3/22/19 – Stocks Decline in Busy Week

For only the third time all year, both indices closed down in a week with a lot to talk about. Concerns about slowing economic growth in Europe and the US coupled with a flattening/inverted yield curve fueled the sell-off. The spread between the 2-yr US Treasury yield and the 10-yr yield is down to 0.1%, down from 0.6% a year ago. This can signal an economic slowdown or recession is on the horizon, but an inverted yield curve also produces a lot of false positive recession alerts. The Fed lowered US growth forecasts for 2019 to 2.1% from 2.3% and said it would not increase interest rates again this year. For the week, the Dow declined 1.3% while the S&P 500 was down 0.8%. Read More

Iconic jeans manufacturer Levi’s went public this week. In celebration, the New York Stock Exchange suspended its ‘no denim’ rule and many traders were wearing denim head-to toe on the floor yesterday. The company first went public in 1971, before being taken private ~35 years ago by the controlling families. The IPO was well received by the market although it did come with some controversy. Most publicly-traded companies have a single class of stock. Every share is entitled to one vote per share owned. Levi’s came to the market with a dual-class structure. In Levi’s case, holders of the Class B shares will have 10 votes for every share held while the Class A shareholders will get one vote per share owned. Most Class B shares are held by descendants of the founder, giving regular investors very little say in the direction of the company. The Strauss and Haas families will retain an 80% voting control of the company after the transaction. This dual-class structure has become very popular for companies as a way for early investors to sell shares while retaining control of the company, but is opposed by most shareholder rights groups. Everything has pros and cons, but my view is these dual-class structures are a net-positive because they encourage more firms to go public which allows regular investors to participate in the upside of these companies. Read More

Biogen Idec, which was a $60bn+ biotech company earlier this week, saw its value decline 30% Thursday after it announced it was ending development of a previously promising Alzheimer’s treatment. It’s extremely rare to see a company that large decline that sharply in a single day. Biogen has important products going off patent over the next year and without this new blockbuster, total sales look to peak next year. The results highlight how difficult and expensive drug development is and the risk investors take in funding that research. Read More

Oil increased 0.8% this week to close at $58.91/barrel. The yield on the 10-yr Treasury moved sharply lower, closing at 2.44% from 2.59% last week. The average rate on a 30-yr fixed rate mortgage moved lower, to 4.28% from 4.31% a week ago.

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