June 27, 2017

Stocks opened lower today. The Dow is currently down 14 pts and the S&P 500 is down .24%. Telecoms and utilities are getting hit, down over 1% at the moment. Semiconductors & biotechs are giving up ground as well. On the other hand, banks and oil/natural gas stocks are up nicely this morning. The dollar is weaker against a basket of foreign currencies today, and has given up about 5% this year. That’s helping US multi-national companies doing business overseas. Most commodities are rebounding (copper, iron ore, oil). WTI crude oil is up again today, trading around $44.11/barrel. The more convinced traders are that oil bottomed last week, the better the stock market will do in the near-term. Bonds are selling off today (maybe a response to oil?). Remember, falling bond yields happen to be the linchpin in most bear investor forecasts. At the moment, the 5-year Treasury yield is back up to 1.81% and the 10-year is up to 2.19%. 

Alphabet (GOOGL) reports the European Union (EU) has imposed a record $2.7bil fine for anti-competitive behavior. And it seems like the company intends to pay the fine. The EU says it investigated the company for seven years and found that Alphabet 1) has monopoly power, 2) altered its search engine results to give priority to its own comparison shopping service (“Google Shopping”), and therefore 3) disadvantaged rival online shopping comparison services. So this is very similar to what the EU did to Microsoft a decade ago. 

Bloomberg ran an article referring to research in QSR Magazine showing the restaurant industry is still hurting. “Restaurants have now posted four consecutive quarters of declining year-over-year sales. The last time the industry experienced a year with all negative quarters was 2009, when the economy was suffering the effects of the great recession.” Restaurant traffic has declined and check growth flat. So the question is, if the economy is stable and consumer spending is growing, why are restaurants getting left behind? Well, profit margins are suffering because wages are rising, and of course this hits quick-serve businesses harder. Remember the push for $15/hour minimum wage? In addition, competition is incredibly fierce. And differentiation like “organic” and “all natural” adds to restaurant operating costs. Think Panera. Are they able to fully pass along added costs to the consumer? Finally, consumer demand patters are changing. Mediocre sit-down chains (i.e. Applebees) and mall food courts are outdated formats. It will take time to shake them out. 

The Case-Shiller Home Price Index rose 5.5% in April from year-ago levels. This nation-wide index has been trending from 4% to 5.5% for the last three years. Results confirm this is very much a sellers’ market. In fact, Bloomberg says a “severe inventory shortage” is the main reason prices continue to head higher. Meanwhile, wage growth just hasn’t kept pace with home prices and this is hurting would-be first-time home buyers. Still, it’s pretty clear that housing demand is higher than supply, and renting is an increasingly unattractive option, so home prices should continue to rise.  

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