@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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@theMarket: Does the Fed Know Something We Don't?
Sometimes too much good news can be interpreted badly. Take the U.S. central bank's about face on monetary policy late last year. That was good news and investors responded by bidding the stock market up by 20 percent. But this week we may have received even better news, or did we?
The Fed did more than met investors' expectation this week at the central bank's monthly Federal Open Market Committee meeting. Chairman Jerome Powell indicated that there would be no more interest rate hikes for the remainder of the year (after saying back in December that two rate hikes were on the table for 2019). There was even some discussion that a rate cut might be possible, if conditions merited such a move.
One would have thought that would send the markets flying, and they did, at least on Thursday. Friday, however, the opposite occurred. Granted, the reaction could simply be dismissed as a "sell on the news" moment or algos playing their daily games. If so, nothing more needs to be said. But I ask myself — why would Powell and the Fed be contemplating a rate cut?
The news startled some analysts and left them asking questions. Is the economy weaker than most suspect? Has the slow-down in the global economy infected the U.S. as well? Afterall, the Fed did lower their forecast for GDP growth this year from 2.3 percent to 2.1 percent, but it is still growing, or is it?
As most economists know, the economy is getting a little long in the tooth; we call it a "late cycle" market. One of the reasons you might want to cut rates at this point would be if you expected the economy to slip into recession fairly soon.
There is certainly a huge discrepancy between the Fed's forecast and that of the Trump administration. In his budget for 2020, Donald Trump is forecasting 3.2 percent GDP growth this year. Given his tweets about the Fed, that is understandable. He believes that the only problem with the economy is the Fed. He does not believe they are in touch with the market or understand things like trade wars and a strong dollar. Investors are hoping that he is right. Time will tell if the Fed knows more than we do.
In the meantime, stocks continue to climb. As I wrote last week, with the world's central banks in an easing mode, stocks are benefiting from all this monetary stimulus just like they have for the past decade. Investor sentiment continues to move higher as well with the latest readings indicating 53.9 percent of investors bullish — the highest level since Oct. 1, 2018. That is the fifth straight reading above 50 percent, which is usually a sign that some caution is called for in investing.
However, the percentage of bulls are still much lower than the 61.8 percent bullish level that was registered when the stock market hit record highs back in September of last year. As a contrarian indicator, sentiment is a useful tool, but only one in my bag of tricks. Clearly, we have had a great run since the lows in December with hardly a pullback to speak of. We could easily decline a couple of percent at any time
As long as we held the 2,800 level, any sell-off would set us up to make a run at the 2,900 level on the S&P 500 Index. If that were the case, it would mean that we not only erased all of the losses of 2018 but would be looking at an almost double-digit return for the stock market year to date. That's quite impressive, given that we are not even in the second quarter of 2019 yet.
But I don't want to get ahead of myself. Just be grateful you hung in there through the fourth quarter of last year, and by all means, ignore the noise and negativity. Stay invested.
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The Independent Investor: Will Pot Stocks Go Up in Smoke?
Today, medical marijuana is legal in 33 states, while recreational marijuana is legal in 10 states, plus the District of Columbia. Although there has been progress, little of the recent enthusiasm and hype over pot stocks will come to naught unless the federal government does a major about face and legalizes the substance. What are the chances of that?
Billions of dollars' worth of investment, stock market gains, and federal, state, and local taxes are at stake. Predicting the outcome of such a change in federal legislation is, for now, like betting all your chips on red or black in a roulette game. Nonetheless, a growing number of retail investors want to "get in" on pot stocks.
The calls and emails I get today are reminiscent of two years ago. Back then it was all about Bitcoin or some other cryptocurrency. As Bitcoin climbed (from a few hundred dollars to $20,000), the interest and demand to "get in" was almost hysterical. As you might imagine, most of those calls were made as Bitcoin hit new highs.
Fast-forward to today and, while no one has called about a cryptocurrency in over a year with Bitcoin now around $4,000, pot stocks are all the rage. And like Bitcoin, few callers know anything about the marijuana industry.
"What do I need to know?" said one client (an ancient hippie like me). "You put it your mouth, inhale, and bingo. You are high."
But smoking it is a lot different than investing in it.
There is now a bewildering array of investment vehicles (and more coming every day) that confronts the up-and-coming pot investor. There are over 80 exchange-listed pot stocks. Most are Canadian companies (where all pot is legal), which have a listing here in the U.S. Since the federal government still deems marijuana illegal, most big major stock exchanges won't touch them. In addition, there are well over 200 over-the-counter (OTC) securities that trade outside of the big exchanges. The question you should ask is which of those stocks will be a winner and how do I avoid the losers?
The short answer is you need to do your homework. Most investors I talk to are woefully uninformed when it comes to understanding this sector. They fail to realize that most (if not all) companies who engage in this business make no money at all. Part of the reason for this is their inability to borrow or obtain any kind of credit from the U.S. banking system. Until the federal government legalizes marijuana, it is a purely cash business.
To compound the problem, few investors do little more than read market research reports that project global spending on legal cannabis will grow by 230 percent and reach $32 billion by next year. Of that amount, $23 billion is expected to come from U.S. sales. But that forecast assumes that more states will legalize the drug this year and next. That's a big "if."
Clearly, there is a bull case for the pot industry. Readers may be aware that over 200 million Americans reside in those states that have already legalized marijuana for medical or recreational use. And over 2/3rds of Americans support its legalization, according to Gallup polls.
What investors ignore is that the medical market for cannabis and the recreational market are vastly different animals. To muddy the waters further, there is the hemp industry. Hemp is another form of the versatile cannabis plant that has been used in textile production, foods and other home products for decades. There is also a growing use of cannabidiol or CBD. CBD is a non-psychoactive cannabis compound that is being infused in products as diverse as skin care, coffee and even dog biscuits. Titus, our 9-year-old chocolate Lab, who suffers from arthritis, for example, is now munching on CBD cookies several times a week. Over 40 states have already passed some kind of CBD legislation.
Each sub-sector of this marijuana industry has a different profile, profitability, and future. But in the rush to make money, these realities are all but by neophyte speculators. Does that mean that pot stocks will go the way of Bitcoin in a year or two?
Some will, and some won't. Like all fledgling industries with promise, there will be some companies that make it and a whole lot that won't. Next week we will discuss what kind of companies and what trends to look for in the months and years ahead.
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