Let me start by reminding you that with 17 speakers and over 400 investors from around the world I will soon be attending the fifth annual Irrational Economic Summit. Let me know what questions you want addressed and I will take copious notes and come back with informed opinions on your concerns
As for the markets, for now the bears look like they’re throwing in the towel, since stocks are in a continuous upward trajectory. As Rodney Johnson, Dent Research put it on Friday, October 6, 2017, “Stocks made new record highs every day this week, while bonds maintain a holding pattern.” That said, we must remain vigilant.
Now is the time to prepare your portfolio protection strategies. As I wrote on August 25, 2017, four of the top five biggest losses happened between September and December 2008 according to Kyle Anderson, Money Morning, August 25, 2015. Keep in mind the stock market lost 25% in the single month of October 2008, says Yahoo Finance.
Thanks to Dent Research, provided here is our weekly information roundup ending the week of October 6, 2017. We start each subject with what you hear in the news and finish with what that information means to you. We hope this information will help you separate the noise from the news
U.S. Economy Loses 33,000 Jobs in September... The unemployment rate dropped 0.2% to 4.2%, while wages jumped 0.5% and now stand 2.9% higher than last year.
What it means – The hurricanes made a mess of Houston, Florida, Puerto Rico, and now the jobs statistics. The gyrations were expected, although maybe not to this degree. Most people expected a low positive reading, not a negative number. Still, everyone should ignore this report.
But don’t tell that to inflation hawks. Interest-rate watchers spotted the rising wage number and, coupled with falling unemployment, surmised that tight labor conditions drove compensation higher.
Normally, this would give the Fed a reason to raise rates in December. But there’s a catch. With Hurricane Nate on the loose, It’s still about the hurricanes! The economy shed jobs at the low end, which leaves more high-end workers in the survey. This skews the wage numbers, just as it did after the financial crisis. In the months ahead, as the jobs return, the wage figure should drop.
Interestingly, our old friend the birth/death adjustment was negative last month, so it reduced the non-seasonally adjusted employment numbers by 49,000. Go figure.
US Auto Sales Jump to 18.6 Million Annualized Rate in September... Riding the replacement wave after Hurricane Harvey, auto sales had their best month in 12 years.
What it means – I wrote about this during the storm. It was obvious that hundreds of thousands, if not millions, of cars sustained flood damage and would spur a replacement surge. Houston-area residents report seeing a lot of paper registration tags.
Cars are interesting things. They wear out, and styles change. People replace them for lots of different reasons, and on a regular basis. Hurricane Harvey bailed out the automakers, which were having a down year, but chances are many buyers simply pulled forward demand. This means new car sales in areas affected by the storm could dip dramatically after this replacement wave is over.
That’s very different from the used car market. When people replace vehicles, the old ride goes into the used car inventory. The storm will remove all of those cars from that flow, arguably pushing up the value of used cars for years to come.
Tesla Delivered 17% of the New Model 3 Vehicles it Forecast... Citing production bottlenecks, Tesla CEO Elon Musk announced the company delivered 260 of the 1,500 Model 3 cars it expected to reach customers last quarter. Model S deliveries fell 11%, while Model X deliveries beat expectations.
What it means – Tesla’s Musk makes a habit of over-promising and under-delivering. So far, it hasn’t hurt the company. Tesla’s stock, which fell several percentage points on the news, rebounded the following day and moved higher.
In the days since, Ford and GM have announced major plans to expand their electric vehicle lineups. It will be interesting to see if Tesla can grow when the large auto makers ramp up production.
No matter who produces them, electric cars should take a lot of market share as new, solid-state lithium ion batteries come to market. These batteries are lighter, carry more power, and can recharge in less than 10 minutes, all of which makes them practical for more users.
Puerto Rico Bonds Drop in Value after President Trump Says They Must Be Wiped Out... Discussing how Puerto Rico would recover, the president noted that the commonwealth is bankrupt, and to assist in its recovery bondholders would lose everything.
What it means – Well, there’s a reason he was called the King of Debt before he was called Mr. President. Trump sees debt as a tool, with sophisticated, rational actors on both sides. That’s not how most municipal bondholders see it, especially because the issuer – in this case, Puerto Rico – promised to use its full faith and credit to make good. Since the commonwealth still has plenty of assets but not cash, it’s fair to say the government officials have held back. Whether it’s right or wrong for them to do so is another story. For now, Puerto Rico bonds trade at about 35 cents on the dollar.
The bigger question for the island is, “What happens now?” Does the U.S. government simply build the commonwealth an electric infrastructure from the ground up, totally bypassing the existing, petroleum-fed power generation plant? Do we send aid dollars and let the same officials that drove Puerto Rico into insolvency control the cash? It’s likely to end up a mixture of the two. Local officials will demand control, but they’ll have to put everything buy the PROMESA Act oversight board created in the summer of 2016. Let’s hope the board stands firm.
The Catalans Voted for Independence from Spain, and the Kurds Voted for Independence from Iraq... National governments in both regions declared the votes illegal and vowed to punish local authorities.
What it means – The Catalans believe they provided more financial support during the recent crisis than other regions, and at the same time the national government curbed its autonomy. Both things are true.
But if Catalonia splits from Spain, it will have all the questions now swirling around Britain’s Brexit, with the added complication of introducing a new currency. Any split would give other restive regions in Europe hope that they, too, could break away. The wild card here may very well turn out to be a country Americans love to visit, Italy. So stay tuned for possible Italy debt default and Euro breakup.
In the Middle East, Kurdistan overwhelmingly voted to separate from Iraq. The semiautonomous region produces about 600,000 barrels of oil a day, and its Peshmerga fighters were among the best allies in the fight against Islamic State.
Iraq doesn’t want the oil revenue to go away, while Turkey and Iran are concerned their own Kurdish populations will start entertaining ideas of independence. Any disruption in this part of the world could drive oil prices higher.
Amazon Experiments with Delivery, Sending Shares of FedEx and UPS Tumbling... The e-commerce giant is testing its ability to pick up goods from third party merchants that sell on the website and deliver those items to retail clients.
What it means – If Amazon can do it, then it means the company can lower its dependence on traditional shippers like FedEx and UPS. It also means the company will spend less with the U.S. Postal Service, driving that quasi-government entity further into the red.
The news will probably weigh on the shippers for months as we go through the holiday season and Amazon figures out if it can save any money by taking the responsibility in house.
Russian Mobile Phone Company MegaFon Issues 500 Million Ruble in Bonds Using Blockchain... The Russian company went straight to bond buyers, recording purchases on the open ledger system.
What it means – Wall Street, you’re about to get smacked! If securities issuers can go straight to buyers, then they no longer need the pricey middlemen called investment bankers. Eons ago these guys would shop a new deal in a dog-and- pony show, explaining to brokers why it would be great for their clients to buy the stock, bond, or whatever was on offer. The internet eliminated the need for such marketing. Now, investment bankers serve only as gatekeeper, for
which they demand a hefty fee. If issuers can use blockchain and totally bypass investment bankers, they will save a fortune.
But there’s a catch. The SEC kind of likes the investment banks. They give the agency a reason for being. If issuers go directly to investors, then the SEC will lose a lot of power. It looks like a turf war in the making, with investors paying the price one way or the other.
Next Week – The second week of October includes the minutes of the latest Federal Reserve meeting and reports on consumer prices and retail sales.
The proof is in the planning.
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