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What I Think I Learned Last Week #12

Big mo’ is back! From the US economic growth demonstrated by surprisingly strong 3.0% GDP growth and 2.2% growth in durable goods (more than the 1% expected) to the earnings from Big Tech who posted Big Earnings on Thursday,  the momentum driving the markets forward is strong.  For the 50th time this year, the S&P 500 closed at an all-time high.

Let’s continue with the economic momentum theme.  The third quarter US GDP report of 3.0% growth following the second quarter’s 3.1% marks the fastest six-month GDP growth in three years, even with two devastating hurricanes thrown into the mix. US new home sales jumped 18.9%, the biggest leap in 25 years; expectations were for a drop of 0.9%. The United Kingdom grew by a faster than expected 0.4% during the third quarter.

Now, the big story: earnings. Early in the week saw strong industrial earnings from companies like 3M, CATERPILLAR, UNITED TECHNOLOGIES, GENERAL MOTORS and FORD. Even France’s RENAULT joined the earnings parade with a strong report. These reports were quickly forgotten by Thursday night when technology giants INTEL, MICROSOFT, ALPHABET and AMAZON all posted huge earnings surprises. INTEL is a relative minnow, even after a 7% jump on Friday, with a $200 billion market cap. AMAZON, with its +13% move passed the $500 billion market cap level, while MICROSOFT’s 6% move gave it a $646 billion market cap. ALPHABET, gaining 4% on its earnings report, passed the $700 billion market cap.

The large gains by big tech are worrying some that we are entering a bubble like 2000. As I pointed out three weeks ago in “Mythbusters #1” these price moves are being driven by strong fundamentals. Just take a look at AMAZON. Less than a dozen companies in the world have more than AMAZON’s $160 billion in annual revenues and none of those companies offer growth rates consistently better than 20%. AMAZON just reported 34% revenue growth, which is their fastest growth rate since 2011. Not only are they growing faster than anyone, they are accelerating their own growth rate.

You better have an AMAZON plan: as I wrote earlier this month in “Once the Bear is in the Tent” AMAZON is re-writing the playbook. This week, it was reported that pharmacy chain CVS is in talks to buy AETNA for more than $66 billion as the drugstore giant tries to strengthen competitive position against AMAZON’s pending move into healthcare. Why the urgency? It was reported that AMAZON has received wholesale pharmacy licenses in multiple states in the US.

APPLE reports this week, but CEO Tim Cook last week did say that customer demand for the iPhone X is “off the charts” as demand from pre-orders exceeded initial supply within ten minutes, leading to Apple having its best day in the stock market in two months. For those keeping score, APPLE’s market cap is now over $842 million.

In other market news, the euro had its worst week against the dollar so far this year, driven primarily by US economic strength and the European Central Bank’s decision to continue its dovish monetary policy. While reducing the bond purchase program, the ECB kept the commitment open-ended and also signaled that any interest rate increases will be a long way off. In addition, the Catalan crisis also weighed on the euro.

The weak euro helped European stocks as Germany’s Dax index set a new record on Friday and French stocks hit their highest level in more than nine years.

Shinzo Abe, fresh off a big election victory, has demanded Japanese companies lift pay by 3% in an effort to give a further boost to Abenomics.

India announced a $32 billion bank recapitalization plan in an effort to help the banks to start lending again in order to provide an economic boost.

As expected, Brazil’s Monetary Policy Committee cut the policy rate by 75 basis points to 7.50%, a slowing from the previous pace of 100 basis points. On the other hand, Colombia’s Central Bank surprised the market by reducing its policy rate by 25 basis points, leaving its benchmark rate at 5%.

Finally, the US National Oceanic and Atmospheric Administration issued a “La Niña watch” by predicting a 55%-65% chance of the phenomenon occurring in 2017-18. Is this important? You bet it is. During the 2012 La Niña episode, grain prices surged as the US Midwest suffered its worst drought in half a century.

And that’s what I think I learned last week.