What I think I learned last week #36
It was a busy week last week, with US & Europe Central Bank Meetings, Tariffs, Canadian weakness and dishonesty, the G-7 summit that Trump wanted to make the G-8 but actually turned into the G-6+1, and the summit with North Korea that Trump thinks he won. The net result of all of this was the S&P 500 ended the week all of 0.01% higher than it started. It’s like it was all just a dream and never really happened.
While Trump and Canada’s Trudeau do not get along, a lot has been made of the relationship between Trump and Macron. Here is a similarity: It turns out both have a China problem.
Speaking of China problems, according to official figures, China’s retail sales, investment growth and industrial output came in below forecasts in May. Retail sales, by increasing 8.5%, fell by almost 100 basis points from April’s year-on-year number and also missed expectations of a 9.4% increase. This was theslowest rate since June 2003, fifteen years ago. Total fixed-asset investment growth missed the forecasted 7.0% by slowing to 6.1%. Finally, industrial output rose 6.8%, also weaker than consensus estimates calling for 6.9% growth.
Do you want some more weak industrial output numbers? Look no further than Europe. Last week it was reported that industrial production in the Eurozone fell more sharply than expected in April, resuming its 2018 decline by being the fourth month out of the last five in which industrial production has fallen. The 1.7% year-on-year gain was well below the previous month’s number of 3.2% and missed expectations for a 2.8% gain.
This continued sluggishness in the Eurozone economy led the European Central Bank to make a significant cut to its forecasted 2018 growth from the previous 2.4% expectation from March to 2.1% today.
This then led to last week’s announcement from the ECB that while the asset purchase program is expected to end in December, the ECB expects interest rates to remain unchanged at least through the summer of 2019.
Meanwhile, as I pointed out last week, the US is an outlier in terms of economic growth and optimism. Consider this front page headline from the Wall Street Journal Friday, June 15: Growth In U.S. Leaves World Behind
US retail sales climbed at their quickest pace in eight months in May as American consumers continued to spend. Headline retail sales jumped 0.8% in May from the previous month, exceeding expectations for a 0.4% increase.
More news on the stronger US economy: US consumer prices posted the strongest annual growth since the beginning of 2012. The consumer-price index rose a seasonally adjusted 0.2% in May from the prior month. Prices rose 2.8% last month from the prior year, the strongest reading since February 2012.
Continued economic strength and the increase in inflation led the US Federal Reserve to lift interest rates by a quarter of a point. They also signaled thelikelihood of continued rate hikes through 2018 and 2019 due to accelerating growth and strong job creation. By increasing rates to a range of 1.75% to 2%, it marked the seventh hike in the current cycle.
This combination of US strength, European weakness, a hawkish Fed and a dovish ECB led to euro weakness as it fell 1.3% on the week against the dollar. On Thursday, the euro had its worst day in over two years.
This US and European dichotomy has also led to a “world of two halves” as global investors pull money out of Europe and emerging markets to invest in the US as the US equity markets experienced their sixth straight week of inflows.
In company news, Tesla said it will cut about 9% of its workforce in an effort to deliver its first profit. Tesla has never made a profit in its 15 year history.
US tax preparer H&R Block is having some profit problems too as its shares fell 18% in one day last week, its biggest decline in more than 30 years. The company said it was closing 400 locations and gave disappointing revenue guidance.
The court-approved acquisition by AT&T of Time Warner was approved and completed last week.
Immediately afterwards, Comcast made a bid for Fox, trying to upset Disney’s plans to acquire Fox.
You can Google it. Facebook Like. Magna, a division of Interpublic Group of Companies, predicts global ad revenue will increase 6.4% to $551 billion this year, up from an earlier projection of 5.2% growth, including ad spending on cyclical events like the Olympics. The reason for the adjustment is the growth of the digital ad titans Facebook and Google. “The thing really that we revise up for is digital,” Mr. Letang, executive vice president of global market intelligence at Magna, said. Growth from small and local businesses was “bigger than we thought.”
Who needs GAAP accounting when you can have “comuunity-adjusted ebitda”? Despite posting a $933 million net loss for 2017, WeWork claimed to actually have a profit once you exclude interest, tax, depreciation, amortisation, share-based pay, other operating expenses, sales and marketing spending and the cost of opening new locations. This “community-adjusted ebitda” was $49.4m for 2017.
Finally, context is everything. A source that I like to read, Finimize, wrote the following: “It’s no $7 billion giant like rival ASOS but at a $3 billion valuation, Boohoo.com is still a force to be reckoned with”. Seriously? A European Ecommerce company is considered a giant with a $7 billion market cap? Let me introduce you to America’s Amazon and its $800+ billion market cap. Now that’s what I call a giant.
And that’s what I think I learned last week…
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