The General Market
Best August Performance In 4 Years
Despite dropping on Thursday and Friday, the main U.S. stock market benchmarks closed with historic highs in August. The S&P 500 Index notched all-time highs this week. The resurfacing of trade fears did not prevent the Dow Jones Industrial Average and the S&P 500 from notching their third straight weekly advances.
For the week, the Dow Jones climbed 0.7% while the S&P 500 climbed 0.9%. This month, the Dow added 2.2%, and the S&P 500 gained 3%. Meanwhile, the Nasdaq Composite Index posted a weekly gain of 2.1% and climbed 5.7% for the month. The tech-heavy index booked its second straight positive week and registered its best August return since 2000. As a recap, the Dow Jones has gained for two straight months. It was also the best August performance for the S&P 500 and the Nasdaq since 2014.
No New NAFTA Yet
Trade negotiators from the United States and Canada were running after a Friday deadline to come up with a modernized version of the North America Free Trade Agreement (NAFTA). However, both sides did not come to an agreement.
The U.S. and Mexico were able to resolve their bilateral differences to reach a common ground earlier this week. The office of the U.S. Trade Representative said that President Trump formally notified Congress of the trade accord with Mexico. Their statement said the agreement is the most advanced and high-standard trade agreement in the world.
U.S. Commerce Dept. swamped with requests for tariff exemptions
The U.S. Commerce Department has received more than 37,000 tariff exemption requests which the assigned small staff is finding difficult to handle. Of the total exemption requests, only 2,871 have been acted upon.
Berkshire Hathaway Buys More Apple Shares
Value investor Warren Buffett confirmed on Thursday during an interview with CNBC that he had purchased “just a little” more of Apple. In a regulatory filing by Berkshire Hathaway Inc. (BRKA) earlier this month, the company had bought 12.4 million shares of Apple in the second quarter. Their total shares are 252 million as of June 30.
Apple Buys Startup Lens Maker
Apple Inc. (AAPL) has confirmed on Wednesday their acquisition of Akonia Holographics. The Longmont, Colorado-based company is a startup focused on making lenses for augmented reality glasses.
The purchase is an indication that the tech giant has plans to make a wearable device that would superimpose digital information on the real world.
Liquidation sales at Sears and Kmart Stores
Sears Holdings Corp. (SHLD) has released the list of unprofitable stores numbering 46 located across 28 states that will close in November. Of the total, 33 are Sears’ stores and 13 are Kmart stores.
The struggling department store chain said that as early as August 30, the liquidation sales at these closing stores will begin. The last time Sears enjoyed a profitable year was 2010. Since then, the company lost $11.2 billion with sales skidding 60% during the period.
Consumer Services Sector Highlights
Coke Buys U.K.’s Coffee Giant
Coca-Cola Co. (KO) $44.57 as of 08/31/2018 (-2.86% YTD)
- Coca-Cola Co. is back in the headlines after making a major announcement on Friday. The company is set to acquire UK coffee giant Costa Coffee for $5.1 billion. Coke is expanding its portfolio beyond sugary drinks. Recently, the soft drink maker invested in sports drink upstart BodyArmor which is the potential rival to PepsiCo Inc.’s (PEP)
- The company has been attempting to add coffee to its portfolio but lacks the right platform to sell coffee on its own. But the coffee brand from the U.K. will help Coca-Cola achieve its goal of becoming a total beverage company that sells everything from water to sports drinks.
New Growth Area
- Also, with the soda market facing a downturn, Coca-Cola is making a push into new potential growth areas. Costa Coffee will give Coke a new retail presence and a solid footing in the ever-expanding coffee market. Costa has nearly 4,000 stores across 32 countries covering parts of Europe, Asia Pacific, the Middle East and Africa.
- Besides the thousands of retail stores, Costa Coffee also has smaller on-the-go outlets called Costa Express, a roastery, and for-home coffee products. Company CEO James Quincey told investors, “This is a coffee strategy, not a retail strategy.” The company is aiming for beverage domination and having coffee shops will bring them closer to that.
- The deal is expected to be completed in the first half of 2019 after the approval from shareholders and regulators. But once the deal is firmed up, Coke will be in direct competition with Starbucks Inc. (SBUX) and several other global coffee and food brands.
- Costa is a much smaller company than Starbucks and much less known in North and South America where Starbucks has over 16,000 locations. But Costa is a bigger player in the UK than Starbucks. It also has over 450 locations in China.
- Costa will definitely give Coca-Cola new capabilities and expertise in coffee. The system of Coca-Cola can create opportunities to grow the Costa brand worldwide.
Swiss Food Giant Seals Licensing Deal with Starbucks
Starbucks Inc. (SBUX) – $53.45 as of 08/31/2018 (-6.93% YTD)
- Nestle SA will soon sell Starbuck Inc.’s (SBUX) products such as Starbucks, Seattle’s Best Coffee and Teavana TM/MC outside of the American company’s coffee shops. The two companies completed their $7.15 billion licensing deal on Tuesday.
- The Swiss food giant has been granted perpetual rights to market and sell the U.S. coffee maker’s packaged coffees and teas around the world. Nestle is also hiring about 500 employees from Starbucks in the U.S. and Europe. The Swiss company is harnessing the name recognition of Starbucks. It hopes to draw strength from Starbucks’ 28,000 outlets around the globe and massive draw in the U.S.
- Aside from this unique consumer-goods alliance, Starbucks is trying to win back Frappuccino customers. The Wall Street Journal reported on Thursday that the U.S. coffee chain is quietly testing new healthier Frappuccino and flavored latte recipes in 600 stores across California, Missouri and Rhode Island. The new recipes are part of Starbucks’ effort to reduce sugar content by 25% in its indulgent beverages like Frappuccino by 2020.
Biotechnology Sector Highlights
Small Biotech Collaborates with Biotech Heavyweight
Affimed NV (AFMD) $5.45 as of 08/31/2018 (+319.23% YTD)
- The shares of Affimed NV soared to a jaw-dropping +246.87% on Tuesday from $1.60 to $5.55. AFMD jumped again on Wednesday to $6.15 before profit takers cashed in on Friday. AFMD closed the week at $5.45.
- On Monday, small biotech firm Affimed NV signed a lucrative licensing deal with Roche Holdings AG (RHHBY) for its Redirected Optimized Cell Killing (ROCK) platform. The company will be receiving a $96 million upfront payment to be distributed over the next 12 months.
- Additional, Affimed is reportedly eligible to receive a staggering $5 billion in additional milestone payments and royalties on sale from the said cancer collaboration agreement with Roche. However, the transaction is subject to customary closing conditions and a clearance under the Hart-Scott-Rodino Antitrust Improvements Act. But it is expected to close in the third quarter of 2018.
- Analysts believe this promising immuno-oncology stock is primed to head even higher because of its partnership with the biotech heavyweight. The two companies will work together to commercialize and develop a host of immunotherapeutic treatments for multiple cancers.
- The agreement will include other pipeline candidates from Affimed’s ROCK platform. They are now under evaluation for multiple solid and hematologic tumors. The partnership is strategic for both parties. Roche should be able to leverage its extensive expertise to get the most out of Affimed’s unique cancer-fighting platform. Meanwhile, Affimed will boost its cash flow to a great extent.
- Apart from the massive revenue opportunity, AFMD should also benefit from its partnership with one of the best in the business at developing novel oncology treatments. It’s a win-win situation from all angles.
Market Shakeup in September
The publicized shakeup in the Global Industry Classification Standard (GICS) will happen after market close on September 28, 2018. Last November 2017, index providers S&P Dow Jones and MSCI announced the renaming of the Telecommunications sector to ‘Communications Services’ sector.
Stocks from the Telecoms, Information Technology and Consumer Discretionary will comprise the refreshed sector. The indexing firms said the changes are intended to improve the categorization of stocks to reflect the changing nature of the global economy.
The New Communications Services Sector
- The tech sector will be most affected by the stock migration and is being cut down to size. The stocks that are heading over to the new communication sector are Alphabet Inc. (GOOGL) and Facebook Inc. (FB) along with Twitter Inc. (TWTR), Activision Blizzard (ATVI), Electronic Arts (EA), and Take-Two Interactive Software (TTWO).
The tech stocks will be joining media and telecom companies that would include AT&T (T), CBS Corp. (CBS), Comcast Corp. (CMCSA), Netflix (NFLX), and Verizon Communications (VZ).
The Information Technology Sector
- The tech sector will be depleted and most stocks will be from hardware, software, and semiconductor companies. Apple Inc. (AAPL) and Microsoft Corp. (MFST) are the two big names. Cisco Systems Inc. (CSCO), Intel Corp. (INTC), Oracle Corp. (ORCL), NVIDIA Corp. (NVDA), MasterCard Inc. (MA), and Visa Inc. (V) belong to this sector too.
The Consumer Discretionary Sector
- The consumer discretionary sector will have some changes as well but Amazon.com Inc. (AMZN) will be the top company in the sector. eBay Inc. (EBAY) will also be added to the sector to join Home Depot Inc. (HD), McDonald’s Corp. (MCD), Lowe’s Companies Inc. (LOW) and Nike Inc. (NKE) among others.
S&P is instituting its GICS reclassification this month but MSCI is aiming to reclassify in early December. There is difference in timetables and some ETFs will be in limbo for a couple of months. There will be adjustments, reshuffling, and swap of holdings.
The Week Ahead
While the renewed fears on trade were unsettling, the U.S. stock market benchmarks managed to set new highs and reach record-setting levels this week. The S&P 500 Index surpassed 2,900 while the NASDAQ Composite Index reached past the 8,000 mark for the first time.
Good economic news continues to reverberate particularly with a key economic data. The U.S. GDP confirmed that economic growth was as strong as projected. The revised GDP estimate shows that the economy accelerated 4.2% in the second quarter,
The trade tensions will also be an ongoing concern but are not expected to have a broad effect on the economy. Solid fundamentals are likely to extend the record-long bull market but the cycle will soon mature.
Next week, after the Labor Day weekend holiday, some important economic data will be released. The Manufacturing Purchasing Managers’ Index is set on Tuesday. The factory and durable goods orders will be known on Thursday while the highly anticipated August’s Jobs Report is the big one on Friday.