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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3/15/19 – Stocks Rebound

Fresh off last week’s worst-weekly performance of the year, equity indices rebounded nicely. It was a light week for financial news and stocks used the lack of headlines to move higher. For the week, the Dow gained 1.6% while the S&P 500 increased 2.9%. Boeing accounted for much of the difference between the Dow and the S&P 500 as all the company’s 737 Max planes were grounded in the US following an Ethiopian Airlines crash. Boeing is now ~15% below its highs reached in early March on the issue. 

Financial transaction taxes have been discussed over the years, including by Bernie Sanders during the 2016 primary. Over the last week, legislation was introduced in the House and Senate to apply a 0.1% tax on all stock, bond and derivative transactions. This means on a $10,000 stock purchase, a tax of $10 would be collected. This tax would apply to all investors – from large institutions to average people buying stocks in their retirement accounts.

The tax is being proposed as a way to discourage high frequency trading, which some people blame for market volatility. The argument is that a tax will discourage high frequency trading, which often attempts to exploit small price discrepancies, by increasing the required return to justify the trades. I’m not convinced a 0.2% (after paying for the buy and sell transaction) is enough to significantly alter behavior. But even if we assume it is, it raises the question of whether reducing high frequency trading is a worthy goal and whether all investors should have to pay to attempt to solve the issue.

There is no question that high frequency, computerized trading increases volatility. However, those traders also provide significant liquidity in the market. It’s easier and cheaper for all investors to buy/sell securities when trading volumes are higher. There is value to that liquidity. Additionally, for long-term investors, the occasional period of volatility shouldn’t really be a concern. While it can be unpleasant, the technical sell-offs we’ve experienced in the last 10 years have been very short-term in nature. In my mind, the cost to pension funds, mutual funds (largely owned by regular investors) and retail investors isn’t worth the loss of liquidity and won’t really do anything to improve the long-term health of the market. Read More 

Oil increased 4.1% this week to close at $58.42/barrel. The yield on the 10-yr Treasury moved lower, closing at 2.59% from 2.63% last week. The average rate on a 30-yr fixed rate mortgage moved sharply lower, to 4.31% from 4.41% a week ago.

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3/8/19 – Stocks Suffer Worst Week of 2019

Stocks sold off every day this week on slowing growth in Europe and a weak February jobs report. Today’s jobs report showed the US economy only added 20k net new jobs in February, well below the consensus of 180k new jobs. While well below consensus, it still extends the job growth streak to an historic 101 months. The unemployment rate declined to 3.8%. A notable bright spot of the report was wage growth, which increased 3.4% year-over-year, by far the best rate in the last 10 years. It was a weak headline number, but it’s important to remember it is only one report and the month saw cold weather and storms for much of the country which likely pushed down job growth. For the week, the Dow and S&P 500 each declined 2.2%. Read More

New York remains one of the highest tax states in the country. Over the last decade there’s been a steady flow of NY residents leaving the state. In 2018, NY state was the #1 state in the country for out-migration. Florida, with no state income tax, continues to be a leading destination for fleeing New Yorkers, especially high-income earners. This has ‘cost’ New York significant tax revenue over the years. New York is fighting back, increasing audits of residents who moved away to try and collect taxes it believes it is owed.

The simple rules are if someone lives outside of New York for more than half the year, they can establish residency in another state and not be subject to New York taxes. This has led many to buy houses in Florida and live in Florida for at least 183 days a year. New York is highly dependent on wealthy taxpayers, with the top 1% of earners paying 46% of the state’s income taxes. In search of every last dollar, New York is ignoring the 183 day rule and trying to show people are still primarily domiciled in NY regardless of the days they live in New York. Auditors are comparing house sizes and cost between NY and FL, checking to see where pets go to the vet, where residents go to the doctor, where valuable art is kept and other things attempting to prove these ‘moves’ are really to avoid taxes.

One accountant says the audit rate is 100% for high income earners moving out of New York state. And roughly 50% of audits find the individuals owe NY taxes, with an average bill of over $140k. While the audit payments are expensive, some wealthy people are primarily trying to establish residency outside of the New York to avoid the 16% estate tax on estates over $5.5 million. Some said it’s worth paying a few years of additional income taxes to eventually escape the estate taxes. The bigger issue is people are mobile and states continuing to raise taxes risk losing the very tax base they hope to use to fund government programs. Read More

Oil increased 0.7% this week to close at $56.12/barrel. The yield on the 10-yr Treasury moved lower, closing at 2.63% from 2.75% last week. The average rate on a 30-yr fixed rate mortgage moved higher, to 4.41% from 4.35% a week ago.

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3/1/19 – Dow (Barely) Breaks 9-Week Winning Streak

After an historic run for the Dow Jones index, it declined slightly this week, breaking a 9-week stretch of gains. The index wasn’t down much though, declining a mere 5 points, for a loss of 0.02%. The S&P 500 was up this week by 0.4%. Due to a down week in late January the S&P 500’s winning streak extended to only five weeks. The market started the year very strong, gaining in January, February and beginning March on a positive note. Through all the turmoil in late 2018, stocks are now back to levels seen in early November.

Lyft, the ride-sharing service made its Initial Public Offering documents public today. The company is seeking a valuation of $20-25 billion. The company was valued at $15 billion last June, the last time the company raised money. Lyft generated $2.2 billion in revenue in 2018, growing 100% over last year, after growing approximately 200% the year before. While top-line growth has been impressive, the company continues to lose money, losing almost $1 billion in 2018 and a total of $2.4 billion over the past three years. The company, and the ride-sharing industry in general, are very popular with consumers and have helped lead to large decreases in drunk driving arrests over the last few years. However, they continue to face all manner of regulatory pressure, largely driven by entrenched taxi companies that don’t want the additional competition. It will be interesting to see how investors respond. You don’t see (m)any companies generating over $1 billion in sales growing at 100%. The key question will be whether Lyft can turn strong revenue growth into profits. Read More

Oil decreased 2.6% this week to close at $55.73/barrel. The yield on the 10-yr Treasury moved higher, closing at 2.75% from 2.66% last week. The average rate on a 30-yr fixed rate mortgage held steady at 4.35%.

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