
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, Business Insider, Barron’s, Bloomberg, The Economist, CNBC, Reuters, and The Associated Press. If you have questions, please call us at 203.458.5220 or reply to this email. Did you know that the average human body temperature is no longer 98.6 degrees, as was first determined in 1869? It is now 97.5, and we are taller, fatter, and live longer. I have a million theories, none of them scientific, for instance, has central heat spoiled us?