David Ross

What I Think I Learned Last Week #17

Even Europe has its FANG, but it isn’t a group of tech stocks. According to the Wall Street Journal last week, Europe’s FANGs are a geographical grouping: France, Austria, the Netherlands and Germany. But, according to Morgan Stanley, these are FANGs that you shouldn’t rush to buy because they are the most expensive stock markets in Europe relative to the last 10 years, with only Austria showing positive earnings trends.

Speaking of FANG, tech stocks were pummeled midweek from a combination of Jerome Powell’s testimony, North Korea missiles, Michael Flynn’s guilty plea and tax cut flip-flops led a huge investment rotation from tech to financial stocks. Wednesday saw the worst fall in the Nasdaq in three months.

The Wall Street Journal reported on Saturday that foreign-investor money is pouring into the US stocks at the fastest rate in five years, following four consecutive years of outflows. Meanwhile, Bank of America Merrill Lynch said that allocations to the US by global fund managers rose in November.

Fed officials were talking last week. On Friday, St. Louis Fed President James Bullard warned of a key bearish signal emerging as the yield curve flattens if the Fed hikes rates as fast as they intend and urged a more cautious approach to rates. Dallas Federal Reserve President Robert Kaplan also warned about the flattening yield curve.

The Bank for International Settlements, the central banker to central banks, warned that interest rates must be lifted enough to cool down some already “frothy” markets.

Senate Republicans were able to pass what they are calling tax reform. It really is not a reform, merely a tax cut. The next step will now be a House and Senate conference committee to come up with a compromise bill that will go to both chambers for a simple majority vote. The plan is that it will be passed before year end. A key provision is the repatriation tax, which could trigger significant dollar strength as cash is repatriated back to the US next year.

Online sales this Thanksgiving weekend smashed previous records with nearly 18% more sold this year than last. This year also saw 40% of online purchases done via mobile, compared to last year’s 29%.

On Sunday CVS agreed to buy Aetna for $69 billion, possibly responding to reports during the week of Amazon in exploratory talks with generic-drug makers such as Mylan and Sandoz.

US third quarter GDP growth rate was revised up to its quickest pace in three years, hitting an annualized pace of 3.3%.

US Consumer Confidence hit a 17 year high, last achieved in November 2000 while economic confidence in the eurozone hit its highest level since October 2000.

Meanwhile, French consumer confidence ticked up after declining for four months in a row. However, French consumer spending fell dramatically last month by dropping 1.9%. This was the biggest fall in more than five years and well below consensus expectations for a 0.1% drop.

US new home sales, after surging in September, surprised again with an unexpectedly large upward move in October by rising 6.2% to a seasonally adjusted rate of 685,000. Expectations were for sales to fall 6.4% to a 624,000 annual rate.

According to the Wall Street Journal, half of the 35 biggest stock markets in the world have hit all-time highs this year, the most since 2007. Not coincidentally, only 13 countries are in recession, the lowest number since 2007.

In the same report, the Wall Street Journal said the “MSCI All Country World Index has jumped to record highs, having risen for a record 12 consecutive months through October. That is its longest streak in at least 30 years.”

The Bank of England is forcing UK banks to hold an extra £6 billion in capital to guard against risks after Brexit. Definitely not a positive for economic growth.

The European Central Bank warned that the state of euro-zone banks is a threat to economic recovery, saying they need to modernize and cut costs like the Scandinavian banks or face falling profit margins.

South Korea’s central bank raised interest rates for the first time in six years.

Reversing five quarters of slowing growth, India’s economy picked up steam, growing at a 6.3% annualized rate in the third quarter.

Opec reached a deal with Russia to extend oil production cuts past the original March deadline all the way through 2018. This helped Brent crude to rise 3.5% and West Texas crude to increase 5.5% during a November.

A study by Index Ventures found that European tech workers own only half as much of their companies as tech workers in the US. A major reason is that European companies reserve a much larger piece of the company to senior executives. The study showed that in Europe, employees own only 10% of European start-ups, compared to 20% in the US, which also offers higher salaries. Senior executives in Europe own two-thirds of start-ups compared to only one-third in the US.

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