continued higher in a relatively quiet week. Third quarter earnings are
largely over, with roughly 75% of all companies reporting better than
expected earnings. We hit all-time highs several times this week and
while the indices were down most of the day on Trump’s negative trade
remarks this morning, both closed slightly up on the day. The S&P
500 has been up five straight weeks with the Dow posting three
consecutive positive weeks. The Dow gained 1.2% while the S&P
increased 0.7% this week. Read More
Stock buybacks have become front page news during the Democratic primary
election. Stocks buybacks are simply companies using their own money to
buy shares in the market, reducing the overall number of shares
outstanding. As stockholders, you own a small percentage of a company.
In a simple example, if an investor owns 100 shares of a company that
had 1,000 shares outstanding, the investor would own 10% of the company.
If the company bought back 50 shares, there would now be 950 shares
outstanding. The investor would now own 100/950 = 10.5% of the company.
This is one of two ways companies return capital to shareholders.
Dividends is the other. Many companies prefer buybacks to dividends
because they can adjust their purchases easily from year to year,
whereas dividend payments are very difficult to cut. Some investors
prefer buybacks because it doesn’t create a taxable event while
receiving a dividend does.
How a company decides to use the money it generates is arguably the
single most important decision a management team makes. There are four
options – share buybacks, dividends, reinvesting in the business and
building up cash. Growth is challenging for many large companies and
management teams have decided investors are best served by getting the
capital back and letting them reinvest the money. I think it’s
critically important to leave these capital allocation decisions in the
hands of management. Investors can debate the value of buybacks versus
other uses of capital, but having the government get in the middle and
decide what companies can and cannot do seems like a bad idea and
potentially a slippery slope.
Oil increased 2.3% this
week to close at $57.41/barrel. The yield on the 10-yr Treasury moved
sharply higher, closing at 1.94%, from 1.72% last week. The average rate
on a 30-yr fixed rate mortgage moved lower to 3.69% from 3.78% last
posted their best week since early September in a week with a lot of
news and several conflicting economic reports. Earlier in the week, the
Fed lowered interest rates another 0.25%. The equity market has wanted
lower rates and the Fed delivered. I don’t personally see interest rates
being an impediment to business investment in the current environment,
so lowering the rate to me hurts savers and won’t spark additional
investment. It also reduces the Fed’s ability to use interest rates as a
stimulus in the next recession, whenever that occurs. For the week, the
Dow increased 1.4% while the S&P 500 gained 1.5%.
The October jobs report came out this morning and reported a
better-than-expected 128k net new jobs created last month. This is good
news after two very lackluster reports in August and September. However
128k is just an okay number and does support the recent concern that the
economy is slowing from the ~3% growth we saw in 2017-18. It is
important to note that jobs in the auto sector declined 42k in October
because of the GM strike and those workers are now back to work. Even
still, we’re on pace for the lowest level of new job creation since
2010. Part of the slowdown in job creation is simply because the
unemployment rate is so low and the number of available workers to take
new jobs is very small. Part of it though does seem to be general
slowing in the economy. Read More
This week gave another warning of the risks of buying young, volatile
companies. Beyond Meat, the recently-new public company that makes vegan
‘meat’ products, dropped ~20% on earnings and is now down 65% from its
all-time reached three months ago. The company went public in late April
and closed the first day of trading at $67/share. Over the next few
months, it shot up $240 before crashing back to $82/share as of today.
For investors who bought on the opening day, they’ve done okay, but many
investors bought the hype over $200/share and are sitting on large
losses. Like we saw with Tilray and other marijuana stocks last year,
these things are nearly impossible to correctly time and generally lead
retail investors to lose money from buying it after the hype then riding
Oil decreased 0.9% this
week to close at $56.14/barrel. The yield on the 10-yr Treasury moved
lower, closing at 1.72%, from 1.80% last week. The average rate on a
30-yr fixed rate mortgage moved higher to 3.78% from 3.75% last week.
Market continued marching higher in a week with mixed earnings reports. Companies such as Visa and Microsoft reported better than expected earnings while names like 3M, Amazon and others missed. This lead to a divergence in performance for many blue chip names, but overall the indices moved higher and sit near all-time highs. Overall, 78% of reporting companies this quarter have beaten expectations. What’s been interesting to see in many of these reports is a slightly better than expected view on the future. October consumer confidence numbers came out higher than September as well. For the week, the Dow gained 0.7% while the S&P 500 increased 1.2%. Read More
The federal deficit doesn’t make the news much anymore, but it continues to balloon. The deficit is the difference in what the government spends and what it collects in tax revenue. That amount must be borrowed each year to fund the difference. In Fiscal 2019, which ended September 30, the deficit increased 26% over 2018 and reached a seven year high of $984 billion. Total government revenues increased 4% to $3.4 trillion, but spending increased 8% to $4.4 trillion. This increased deficit spending serves as a stimulus to the economy and props up economic growth numbers artificially. While deficit spending can help growth in the short term, it creates long term problems for an economy. We are fortunately still able to borrow money at very low rates, but that can’t continue forever. Sadly, no one in Washington DC seems interested in reducing spending to help the situation. Read More
Oil increased 5.5% this week to close at $56.64/barrel. The yield on the 10-yr Treasury moved higher, closing at 1.80%, from 1.75% last week. The average rate on a 30-yr fixed rate mortgage moved higher to 3.75% from 3.69% last week.
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Banks kicked off third quarter earnings with stronger than expected results. JP Morgan, Citibank and Bank of America all reported stronger earnings than the analyst consensus. Earnings for most of the S&P 500 companies will come over the next few weeks, which will hopefully give us a nice break from trade-related headlines. For the week, the Dow declined 0.2% while the S&P 500 increased 0.5%. Read More
The last two weeks have seen the ramifications of mixing sports and politics. On October 4th, the General Manager of the NBA’s Houston Rockets sent a pretty innocuous tweet supporting the protestors in Hong Kong. This immediately set off a firestorm with essentially every Chinese company with a financial relationship with the NBA suspending those deals. NBA Commissioner Adam Silver danced around issue saying he supports free speech for all NBA employees, but not speaking out against China in its attempt to increase control over Hong Kong and its residents. Lebron James, arguably the game’s biggest star, appeared to speak on China’s behalf in arguing the GM’s tweet wasn’t very educated. Today, Silver said, “the financial consequences have been and may continue to be fairly dramatic.” This appears to be a much more significant financial hit than the NFL felt following the national anthem protests and illustrates the point that sports leagues that venture into the political arena risk hurting their league financially. Read More
Oil decreased 1.8% this week to close at $53.70/barrel. The yield on the 10-yr Treasury ticked higher, closing at 1.75%, from 1.74% last week. The average rate on a 30-yr fixed rate mortgage moved higher to 3.69% from 3.57% last week.
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