DIASTOLE ECONOMIC AND MARKET COMMENT
April 29, 2019

Wednesday will be May Day - the day on which we celebrate workers and daisy chains.  In the meantime it is still April, and it might snow near you.  Contrary to my faulty memory, it is NOT the day when the Soviet Union and Eastern Bloc countries traditionally held military parades.  That, apparently, is May 9th, in celebration of Victory Day in World War II.  I didn’t know that.

Other things we can celebrate this week are market highs reached last week.  The Standard & Poor’s 500 closed Friday at a record high, as did the Nasdaq Composite Index.  The Dow Jones Industrial Average was close to one.  On Friday, we learned that first-quarter GDP rose by 3.2%, WAY more than anticipated.  Increased governmental spending on defense is considered the main mover of GDP during the period.

Quarterly earnings season continues.  Amazon beat forecasts with $3.6 billion in profit on about $60 billion in sales.  (This was versus $1.16 billion on $51 billion for the first quarter of last year.)  Amazon’s core business is slowing, but is becoming more profitable, while its cloud-computing business now provides more operating income than its retail sales.  Apple, for one, is a big consumer of Amazon’s cloud storage, spending $30 million each month.

And speaking of Amazon, the company has just announced that it will provide one-day delivery to Amazon Prime customers worldwide, at a cost of $800 million to the company.  Also, Amazon revealed that warehouse workers’ productivity is monitored by a computerized tracking system that automatically fires people who don’t keep up.  Ouch.

Elon Musk of Tesla fame has reached an agreement with the Securities and Exchange Commission (SEC) that he will not tweet about anything material to Tesla without pre-approval from a Tesla securities attorney.  But Musk also announced last Monday that Tesla plans to roll out one million robo-taxis by next year.  Huh?  Maybe he said that before he reached his agreement with the SEC?  It is clear that Tesla does not have the capacity to manufacture one million extra cars, but, wait, Musk says that people who already own Teslas will be able to use them as robo-taxis, in competition with ride-hailing companies Uber and Lyft.  So, you drive home from work, turn your auto-driving Tesla free, and tell it to come back before morning with the money it made overnight?  It gives a whole new meaning to "pimp my ride”.

Tesla first-quarter earnings were reported on Wednesday and disappointed.  Sales of Model S and Model X fell drastically.  For the quarter, Tesla lost $2.90 per share on revenue of $4.54 billion versus expectations of a loss of $1.30 and revenue of $4.84 billion.  Tesla maintains that the Model 3, which sells for less, is not cannibalizing the sales of the more expensive Teslas, but it may be no coincidence that Tesla just decided to stop selling the Model 3 on its website.

Pacific Gas & Electric, which is blamed for starting wildfires in California, has declared that it cannot prevent all sparks coming from power lines, and so it may turn off power to customers in regions that are prone to fires - when conditions are right (or wrong).  If it is hot, dry, and windy, PG&E may cut service to up to one eighth of its customer base in California - for up to several days at a time.

The White House has announced that Chinese President Xi Jinping will visit the U.S. again “soon”.  Does this mean that the U.S. and China are nearing a trade deal?  Rumors of a deal have been circulating all year, and have contributed to market rallies, but we have no actual facts.

The college admissions scandal has gone global.  One Chinese family is accused of paying $6.5 million in bribes to get a student admitted to a U.S. college, while another apparently paid $1.2 million to get a daughter into Yale.  (FYI, she is no longer there.)  One wonders whether the families are used to paying large bribes to get things done, and didn’t necessarily know that it was illegal.  Still - no excuse!

The Berkshire Hathaway annual meeting will be held this coming Saturday in Omaha.  CEO Warren Buffett, now age 88, and Vice Chairman Charlie Munger, now 95, will meet with shareholders and disseminate wisdom.  Buffett took over Berkshire in 1965, and in the period since then, Berkshire has beaten the S&P 500 overall.  But for the past five, 10, and 15 years, Berkshire has lagged.  Buffet has recently said that investors should not necessarily expect Berkshire to beat the S&P going forward, but that it provides more stability.  Will we hear this year who is in line to take over the company?  Stay tuned!

For the week ending April 26th, the S&P finished at 2,939, the Dow at 26,543, and the Nasdaq at 8,146.  The yield on the ten-year Treasury Note closed at 2.50%.  U.S. crude cost $63.30 per barrel, N.Y. gold cost $1,284.90, and one Euro was worth $1.1146.

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, Barron’s, Business Insider, The Economist, Bloomberg, Reuters, The Associated Press, and MarketWatch.  If you have questions, please call us at 203.458.5220 or reply to this email.  Did you know that Dairy Queen now has a Dreamsicle orange dip for your cone?  Also that its Caramel Cannonball Blizzard is to die for?  Oops, that was meant to be a note to self.
DIASTOLE ECONOMIC AND MARKET COMMENT
May 6, 2019

Last week produced excellent economic numbers.  263,000 new jobs were created in April.  The unemployment rate fell to 3.6% - the lowest in 50 years.  Productivity grew at an annualized rate of 3.6% in the first quarter.  Wow!  But the inflation rate was lower than hoped for at 1.6% for the trailing 12 months, versus 2.0% in 2018.  Real wage growth was 1.3% for the last 12 months - obviously not keeping pace with inflation.

So, what’s the problem with wages?  Analysts looking into it say one of the biggest problems for wages is that during the Great Recession large companies eliminated many middle-management jobs, which were not reinstated during the subsequent recovery.  And without promotions possible for workers below middle management, big raises are not happening.  The money is instead flowing toward automation and computing initiatives.  At small companies, the pain of crazy health-insurance costs is cutting down the pool for wage increases.  The days of devoting your career to one company are waning, as data now shows that median wage growth among "job switchers” is 40% higher than among “job stayers”.

Nonetheless, consumer spending in March increased by its fastest rate in ten years.  And personal spending creates more than 2/3 of domestic economic activity.

Markets rose on the good jobs numbers Friday, but were essentially flat for last week.  There is turmoil in today’s markets because of news released over the weekend that the President is considering raising tariffs on Chinese goods this coming Friday, if a trade agreement is not reached.  A large Chinese contingency was expected to arrive in Washington midweek to continue trade talks, but this is now in limbo.

A unicorn is a privately-held tech-startup company with a valuation of over one billion dollars.  Only about two percent of startups will achieve this status.  Nonetheless, we seem to be awash in unicorns.  For instance, Beyond Meat (which makes meatless products from pea proteins) went public at $25 per share last week, but the stock quickly moved up by 163% to $67 per share.  The company is now worth about four billion dollars. 

And Uber is planning to go public on Friday (while Uber and Lyft drivers in major cities will be on strike on Wednesday, asking for higher wages and employee status).  Yahoo Finance says the Uber initial public offering (IPO) will sell 180 million shares of stock, representing almost 11% of the outstanding shares, for more than $10.3 billion.  That implies a market capitalization for the company of more than $90 billion.  That’s a big unicorn - with wings and glitter.

WeWork just announced that it also filed for an IPO to be held this year.  In its most recent round of private fund-raising, the company was valued at $47 billion, despite the fact that it continues to lose billions of dollars.  WeWork rents office space, cleans it up and installs pingpong tables and juice bars, and then re-rents it piece by piece to individual entrepreneurs who share the common spaces.  Is this a productive business model?  Not so far, and yet… $47 billion.

For the first time, the U.S. is producing more electricity through the renewable energy sector (water, wind and solar) than with coal.  A couple of factors are at work: renewable energy has become cheaper to produce, and consumers are demanding it more.

The Federal Reserve Board announced last week that it was not raising interest rates.  There is a public debate ongoing about whether rates should be raised, or allowed to rise (my hand shoots into the air) or cut (as the President and his economic advisers advocate from the bully pulpit).  With the economy chugging along nicely, the stimulus of a rate cut is not needed, and only benefits borrowers, not savers.  But with our federal deficits and debt growing rapidly, it seems inevitable that rates will have to rise to attract new Treasury Bond buyers to fund our borrowing.  That’s just the interest rate market at work.

Last Thursday was the 500th anniversary of the death of Leonardo da Vinci.  We often think of the 16th century as primitive, but Leonardo invented robots, some musical instruments, helicopters, and a way to move water upstream.  And he painted the Mona Lisa.  What have we done by comparison?

What can we say about the Kentucky Derby?  Who knew that there were lanes for the horses!  I thought the idea was to ride as close to the rail as possible.  All at once.  And what about Avengers: Endgame.  It earned $2 billion in its first 11 days of release.  Unicorn!  (Okay - not a private startup company, but it already has income greater than the GDP of Grenada.)

For the week ending May 3rd, 2019, the S&P 500 finished at 2,945, the Dow Jones Industrials at 26,504, and the Nasdaq at 8,164.  The yield on the ten-year Treasury Note closed at 2.53%.  U.S. crude cost $61.94 per barrel, N.Y. gold cost $1,279.20 per ounce, and one Euro was worth $1.1198.

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, Barron’s, Business Insider, Yahoo Finance, Bloomberg, The Economist, Reuters, and The Associated Press.  If you have questions, please call us at 203.458.5220 or reply to this email.  Mother’s Day is this coming Sunday.  You know what you have to do!

DIASTOLE ECONOMIC AND MARKET COMMENT
May 13, 2019

Trade war with China!  News at eleven!  Last week the White House threatened, and then implemented, a tariff hike on the Chinese goods that we already tariff.  (Tariff - it’s not just a noun anymore!)  Rates on Chinese goods rose from 10% to 25%.  The White House also said that China would pay $100 million in tariffs directly into the Treasury.  Um… not so much?  Tariffs are a tax on imported goods which are paid by the importers and generally passed along to the end consumer.  In this case, it is a regressive tax, paid disproportionately by the middle- and lower-income families who buy Chinese-made goods.  Think Walmart.  At current levels, it is predicted that an American family will pay $800 per year as a result of the tariffs.  But there’s more!  The Trump Administration is now proposing tariffs on all Chinese goods that come to America - perhaps costing each American family an additional $1,200.

And of course China is retaliating, with tariffs on $60 billion of U.S. goods exported to China.  Which will make American agricultural exports more expensive to the Chinese, who, as we have seen in the recent past, will look for other countries from whom to buy their soybeans and other crops.

Which will lead to U.S. government subsidies for farmers who lose market share.

So the U.S. consumer pays the cost of the tariffs on Chinese imports, and the U.S. farmer pays the price for Chinese tariffs on America exports, and the U.S. taxpayer pays to subsidize farmers who used to sell to China, and nobody wins in a trade war.

The markets lost 2-3% last week as they absorbed the news on trade.  On Friday, the President and Treasury Secretary Mnuchin indicated that last week’s trade talks with China were productive.  It is getting harder for the markets to accept the rhetoric without proof.  And this morning, stocks are lower on the news of the new Chinese tariffs on American goods.

And, oh yeah, there was Uber.  For years, literally, investors have been anticipating the initial public offering (IPO) of Uber.  And then Lyft came along and there was a little more competition, but still Uber was king.  And then drivers started striking and complaining about working conditions and poor pay, and studies showed that Uber and Lyft were the biggest contributors to traffic congestion in San Francisco, but still Uber was king.  Private investors valued the company at about $76 billion in August, but “everyone” knew that Uber was worth much more.  It didn’t matter that the company was losing money and had always lost money.  So Uber went public on Friday at a very conservative $45 per share, practically guaranteeing that the stock would trade up.  But, oops, it didn’t.  The stock fell by 8% on its first day of trading, costing the lucky few who got shares at the IPO price a whopping $655 million.  And now the company has a market value of near $70 billion.

Lyft shares fell too.  Lyft also loses money.

And speaking of cars and losing money, Tesla is going to market with bonds and stock to raise about two billion dollars to cover its budget shortfall.  This comes in the wake of Very Important Guy Elon Musk telling investors that Tesla would soon be profitable and would not need to borrow more money.  Oops again.

While the trade war and the Uber IPO sucked all of the air out of the room last week, there were a few other news items of note.

Nest, the smart thermostat company, was purchased by Google a little while ago, and the companies remained separate.  No longer.  Data compiled by your Nest is now going directly to Google for analysis.  Although what they’re going to do with temperature data is beyond me.  (But somehow they’ll monetize it.)

Federal revenue for the first seven months of fiscal year 2019 (October 2018 through April 2019) rose 2% versus the same period a year earlier.  But the budget deficit grew by 38% to $531 billion.  That shortfall will be covered by bond investors who buy U.S. government bonds.  But what happens when not enough people (or countries) want to buy our bonds?  Yields on those bonds will have to rise to entice them.  Meanwhile, in Europe, the amount of negative-yielding government bonds outstanding has risen by 20% over the past year - to roughly ten-trillion dollars worth.  What does it say that people would rather lose money in a European (especially German) bond rather than make money in an American one?

The new British royal baby is named Archie.  The next one will be named Jughead.  If you don’t get this joke, congratulations, you are young!

Chinese economic directors are planning to eliminate the “mining” of bitcoin in that country.  The electricity required for producing new bitcoin is estimated to equal the consumption of Kuwait.

Apple has created its own new iPhone game for the first time since 2008.  It’s called “Warren Buffett’s Paper Wizard” after the legendary money manager and Apple investor.  Based on Warren Buffett’s childhood job, the app is a newspaper-tossing game in which you can win Warren bucks.  But not shares of Berkshire Hathaway, apparently.

Robert Philips took a piece of Stonehenge home with him when he worked on repairs to the ancient site in 1958.  Sixty years later, he is returning the piece.  The time travel portal is now open!

For the week ending May 10th, the Standard & Poor’s 500 finished at 2,881, the Dow Jones Industrials at 25,942, and the Nasdaq Composite at 7,906.  The markets were down between 2% and 3% for the week.  The yield on the ten-year Treasury Note slid slightly to 2.47%.  U.S. crude oil cost $61.66 per barrel, N.Y. gold cost $1,285.70 per ounce, and one Euro was worth $1.1230.

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, Barron’s, Business Insider, The Wall Street Journal, The Economist, Reuters, The Associated Press, and CNBC.  If you have any questions, please call us at 203.458.5220 or reply to this email.  Enjoy this coming week of no holidays to celebrate!
DIASTOLE ECONOMIC AND MARKET COMMENT
May 20, 2019

Okay, sure, there were trade-war updates, and Uber news, and Big Pharma lawsuits, but let’s start with the most important story: Jeff Koons’s sculpture of a rabbit. 

It just sold at Christie’s for $80 million plus costs and commissions of over $11 million, for a total of more than $91 million.  That’s the most money ever paid for a work by a living artist.  But - wait for it - the three-foot-tall “Rabbit” is made of stainless steel and was cast in an edition of three.  That’s right, it’s not unique.  AND, the buying art dealer (for a client) was Treasury Secretary Steven Mnuchin’s father.  AND, given Jeff Koons’s method of working, it is quite possible that he never touched the work, which was probably made by apprentices.  $91 million.  Here’s a reminder of how the art world works, or doesn’t: the money goes to the seller of the work (in this case, the estate of S.I. Newhouse, who died in 2017) and none to the artist.  Maybe Koons is onto something when he doesn’t make his own art.

So - back to the lesser news.  It’s a little hard to keep track of where we are in the tariff war with China, but basically, we imposed more on them, and then they imposed more on us.  And at the same time, the Trump White House keeps saying that we’re near a trade deal, although the Chinese say no such thing.  The markets don’t quite know which way to turn, although we are only slightly off recent highs. 

The bigger question is whether China will stop buying, or even will sell, U.S. Treasury bonds.  They are the number one foreign holder of U.S. debt.  In other words, when we overspend, which is always, China loans us money.  What will happen if they stop?

Tangible good news arrived on Friday, when President Trump lifted tariffs on metal imports from Canada and Mexico, and instituted a six-month delay on the possible imposition of tariffs on automobiles from Europe, Japan, and other countries.  That decision will now be made in November.  Congress had reportedly refused to ratify USMCA, the replacement for NAFTA, until the tariffs were lifted.

The U.S. birthrate is at a 32-year low.  Our birthrate has been less than needed to replace us largely since the 1970s, but is not yet lower than our death rate.  The replacement rate is 2.1 births per woman, while we are currently achieving only 1.7 births per woman.  2% fewer babies were born in 2018 versus 2017.  In the past, we have made up the difference in the tax base through immigration, but that may be changing.

A jury in Northern California just awarded $2 billion to a couple who claimed that Roundup weedkiller caused their cancers.  This is the third straight loss for Bayer, which last year bought Monsanto, maker of Roundup.  When Bayer made the acquisition, there had been no awards to Roundup claimants.  Surely now they have buyer’s remorse.  Roundup is still on the market, and has no warning labels.

The moon is shrinking like a raisin as it ages.  Well, so am I, but that’s not news.  The aging and cooling process that is natural on planets is causing moonquakes.  Additionally, the drag of Earth’s gravitational pull also causes moonquakes.  Also, the hollowing out of the moon, which is used by alien spaceships as a giant hangar, is creating stress on the moon’s crust.  (It’s called The History Channel because it’s true!)

Uber, whose recent IPO was kind of a disaster, received good news from the National Labor Relations Board, which concluded that Uber drivers are contract workers and not employees.  Uber drivers claim that they are employed by Uber and deserving of at least minimum wage and benefits.  On the news, Uber stock turned slightly upward, although it is still trading about 8% below its offering price.

Six more states are suing Purdue Pharma for alleged illegal marketing and selling of opioids, contributing to a nationwide epidemic responsible for 47,600 overdose deaths last year.  That brings to 45 the number of states which are currently suing Purdue, maker of Oxycontin.  Additionally, members of the Sackler family, which owns Purdue, are included individually in many of the suits.  The Metropolitan Museum of Art, among many art museums, has announced that it will stop taking donations from the Sacklers, a generously philanthropic family.

Green funerals are on the cusp of becoming big business.  Currently, “regular” burials also inter lots of formaldehyde and whatever is used to preserve wooden caskets.  Cremation releases carbon and mercury into the atmosphere.  One current option is a green burial, in which the body is unembalmed, and the caskets are biodegradable.  But the state of Washington is poised to be the first state to approve human composting (also known as “natural organic reduction”.  In this process, already used for cattle, the body is placed in a steel container with bacteria, wood chips and straw and kept at a high temperature for a few weeks, after which about two wheelbarrows-full of topsoil comes out.  Who’s thinking geraniums?!

Finally, another entry in the “why didn’t we think of that” category.  In China, the government maintains a list of everyone who has been ordered by the courts to pay money.  Now some phone companies have used the list to give a special ringtone to the debtors.  AND callers to those debtors are encouraged to remind the laolai, as they are called, to pay their bills.  This is part of China’s campaign to use public shame and approbation to influence the behavior of its citizens.  Scarlet letters are probably next.

San Francisco has replaced Zurich as the city where you can earn the most and also have the most disposable income after rent.  Or after earthquakes.  Move there, but buy insurance.

For the week ending May 17th, the Standard & Poor’s 500 finished at 2,859, the Dow Jones Industrials at 25,764, and the Nasdaq Composite Index at 7,816.  The yield on the ten-year U.S. Treasury Note closed at 2.39%.  U.S. oil cost $62.76 per barrel, N.Y. gold cost $1,274.50 per ounce, and one Euro was worth $1.1159.

Elizabeth E. Cook
Partner

News and information presented here was gathered from sources believed, but not guaranteed to be reliable (we’re looking at you, The History Channel), including The New York Times, Bloomberg, Barron’s, The Economist, Business Insider, The Wall Street Journal, CNBC, Reuters, and The Associated Press.  If you have questions, please call us at 203.458.5220 or reply to this email.  Happy Memorial Day!