@theMarket: Earnings Season Cause Markets to Surge
After a week of low volume consolidation, all three averages broke higher on Friday. The bulls are still in charge and seem determined to push stocks back to their all-time highs.
A trigger could be this year's first quarter earnings season, which is upon us, some of the multi-center banks reported today. They did not disappoint, beating estimates handily and expectations are that most of the big banks will also beat earnings estimates. That won't be too difficult to do given that earnings estimates have been down-graded not once, but twice, over the last three months.
Overall, the Street is expecting companies that comprise the S&P 500 Index to report a decline in earnings this quarter (anywhere between 2.5 to 4 percent). As such, it won't take much financial engineering for companies to beat these low-ball estimates. With that same index less than 1 percent from its all-time highs, I would expect that next week we should see that level at least touched, if not broken on the upside.
Be advised that the S&P 500 Index has been up 10 out of the last 11 days. That is an unusual performance, but it doesn't mean that string of gains needs to be broken any time soon. On the contrary, stocks could climb and climb until the last buyer has committed to the market before falling. It usually happens that way when the bull becomes a thundering herd.
But it is not earnings that are propelling the markets higher, it is the Fed's easy-money policy stance. As long as that program remains, stock prices will be supported both here and abroad. Overseas, just about every central bank is singing off the same song sheet by lowering interest rates and dumping more money into their financial markets in an effort to prop up their slowing economies as best they can.
Here at home, President Trump has taken to the airways once again, demanding our own central bank cut interest rates, while providing more stimulus to the economy and financial markets. I don't underestimate his power to bend the central bankers to his will. Trump has forced a new political era in this country where the rules and regulations of the past seem to be falling by the wayside on a daily basis.
I couldn't help but notice last week, the April 8th piece in Barron's, a well-regaraded business and investment newspaper. "Is the bull unstoppable?" the editorial team asked, in a huge front-page headline. They went on to write "And just the fact that we're asking the question — on the cover of Barron's, no less — could be a contrarian indicator signaling that the market has truly topped."
They recognize that many times in the past, when a major media publication splashes a story like that on their cover page, a correction, or even a bear market, develops within a short period of time. If you couple this article with yet another increase in bullish sentiment of the Investors Intelligence Advisors Sentiment poll, which came in at 53.9 percent (the highest reading since last October and another contrarian indicator), readers should not be surprised if sometime soon we see a 4-5 percent hit to the averages.
So what? All it would mean for the markets is a much-needed correction before making even higher highs in the months to come. Of course, that forecast is largely dependent upon a trade deal with China by May. The negotiations, according to the White House, are progressing favorably.
The president, however, is still hedging his bets. The word "if" continues to come up whenever Trump is asked about the progress in the U.S./China trade deal. Is that simply a negotiating ploy, or is he truly worried about successfully concluding a deal?
Another potential positive for the markets and the economy might surface if the president can make a deal with the Democrats in furthering a U.S. infrastructure initiative. Speaker Nancy Pelosi will be meeting soon with the president on the subject. It is one of the few areas that both parties can legitimately find common ground. Whether they can get beyond the concept stage, however, remains to be seen. In the meantime, stay invested.
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The Independent Investor: Retirement Savers Could See Positive News This Year (Maybe)
In this acrimonious political environment, little in the way of new legislation is expected to pass both chambers of Congress. One exception may be the Secure Act. Last Tuesday, a key House committee unanimously approved the bill, which would greatly enhance some private retirement plans.
The bill would not only increase the flexibility of 401 (k) plans but would also provide much greater access for small-business owners and their employees. The changes would hopefully encourage many more small businesses to offer private retirement benefits to their workers. It is the most sweeping legislation to come out of Congress in over a decade.
The sponsors, including the top Democrat and Republican on the tax-writing Ways and Means Committee, intend to allow smaller companies to join together to provide these plans and provide a $500 tax credit for companies that establish plans and provide their workers with automatic enrollment. It would also offer the opportunity for long-term, part-time workers to participate in retirement savings plans.
A case in point is Brothers Landscaping and Construction of Hillsdale, N.Y. The McNamee's established their business back in 2007. Twelve years later, the company's revenues are just shy of $1 million a year.
I have known these guys ever since they started cutting my lawn in 2007. Hard-working, conscientious, and honest to the bone, it is men like these who are the backbone of this country. James, 29, called me a few weeks ago to explore opening a 401 (k) plan for he and his 28-year-old brother, Tucker, as well as four additional employees.
"We felt we had to do it in order to compete with much larger companies in our region," James explained. "Our work force ranges from 21 to 29 years old and we need to keep our key qualified help around through providing added incentives."
Although Brothers Landscaping has several additional valuable, part-time employees, under the exiting rules, they do not qualify to be included in the plan. The McNamees are hoping that the Secure Act finally becomes law. They are planning to embrace its key provisions wherever they can.
The legislation also benefits older workers like me. It would repeal the maximum age for IRA contributions. Today under the old laws, at 70, I can no longer contribute to my traditional IRA. I am also required to take a mandatory minimum required distribution (MRD) from my tax-deferred IRA at 70 1/2. The Secure Act would repel the maximum age provision and push back my MRD until I reach 72 years of age.
It also allows 529 educational plans to cover home schools and student loans in addition to college-related expenses. That could be a big boon to parents and students alike who are drowning under educational loan debt.
The Senate Finance Committee introduced a companion bill last week as well. The legislation is an acknowledgement by Congress that more and more Americans are facing a "retirement crisis," according to Chairman Richard Neal, D-MA. Over one-third of all Americans have less than $5,000 saved towards retirement (21 percent have saved nothing at all), according to Northwest Mutual's 2018 Planning and Progress Study.
Obviously, Social Security benefits, which were never intended as a retirement vehicle, are not going to cut it for those who haven't saved enough. As such, more and more older Americans are going to need to continue working and saving if they expect to survive financially. To make matters worse, Americans are living longer, which is a mixed blessing, since we will need more money for longer to make ends meet in our advanced years.
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@theMarket: Markets on a Tear
As fearful as investors were back in December, the greedier they have become in April. Investor sentiment is climbing, interest rates are falling, and the Fed is on hold. All we need to push the markets even higher is a trade deal with China. It's coming.
The S&P 500 Index has tacked on a hundred points in nine days. The all-time record highs for that index is at 1,940 less than 50 points away. That index has been up seven days in a row. The Dow up 6 out of 7. Last week's worry, the inverted yield curve, which occupied everyone's attention, is a barely remembered footnote in buyers rush to own stocks.
Of course, there are warning signs sprouting up throughout the markets. The Algos and computer-driven "Bots" are pushing the indexes beyond their limits. Plenty of strategists are warning that the markets have come too far, too soon. They are probably right, but they were probably right one hundred points ago.
If we all know this, then why not get out while the getting is good? The simple answer is no one knows where to get back in. You might say "I will wait until equities become low enough to offer fair value." The problem is that no one knows what that means anymore.
We live in an environment where markets are pushed to extremes without much, if any, fundamental reason. Markets go higher "just because." And if that is the case, there is no telling when the flipside of these gains will occur. Every day there is a 50/50 chance that stocks will continue higher, but the same probability that they will go lower.
Plenty of people have called me who are now worried about how high the market's have climbed. They have made 18% or so in a short time and don't want to lose it. But in their next breath, they caution me against selling any of their funds "until the market looks like it is going to pull back."
If the truth be told, every day of the last two weeks, around lunchtime, the markets looked like that. But instead, during the last hour of trading, stocks recovered losses and moved even higher. Honestly, folks, if you are still operating within that mindset, you need to change your thinking. Please understand that the markets no longer conform to behavior patterns that may have worked for you a decade or more ago.
The bears will tell you that with the economy slowing, the yield curve inverting (last week's argument), and the likelihood that earnings will probably be negative in this year's first quarter, that the risk of a market decline is quite high. I do not dispute that.
However, with a Chinese/U.S. trade deal possibly just around the corner (2-4 weeks away), do you really want to miss out on the market's potential to celebrate? Then there is the president's new message to the Federal Reserve Bank that it needs to start another round of quantitative stimulus. Who knows whether the Fed will cave-in again and do the president's bidding?
As you know, I have been monitoring investor sentiment as an important contrary indicator for the markets. Wherever I look, that bullish (greed) sentiment is rising to levels which reflect extreme optimism. That's almost always a signal that we are in for a pullback. The question is when.?
John Maynard Keynes once said that "markets can remain irrational far longer than you can stay solvent." My advice: don't try to game this market, stay invested, and if a decline occurs, take your lumps because stocks will most likely recover and continue upward.
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The Independent Investor: Coffee Prices at 13-Year Lows
A few days ago, arabica coffee futures prices fell to a price they haven't seen since December 2005. But don't expect your morning cup of coffee to reflect those cheaper prices. The coffee business doesn't work like that.
Normally, when the price of a commodity falls (like oil), consumers can expect to see a drop in price at the gas pumps within a week or three. The same thing might happen if the price of beef, wheat, corn or any number of commodities experienced a decline in price, so why not coffee?
You might guess (as I did) that the demand for coffee by consumers must be falling, but that's not the case. In fact, more Americans are drinking at least one cup of coffee per day, if not more, than at any time since 2012. Over 64% of Americans drink a cup of the brew daily.
In order to understand this disconnect between the prices we pay at our local Starbucks or Dunkin Donuts, and the money that growers receive in places like Colombia, Brazil and Vietnam, we need to understand the present state of coffee production. Too many farmers are growing too much coffee. We call that "oversupply."
One of the culprits is government, which, in the case of Colombia, offered additional incentives for farmers to grow more coffee. In Brazil, where growing any sort of food is a big business, they decided to step up their coffee production. At the same time, the cost of growing coffee is also climbing, as costs of labor, energy, equipment, etc. keep rising.
Last year, Colombian coffee farmers were getting $1.08 per pound for their coffee, while the costs were closer to $1.40/pound. It has hurt Colombian farmers so badly that the Colombian Coffee Growers Federation is warning that it may stop trading coffee on the New York Stock Exchange altogether.
So, what makes consumers continue to pay more and more for their coffee? At the risk of dating myself, the year I was born, a cup of coffee cost my Dad 27 cents. Since then, it has climbed and climbed. Recently a survey by 24/7 Wall St, a business blog, tracked the price of a cappuccino today worldwide. In America, the price of a regular cappuccino cost $4.02.
The fact that a cappuccino was used instead of a simple cup of joe is instructive. A cappuccino is equal amounts of espresso, steamed milk and foamed milk. It is one of the most popular drinks in the world, but it isn't all coffee. Thanks to Starbucks and others who followed their lead, today's coffee drinkers rarely drink simple black coffee.
The next time you are in your local coffee shop glance at the menu. You may have a hard time spotting that plain coffee among the eggnog, pumpkin, salted caramel, chocolate, hazelnut, cinnamon, gingerbread and a dozen other ingredients that go into today's popular drinks. Consumers, for the most part, are now drinking coffee-based beverages. Increasingly, the amount of coffee in each cup is less and less. All those other ingredients keep climbing in price and make up more and more of the cost of that coffee cup to the seller.
That's not all, however. Rent, labor, local mandates and regulations, competition, distribution, marketing and last, but not least, commodities associated with your beverage of choice overwhelms that simple cup of black java.
It's my bet that you won't see a decline at the coffee counter any time soon, if at all. There may be some hope for the coffee growers, though. Some commodity experts are predicting coffee prices may rise by 20% or so in 2019, although so far that has not been the case.
They point to the fact that heavy-weight Brazil will have an off-year in production due to their practice of biennial production cycles. If so, the growers may keep their heads above water. Of course, any increase in costs will most assuredly be passed on to us at the coffee counter.
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The Independent Investor: The Business of Baseball
Attendance is down, as is viewership, as we head into the 2019 season. Major League Baseball is hoping some rule changes will turn around the decline. Will it be enough, and does it matter anyway?
Defenders of the game argue that last season's declines were to be expected. Television ratings for all sporting events have been declining for years. But TV ratings in the new world of digital streaming are not what they used to be. There just isn't a good way to capture this new viewership data.
However, there is no way of denying that no World Series (the most popular of baseball's games) has been able to beat the average of 20 million viewers per game that was achieved back in 2010. Last year, viewership of 2018's opening game was at an all-time low of just 3.6 million viewers.
Critics argue that Major League Baseball (MLB) needs to fix the sport in order to boost viewers. A list of criticisms includes "Young people aren't watching. The games drag on and it's boring." After ignoring these criticisms for years, the MLB is finally addressed what they see as the most troublesome issues: the length of games, pace of play and too many strikeouts.
The rule changes have included both on-field changes, as well as proposals from the player's union to improve the competitive balance of the franchises. Some of the suggestions include making the designated hitter universal across both leagues, a rule that would require pitchers to face a minimum of three batters, a 20-second pitch clock, and a reduction in mound visits.
There were several more suggestions, but it is clear that many of the new rules could speed up the game. Another complaint by fans has been that the same five or six teams seem to almost always win the titles (think Yankees and Red Sox). Some of the player's union suggestions would address that by improving draft positions to high-performing, lower-revenue teams, while penalizing teams that repeatedly lose large numbers of games.
But before you fall victim to those that proclaim the death of baseball, know this, Major League Baseball is still a thriving and quite lucrative business. MLB revenues passed the $9 billion mark in 2017, and last year hit $9.3 billion, which is an average of over $300 million per team. Almost 55 percent of that amount went to Major and Minor League player salaries. And MLB revenues are increasing at a much higher rate each season than players salary.
That doesn't mean that the players will be entering the poor house anytime soon. Last year, the average MLB player's salary was $4,095,689. The 2019 minimum salary paid to players called up from the minor leagues is $555,000. The top players can easily command $30-35 million per year with some, like Bryce Harper, signing a ten-year, $360 million contract.
While much attention has been paid to the declining physical attendance at the nation's ballparks, the facts are that stadium attendance is one of the least significant revenue sources for all 30 Major League ballclubs. Sure, when all the proceeds are touted up, several hundred million of that $9 billion comes from attendance, but stadiums cost almost as much to run.
No, the real money for baseball franchises is in media contracts, revenue sharing, and developmental technology like baseball's BAMTech, the MLB's direct-to-consumer streaming, data analytics and commerce management service with 8 million subscribers. It doesn't matter if their teams win or lose, which big shot players they sign, or how many fans are sitting in those bleachers; the money keeps rolling in day after day from this myriad of lucrative sources.
While demographic factors, like age or the decline in interest in playing team sports may crimp the profits of baseball on the margin, in my opinion, it will require a sea-change in viewership before baseball strikes out with investors.
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