We got the GDP data on Friday which was good but not great (more on this in the ECO section). The markets largely shook this off and finished the week higher as corporate earnings come in with good numbers and there is continued evidence of a cultural change in corporate America as CEOs want to invest domestically and re-patriate cash from overseas. I occasionally get asked if this market is getting overvalued and the answer is that fundamentals are driving the bus as opposed to ultra-low interest rates and stock buybacks. This market has changed. The Fed raising interest rates in the face of mediocre growth would have likely collapsed the stock market as we approached 2018. The second half of 2017 will be viewed as a significant shift in structure (tax cuts), technicals and growth (GDP) as they all aligned in a positive direction to finish the year. Growth in the economy is accelerating and investment dollars are going to flow into the United States from foreign and domestic corporations.
The reduced tax rates are considered a very significant variable to international corporations when they consider where to build their factories and hire workers. A shift of investment capital towards the United States would provide a fundamental backdrop of pushing GDP higher in the coming years which would provide a boost to the middle class and manufacturing jobs. It is truly amazing to see corporations handing out cash bonuses and stock to their employees – a surprise to everybody and evidence that maybe this tax reduction is underrated.
For the stock market, the advance is broadening which means more sectors are participating in the rise. If you recall, the tech sector and FAANG (Facebook, Amazon, Apple, Netflix & Google) stocks were responsible for pushing the broader indices higher over the past couple of years. This change is evidenced as some of the leading sectors for 2018 are Oil ($OIL), Coal ($KOL), Biotechnology ($XBI) and Steel ($SLX), among others. That means you can diversify your portfolio across more sectors and find value at the same time. Something we didn’t have with narrow leadership.
We are approaching the heart of earnings season so keep watching for earnings releases and what CEOs are telling us about their capital investment plans for 2018.
Chart of the Week!
How is wealth owned?
Economic & Central Banking Snippets
- The Senate officially confirmed Jerome Powell this week to become the 16th chairman of the Federal Reserve, clearing the way for a new leader to continue raising interest rates and keep the economic expansion on track.
- Japan’s exports grew less than anticipated in December, but shipments to the rest of Asia and China both notched their highest on record. The value of exports rose 9.3% (YOY) which marked 13 straight months of expansion. (FT)
- US economic growth undershot expectations for Q4 with GDP expanding at 2.6% which was the lowest rate since the start of 2017. The reduced pace of growth reflected a drag from trade imports while rising inventories offset the strength in consumer spending. There may have also been some distortions due to a change in tax laws as companies may have chosen to book some of their business into 2018 – we will have to wait several weeks to know this for sure. Net trade caused a haircut to GDP in Q4 as the surge in imports subtracted -1.96% from the final GDP number.
- There was good news in nonresidential fixed investment (spending on equipment, structures and intellectual property) as it rose 6.8% in Q4 after rising 4.7% in Q3. A contribution of 0.84% to the annualized Q4 GDP’s bottom line.
- Real disposable personal income (adjusted for taxes and inflation) increased 1.1% in Q4 after increasing 0.5% in Q3.
- For inflation watchers, prices of goods and services purchased by U.S. residents increased 2.5% in the fourth quarter after increasing 1.7% in the third quarter.
- For 2017, the increase in real GDP reflects increases in consumer spending, business investment, and exports. These contributions were partly offset by a decrease in inventories while imports increased. Prices of goods and services purchased by U.S. residents increased 1.8% in 2017, compared with an increase of 1.0% in 2016. Excluding food and energy, prices increased 1.7% in 2017 after increasing 1.4% in 2016.
Market Snippets
- According to Ernst & Young which researched the cryptocurrency world’s nearly 400 initial coin offerings (ICOs), more than 10% of funds raised through ICOs have been either lost or stolen. The report says fundraising has been waning as only 25% of ICOs are hitting their fundraising targets in November verses 90% in June (2017). E&Y’s Paul Brody: “We were shocked by the quality of some of the white papers, we see clear coding errors and we see conflicts of interest between the companies issuing tokens and the community of token holders.”
- Amazon‘s cashier-less convenience store is slated to premier in Seattle. Named, Amazon Go, the store uses computer vision and machine-learning algorithms to track shoppers and charge them for what they select – eliminating checkout counters.
- Puerto Rico’s governor plans to privatize the commonwealth’s troubled electric utility. Governor Ricardo Rosselló, calling the electric utility a “heavy burden”, said on Monday that he would seek to sell the assets of the Puerto Rico Electric Power Authority — known as Prepa. The governor said he expected the process to take about 18 months.
- Verizon will give most of its employees 50 shares of restricted stock as the US telecoms group said it expects savings from tax reform to boost operating cash flow by $3.5B to $4B. The shares, which will be given to employees other than top management – at their current price of roughly $53, the award would be worth about $2,650 per employee.
- General Electric revealed that securities regulators have opened a probe into the company’s accounting practices. The Securities & Exchange Commission is investigating GE’s recent review of its insurance business as well as the company’s revenue recognition for certain service contracts. The disclosure came as GE’s fourth-quarter revenue and profit dropped amid its massive restructuring and further deterioration in its core power division.
- LG Electronics has told retailers it plans to raise prices on its laundry appliances following President Donald Trump’s approval this week of steep tariffs on imported washing machines. Industry experts say they expect LG will raise published retail prices on at least some of its washer and dryer models by approximately $50.
- The benefits of the recent Trump tax overhaul and a stronger than expected fourth-quarter earnings report combined to push up Intel’s stock price by 4% in after-market trading on Thursday. The US chipmaker boosted its dividend to shareholders by 10% as its effective tax rate will fall sharply. Intel mentioned that the new US tax law had given it “further incentive to continue” its investments in the US and “reinforces our decision” to build a new plant in Arizona. (FT)
- Honeywell, the US industrial conglomerate, plans to repatriate $7B from overseas due to US tax reform and will use it for acquisitions, share repurchases and to increase company contributions to US employee pension funds. The company also plans to use the benefits of tax reform to increase 401k pension contributions for employees in the US. (FT)
International Snippets
- S&P Global Ratings on Friday upgraded Greece’s long-term sovereign credit rating by one notch to B from B-’ leaving it below investment grade but with a positive outlook.
- Japan’s largest bank is hopping onto the cryptocurrency bandwagon. According to reports, Mitsubishi UFJ Financial Group Inc. (MTU) is planning to release its own coin by March 2018. The MUFG coin will have parity with the Japanese yen and will be rolled out to employees of the financial services group first. It will enable standard transactions, such as shopping or transfer of money between individuals (for example, splitting of a bill after a meal or drinks), at much lower costs as compared to credit cards. Banks, which were reluctant to embrace cryptocurrencies, have increasingly moved towards developing their own coins or adopting the underlying technology to streamline operations.
- Mizuho Financial Group is leading a consortium of banks to develop a cryptocurrency, known as J-coin, in time for the Tokyo Olympics in 2020. Along with South Korea, Japan accounts for a majority of trading volumes in prominent cryptocurrencies, such as bitcoin and ethereum. (FT)
- The cut to corporate tax rates in the US is already prompting business to look at making new investments in the USA. Several European bank bosses told the Financial Times privately that they were considering moving more of their global operations from the UK to the US. One of them said this shift had already started to happen, citing Intercontinental Exchange’s decision to shift hundreds of energy futures contracts from London to the US to escape new Mifid II rules in Europe. The world’s largest investment banks book much of the business they do around the world in London, not only from European clients, but also from those in Asia, Africa, the Americas and the Middle East. Twice as many US dollars are traded in London as in New York. The UK accounts for almost 40% of the world’s $3T-a-day interest rate derivatives market, although it was recently overtaken by the US. (FT)
- Sky has raised the prospect of the end of the satellite era with plans to launch its full range of subscription pay-television services over the internet rather than the airwaves. The company hailed the plans to launch Sky as a streaming service in Italy and Austria before taking it other countries, including the UK, as a “major development”. It cautioned that the move did not mean it was ending its use of satellite technology, which is how 12m Britons receive Sky, but said streaming would “open up headroom” in existing markets.
That is all for now until next week’s Market Update. If someone forwarded you a copy of this report, you can sign-up directly at www.kiscocap.com.
Good luck out there!
-Paul