DIASTOLE ECONOMIC AND MARKET COMMENT
June 24, 2019
 
Last week the Federal Reserve Board’s Open Market Committee met and decided to do nothing.  I kid the FOMC!  Of course the Committee met and deliberated for two days and then decided to do nothing and instead just to indicate that it might think about lowering interest rates sometime in the future.  Stock markets rose on the hint.
 
So this might be a good time to remember that the stock market is not the economy, but is instead a predictor of the economy.  A record high Standard & Poor’s 500, like we saw last week, doesn’t mean that everyone is profiting from the current economic environment.  But it does indicate that investors believe stocks are worth buying.  And why not?  The tax cuts that were enacted at the end of 2017 continue to benefit corporations.  Lower interest rates would also benefit corporations.  Stagnant wages benefit corporations.
 
And corporations continue to use their windfalls to buy back their own stocks.  When they do so, there are fewer shares outstanding, and earnings per share rises.  And therefore the price to earnings ratio drops, making the stock more attractive to buyers.
 
That’s the macro outlook.  But what else is going on?
 
Even without Fed action, interest rates are dropping due to market factors.  The yield on the ten-year U.S. Treasury Note briefly dropped below 2% last week, before closing slightly above.  Investor money moved into “safe” investments like gold and government bonds, driving the prices of both higher.  Putting aside the idea that gold is a good investment (unless you have an industrial use, you’re pretty much wearing your wealth), remember that as bond prices rise, the yields they pay fall (while the dollar amount of the interest payment remains the same).
 
Yields have fallen so much in Germany, that the ten-year government Bund is now yielding -0.28%.  So, if you buy it and hold it to maturity, you will lose money.  Investors are betting that things will get worse in the next ten years, and yields will fall further, and they’ll be able to sell their bonds at a profit.  German consumer confidence has dropped to its lowest level in almost five years.
 
Mortgage rates are also falling, enticing home-buyers back into the market.  Demand for existing homes rose 2.5% from April to May as we entered prime house-buying season.
 
Global energy consumption rose 2.9% in 2018 - the fastest rate in eight years, according to BP.  Most of the additional consumption was in China and India (increasing manufacturing) and America (where we like it hot in the winter and cold in the summer).  Global carbon emissions rose by 2%.
 
In overhead news, Uber has announced that it is testing food delivery by drone - starting in San Diego with McDonald’s.  Really?  Those french fries are inedible four minutes after they leave the drive-thru, so I’m not sure that drone delivery is a good idea.  Will they be packed in a heated crisper?  Asking for a friend.  And Amazon has just received a patent for a delivery drone, to be used “primarily” for deliveries, but also, potentially, for customers to check on their properties.  Also, potentially, for Amazon to check on your property.  Have you mowed your lawn?  Maybe you need a suggestion for a lawn-care company!
 
Facebook announced that it is creating a new cryptocurrency, called Libra.  More than twenty companies are backing this effort, including MasterCard, PayPal, and Uber.  Facebook says it does not want to make money on Libra, nor be solely responsible for it.  The value of Libra will be tied to actual currencies, and its processing will be taken care of by Calibra, a company Facebook WiLL make money from.  Calibra will host the Libra “wallets” where you will store your Libra(s)(?).  Think “Bank of Facebook”.  Would you ever trust Facebook with your money?  You trust it with your pictures and your friends and the story of your life….  But wait, Congress thinks Facebook should slow down for regulators to take a look.  No wonder bitcoins are rising in value - no one is trying to regulate them!
 
The Boeing 737 MAX has been under heightened scrutiny since the March crash of an Ethiopian Airlines flight, and the planes are still grounded.  Now more than 400 pilots have filed a class-action lawsuit against Boeing, saying that it perpetrated an “unprecedented cover up.”  But meanwhile, Amazon has just leased 15 737s to haul cargo, and the parent company of British Airways has ordered 200 more of the jets.
 
In the I-am-absolutely-not-making-this-up department, the Mueller report, which is 448 pages long, is daunting to some readers.  But don’t worry, publisher IDW is planning a graphic novel version!  It is due out next April, and will be about 200 pages long.  I’m tempted, but might wait for the two-part miniseries instead.
 
For the week ending June 21st, the S&P 500 closed at 2,950, the Dow Jones Industrials at 26,719, and the Nasdaq Composite Index at 8,031.  The yield on the ten-year Treasury finished at 2.06%.  U.S. crude was slightly higher at $57.43 per barrel, gold was up at $1,396.20 per ounce, and one Euro cost $1.1371.
 
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 CNBC.  If you have any questions, please call us at 203.458.5220 or reply to this email.  Happy Summer!
DIASTOLE ECONOMIC AND MARKET COMMENT
July 1, 2019

Although markets were down slightly last week, overall June was a terrific month.  The Dow Jones Industrial Average did better than any June since 1938, and the Standard & Poor’s 500 did better than it had in decades.  The two biggest market movers were the hints from the Federal Reserve Board that it might consider an interest rate cut, and the hints from the White House that the trade war with China might be resolved soon.

As for the first, bad idea!  Interest rates are already below historical norms, and with record-low unemployment, and record-high markets, this is not the time to stimulate the economy.  A recession will come, and when it does, we will again need monetary weapons to fight it.

As for the second (the trade war(s)) - to date the U.S. has imposed tariffs on 50.6% of Chinese imports, while the Chinese have imposed tariffs on 56.3% of their imports from America.  (The Chinese send WAY more goods to us than we send to them.)  Tariffs are paid by the exporting companies, and are passed along to the end consumer.  So, tariffs on Chinese goods are paid by us, while tariffs on U.S. exports to China are paid by the Chinese.  These higher prices do deter some purchasers, and we are seeing the Chinese find other sources to replace our agricultural products.  They don’t care if they eat tofu made from Brazilian or American soybeans.  Will they come back to our beans if and when the trade war is resolved?

At the G20, President Trump and Chinese President Xi agreed to halt the imposition of additional tariffs on each other’s goods.  This does not mean that existing tariffs will be removed, but the hope of a trade-war resolution has been buoying stocks all year.  And last week, Treasury Secretary Steven Mnuchin announced that a deal with China was 90% done.  If I break it and then glue it mostly back together, can I legitimately say that I fixed it?

OPEC (Organization of Petroleum Exporting Countries) has come to an agreement with its non-OPEC oil-producing friends to extend their supply cuts until the end of the year.  (The U.S. is not part of the pact, and by some measures is now the largest oil-producing country in the world.)  The supply cut is meant to force prices higher, but as we have often mentioned, as soon as prices rise, shale-oil drillers get back into the business, pushing prices further down.  Oil prices, which topped $75 a barrel last October, are now in the $50-$60 range.

The U.S. economy, as measured by GDP (gross domestic product - the sum of all goods and services sold) grew by 3.1% (annualized) in the first quarter of this year.  Economists estimate that growth will be nearer to 2% annualized for the remainder of 2019.  Last year GDP growth was 2.9%.

By 2027, India will surpass China as the world’s most populous country.  Together, the two countries now make up 37% of the global population of 7.7 billion.  By 2050, the world’s population will be 9.7 billion.  (In 1950, the population was 2.6 billion.)  Wow, Earth - populate much?

It looks like the Boeing 737 Max will remain grounded for the foreseeable future.  The FAA (Federal Aviation Administration) found a new problem in the software that runs the stall-prevention system on the aircraft.  It turns out that Boeing outsourced the software development to recent college grads and temporary workers, which is probably fine if you’re creating a video blog about kitties in hats, but maybe not for airplanes?!

If you spent the week wondering why cell phone usage causes humans to grow horns, as I did, you will be relieved to know that it doesn’t.  Humans do grow horns, but it’s not because of their cell phones.  More typically, it occurs in older people and is related to a degenerating musculoskeletal system.  Are you feeling behind your ears right now?

Nestle is now making cookie dough that is safe to eat.  Toll House edible cookie dough will be available soon and is not meant to be baked - just eaten by large spoonful after large spoonful straight from the jar.  But if raw eggs (salmonella) and unbaked flour (e. coli) are the reasons we don’t eat cookie dough now, what is the new stuff made of?

The markets will close at 1:00 on Wednesday and remain closed on Thursday, July 4th.  Diastole will also be closed.  Happy 243rd Birthday, America!  If you’re old, like I am, you will fondly remember the Bicentennial of 1976.  Fireworks fireworks fireworks!  In just seven short years we will celebrate our Sestercentennial.

For the week ending June 28th, the S&P 500 finished at 2,941, the Dow at 26,599, and the Nasdaq Composite Index at 8,006.  The yield on the ten-year Treasury Note closed at 2.01%.  U.S. crude oil cost $58.47 per barrel, N.Y. gold cost $1,409.70 per ounce, and one Euro was worth $1.1371.

Elizabeth E. Cook
Partner

News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including Business Insider, The Wall Street Journal, The New York Times, Barron’s, The Economist, Bloomberg, CNBC, Reuters, and The Associated Press.  If you have questions, please call us at 203.458.5220 or reply to this email.  Wishing you sprinklers and sparklers for the 4th of July!
DIASTOLE ECONOMIC AND MARKET COMMENT
July 8, 2019

We’re back to good news is bad news.  A strong showing in jobs (224,000 created in June) caused markets to fall slightly from record highs last week, as investors feared this would keep the Federal Reserve Board from lowering interest rates.  160,000 jobs were predicted.  May was a disappointing month in jobs, with 75,000 new jobs created - now revised downward to 72,000.  But the markets liked the bad jobs report and disliked the good jobs report.  Another factor which hits the markets quarterly is the blackout period that public companies face, which keeps them from doing important things like stock buybacks in the couple of weeks before they announce earnings.  More on this later.

The unemployment rate edged upward to 3.7% in June, and wages grew by 3.1% (annualized), just shy of the 3.2% expected.  It seems that our economic recovery, while tepid by previous standards, has exceeded all duration expectations with its slow and steady growth.  Ten years and counting, and the memory of the pain caused by the Great Recession is fading.  But we shouldn’t forget how the bubble burst, and the economy stopped dead, and only government spending and reduced interest rates got us going again.  A recession will come, and we must have ballast to throw overboard when it happens.

Personal spending continues to fuel this recovery.  In the second quarter of 2019 (April through June), personal consumption rose 3.7% annualized, versus a drop in business spending on equipment by 4.4%.  Business spending on structures fell by 4.6% year over year.  One place where business spending doesn’t seem to be falling is in stock buybacks.  Goldman Sachs expects S&P companies’ buybacks to equal $940 billion this year.  This means that fewer shares of stock are outstanding, but demand for stocks keeps growing as people fund their retirement accounts and some enjoy lower taxes.  Therefore, prices rise.  A new stasis will be reached at some point, although the corporate tax cuts enacted late in 2017 keep on giving.

Like Lucy with the football, Saudi Arabia is once more dangling the idea of an initial public offering of Saudi Aramco, the state-owned (and world’s biggest) oil company.  We first heard about the potential IPO in 2016, but it was postponed several times, probably because oil prices were falling.  In April, Aramco held its first international bond sale and raised $12 billion.  In June of 2008, oil prices exceeded $160 per barrel, but have since been sliding because of a combination of slowing demand and growing supply.  On Friday, U.S. oil cost $57.51.

Israel, which is surrounded by Middle Eastern oil-producing nations, has never struck much oil itself.  But now it has found an abundance of offshore natural gas -  so much that the whole country could run for a year on 1% of the reserves.  The country is gas rich!  But… cheap gas is already available from the U.S., Australia, Qatar, and Russia, and this increase in supply will make gas even cheaper.  Is it worth it to build the necessary pipelines?

Women’s sports dominated the news last week as, first, 15-year-old Coco Gauff beat Venus Williams at Wimbledon.  Coco continues into week two of the tournament.  And then, the U.S. women’s national soccer team dominated in World Cup play and won the whole shebang.  Equal pay is the team’s rallying cry, since the women soccer players earn MUCH less than the men.  The grand slam tennis tournaments have instituted equal pay, but in lower echelon events there is a great disparity.  Winners like the ones we’ve just watched bring attention to the problem, and hopefully the solution.  It reminds me of a sign posted in my local lumberyard about women’s college basketball: “UConn, where men are men and women are champions.”

And speaking of college, student debt in America now exceeds $1.5 trillion dollars.  There are more than three million senior citizens who are still paying on their student loans.  (OMG, I think I’m one of them!  3,000,001!)  (It’s not that I’m irresponsible, I was already 56 when I got my Master’s.)  And due to repayment provisions that allow a borrower to repay less than the ongoing interest on his loans, there are 101 people in the U.S. whose student-loan indebtedness now exceeds one million dollars.  According to a survey last year, student debt is the reason 13% of childless Americans decided not to have children.

Amazon turned 25 last week.  And because it’s now a grownup, a U.S. court has ruled that Amazon can be held responsible for defective products that are sold on its site.  As with all new industries (think robber barons), innovation and massive wealth come first, and regulation comes later.

Southern California wobbled with two major earthquakes at the end of last week, a 6.4 and a 7.1.  Neither was “the big one”.  Aftershocks continue, and there is a 10% chance that another quake of 7.0 on the Richter scale will hit this week.  Thankfully, no fatalities were reported.  My sister, who lives in Long Beach, is fine, thank you for asking.  Also last week, the temperature in Anchorage, Alaska, reached 90 degrees, beating the record of 77 which was set 20 years ago.  In a related story, there is apparently a simple answer to the problem of the 300 billion extra tons of carbon that humans have added to Earth’s atmosphere - plant trees!  Researchers say there is enough suitable land available to increase our forests by one third.  Trees naturally remove carbon from the air and store it in leaves and below ground.

Things worth Googling: did a guy driving a hearse really think he was entitled to travel in the carpool lane?

For the week ending July 5th, the Standard & Poor’s 500 finished at 2,990, the Dow Jones Industrials at 26,922, and the Nasdaq Composite Index at 8,161.  The yield on the ten-year Treasury Note closed at 2.04%.  U.S. crude oil cost $57.51 per barrel, N.Y. gold cost $1,396.70 per ounce, and one Euro was worth $1.1225.

Elizabeth E. Cook
Partner

News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including CNBC, The New York Times, Barron’s, Business Insider, Bloomberg, The Wall Street Journal, Reuters, and The Associated Press.  Did you know that Walmart is now selling a complete line of sex toys?  I will not tell you how I learned this.
DIASTOLE ECONOMIC AND MARKET COMMENT
July 15, 2019

The stock markets hit all-time highs last week, the Wimbledon men’s final went to a record fifth-set tiebreaker, it’s the fiftieth anniversary of the Apollo 11 moon landing, and global warming is causing a permafrost thaw in Russia that is exposing an unprecedented number of frozen woolly mammoths.

Let’s start with the mammoths.  Just kidding!  Last week Federal Reserve Chairman Jerome Powell testified to Congress that while the Fed was resistant to political pressure, it was also willing to cut rates if necessary.  That’s all it took for investors to hear “lower rates” and start to buy.  Interestingly, though, at a Treasury auction of 30-year bonds, rates had to rise to attract enough buyers to sell out the offering.

So what is going to happen when the clamor to cut rates runs head-on into the need to raise rates to fund our deficit?  Well, just as the Fed was raising rates over the last couple of years but market yields fell instead, we may see the Fed lower rates while yields rise anyway.

And speaking of the budget deficit, it increased 23% in the first nine months of the fiscal year (which started in October) as opposed to the same period last year.  Spending reached $3.36 trillion on revenue of $2.61 trillion.  Both figures were all-time highs.  While tax revenues were lower because of the tax cut enacted in December 2017, additional revenues from trade tariffs rose.  But spending rose more.  When the fiscal year ends on September 30th, the total annual deficit is expected to exceed one trillion dollars.

And with increased deficit spending comes a challenge to America’s debt ceiling.  It is now anticipated that unless the ceiling is raised, the U.S. will face a potential default in early September.  Lower than expected tax revenues are responsible for moving this date closer.  Luckily, Congress will immediately take action to increase income and reduce spending.  Just kidding again!

Today is the beginning of Amazon’s two-day Prime sale.  The point of the sale is to sign up new customers for the Amazon Prime service, which offers “free" two-day shipping and streaming Amazon video and some other stuff, for the bargain-basement price of $119 per year.  Meanwhile, Amazon announced last week that it plans to spend $700 million on training warehouse workers so they can rise in the organization.  It already increased worker minimum pay to $15 per hour.  Nonetheless Amazon employees are holding protests about working conditions in at least seven cities during Prime Day(s).

Just when you thought it was safe to go back in the water (Jaws joke. It’s summer!), Google announced that it has a team of workers whose job it is to listen and transcribe peoples’ commands to their Google Assistants.  This is just so that the listening technology can be improved.  Of course it is.

American Airlines has announced that it will keep its Boeing 737 MAX airliners grounded into November.  As a result, it will cancel about 115 flights per day.  The aircraft has been out of service since March following terrible crashes in Indonesia and Ethiopia.  American will report its earnings in ten days, but has already announced that the grounding has cost it $185 million in second-quarter income.

In a related story, Airbus is now poised to overtake Boeing as the world’s largest airplane manufacturer.  Boeing’s orders have been weak following the MAX grounding.

Uber is now offering helicopter rides between lower Manhattan and JFK airport during the weekday afternoon rush hour.  This is an eight-minute flight that costs $200-$225.  Blade, an aviation company, already offers helicopter flights to all three major NYC airports for $195.  And Airbus-owned Voom, which does the same thing in Sao Paulo, Brazil, is said to be coming to America.  Companies are trying to get experience in this market before launching air-taxi services with electric-powered aircraft.  Uber plans to offer this service beginning in 2023, when it launches Air.

Richard Branson’s Virgin Galactic is now planning an initial public offering (IPO) which may value the company at $1.5 billion.  The company aims to take passengers into space, which is much further than the airport.  A recent Virgin Galactic test flight touched the outer edge of earth’s atmosphere.  Branson was negotiating for one billion dollars in funding from the Saudis, but cancelled the deal in the wake of the Jamal Khashoggi killing.

Oil prices are higher following the shuttering of oil rigs and refineries in the Gulf of Mexico in anticipation of Tropical Storm Barry.

For the week ending July 12th, the Standard & Poor’s 500 finished at 3,013, the Dow Jones Industrials at 27,332, and the Nasdaq Composite Index at 8,244.  The yield on the ten-year Treasury Note closed higher for the week at 2.12%.  U.S. crude oil cost $60.21 per barrel, N.Y. gold cost $1,409.90 per ounce, and one Euro was worth $1.1271.

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, Barrons, Business Insider, The Economist, CNBC, CNN, Reuters, The Associated Press, and The Guardian.  For those of you who wondered about last week’s sex toy teaser but didn’t want to ask, I learned about it in The New York Times.  First one to actually find a sex toy on the shelves at Walmart wins a free subscription.