The General Market
HISTORIC WEEK FOR U.S. STOCKS
August 22, 2018, will go down in history as the day the U.S. stock market registered the longest bull market run which started on March 9, 2009. The day after on Thursday, the three main U.S. benchmarks dropped with some analysts citing a typical late-summer session which is characterized by low trading volumes.
On Friday, a new record was established again. The S&P 500 Index finished at an all-time high, breaking a 145-day run without a record close. Through Thursday, the broader index hadn’t posted a record close since January 26.
The S&P 500 advanced 17.71 points (+0.62%) to end the week at a record level of 2,874.69. It was another triple-digit rise by the Dow Jones Industrial Average as the benchmark climbed 133.37 points (+0.52%). The Nasdaq Composite Index gained 67.52 points (+0.86%).
Many market observers say that it is doubtful the political drama developing in the White House will hurt investors’ sentiment. The market has been holding steady because of a healthy economy and strong corporate earnings.
The month of August is usually a volatile month. However, with one full week left, the Dow Jones has gained 1.5% this month. The S&P 500 is up 2.1% while the Nasdaq Composite Index has advanced about 3.6%. By the end of next week, the U.S. benchmarks might just produce the best August returns in four years.
Trump unhappy with Feds raising interest rates
U.S. President Donald Trump said during an interview on Monday that he was “not thrilled” with the Federal Reserve for raising interest rates. He was criticizing his own appointee, Chairman Jerome Powell, and said the U.S. central bank should do more to help boost the economy.
U.S. stocks rise on Fed’s plan to raise interest rates gradually
Fed Chairman Jerome Powell spoke on Friday during the annual central banking conference. In his speech, he reaffirmed the Federal Reserve’s strategy to gradually raise interest rates citing the strength in the economy and robust corporate results. But there are criticisms that the central bank is moving either too quickly or too slowly and that could endanger the economy’s expansion.
U.S.-China trade talks conclude with no breakthrough
The two-day meeting of mid-level officials from the U.S. and China ended on Thursday with no major breakthrough. It was actually a resumption of the trade talks.
The trade war further escalated with the activation of another round of punitive tariffs on $16 billion worth of each country’s goods. The meeting was not derailed even if the latest 25% tariffs were implemented on Thursday.
Billion dollar deals announced
Two major acquisitions worth billions of dollars were announced on Monday. PepsiCo (PEP) disclosed that it is buying Israel’s household drink-machine maker SodaStream (SODA). The deal is worth $3.2 billion and Pepsi wants to have a competitive edge in health-conscious beverages against chief rival Coca-Cola Inc. (KO).
Tyson Foods Inc. (TSN), the largest U.S. meat supplier by sales, announced that it would acquire Keystone Foods from Brazil’s Marfrig Global Foods in a deal worth $2.16 billion. Marfrig bought Keystone back in 2010. Keystone is a supplier of meat protein to fast food restaurants and retail stores. It is also known as the maker of McNuggets.
SEC Staff Rejects Bitcoin-Based ETF Applications
On Wednesday, the applications of 9 bitcoin-based exchange-traded funds were rejected by the SEC staff. The said SEC staff was exercising its delegated authority. But four SEC commissioners said on Thursday that it will review the decision. The staff blocked the applications because they were not convinced that the said bitcoin-based ETFs would not be subject to fraud or manipulation.
Semiconductors Sector Highlights
Advanced Micro Devices Inc. (AMD) Nears Fortune 500 Status
Advanced Micro Devices Inc. is ruling Silicon Valley and winning the chip war against rival Intel Corp. (INTC). The price of AMD has more than doubled this year and is trading at a nearly 12-year high. That makes the stock the best performer in the S&P 500.
AMD climbed 6.65% on Thursday to post an all-time high of $22.29. The record was quickly erased on Friday as the stock soared 7.58% to finish the week at a record $23.98.
CEO Lisa Su, one of the few women CEOs in tech space, is leading AMD’s surge. AMD is no, 506 based on annual sales in the most recent ranking. With analysts forecasting a 25% jump in revenue, AMD will soon be in the Fortune 500 list.
The chipmaker’s stock is significantly outperforming the market this year. Its shares are up 117 percent year to date through August 23 versus the S&P 500’s 7% gain.
AMD stock’s performance ranks as the top return in the S&P 500 this year. When the S&P 500 logged its record high last January 26, AMD’s price was $12.95. As of Friday’s closing, the stock is 85.17% higher.
Analysts see Advanced Micro Devices Inc. will have more business with cloud computing vendors that are seeking to diversify their risk exposure to chip-specific security flaws. These customers will increasingly demand multi-sourcing and AMD will be there to engage with them.
Intel Corp. (INTC) is still searching for a CEO
Unlike Advanced Micro Devices Inc. with the stewardship of female CEO Lisa Su, Intel is still in search of a new CEO. Former CEO Brian Krzanich was booted out in June and INTC has plummeted over 12% during the last three months
With several issues surrounding Intel at the moment, most rivals like AMD, Samsung, and Taiwan Semiconductor Mfg. are gaining ground. They should find a replacement for the deposed CEO who can help provide a stabilized vision for the future.
The mass production of their 10-nanometer “Cannon Lake” chips Intel has been delayed multiple times already. The rollout of the next-generation chips was supposed to be by the end of 2018 but has been moved to early 2019.
Intel continues to boast that their chips are far superior to its competitors. The company has also increased its 2018 capital expenditures by $1 billion. The company is aiming to spend more money to enter new growth markets.
Consumer Discretionary Sector Highlights
THE BEST PERFORMING SECTOR ETF IN AUGUST
When you talk of non-essentials, you are referring to consumer discretionary goods that consist of apparel, durable goods, entertainment and leisure, and automobiles. In a weak economy, consumers usually forego spending on consumer discretionary goods.
The financial performance of companies that produce consumer discretionary goods is anchored on the state of the economy. Also, the performance of the companies belonging to this sector can be a good measure of future economic condition and stock market performance.
It is apparent that in August, consumer confidence is high. The U.S. job market is building strength with many lower-income consumers receiving extra cash.
Consumer Discretionary Select Sector SPDR® Fund (XLY)
The consumer discretionary sector was among the under performing sectors in the S&P 500 in early August. However, it picked up steam to lead all 11 primary sectors this month. The telecommunications, information technology and health-care stocks also rising.
XLY was at $110.72 on August 1st and with just 5 trading sessions remaining this month, the ETF is at $114.89 (+3.76%). The Top 3 holdings of the fund by portfolio weight are com Inc. (AMZN) – 23.6% followed by Home Depot (HD) – 7.51% then Walt Disney Co. (DIS) – 5.57%.
Vanguard Consumer Discretionary Index Fund ETF Shares (VCR)
VCR was already above $170.00 on the first day of August. The way the ETF is performing this month is similar to Consumer Discretionary Select Sector SPDR® Fund. It hit $176.39 on the 9th and as of Friday, stands at $178.32.
The Top 3 holdings of the fund by portfolio weight are com Inc. (AMZN) – 22.97% followed by Home Depot (HD) – 7.24% then McDonald’s (MCD) – 3.93%.
SPECIAL REPORT: TESLA, INC.
Elon Musk Abandons Take-Private Plan
The hoopla began on August 7 when CEO Elon Musk sent an e-mail to company employees and telling them he was pondering to take Tesla private. His goal is to “create the environment for Tesla to operate best.” Musk wrote, “As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone working at Tesla, all of whom are shareholders.”
Musk made headlines and TSLA jumped 10.98% from $341.99 to $379.57. But his ‘tweet’ on the same day triggered a storm. He trumpeted on Twitter that he had he secured funding to take Tesla private for $420 per share.
Tesla’s board members were surprised too with the proposed take-private plan. They wanted Musk to provide them a detailed financing plan. It also started a fight with short-sellers who were facing a paper loss of more than $1 billion collectively.
Musk name dropped Saudi Kingdom’s Public Investment Fund (PIF) as the potential funder of the $72 billion transaction. But instead of participating in Musk’s take-private plan, the PIF made an initial investment of $500 million in electric-car startup Lucid Motors Inc. based in Newark, California-based company.
The US Securities and Exchange Commission (SEC) started an investigation to determine whether Elon Musk violated securities laws by claiming he had funding. Angered investors filed lawsuits. One plaintiff, Mr. Isaacs said Mr. Musk misled the market to artificially inflate Tesla’s stock price. He added that Tesla’s failure to correct them amounted to a “nuclear attack” designed to “completely decimate” short-sellers.
Musk Accepts Reality
On Friday, August 24, Elon Musk came to terms with reality. In a blog post, Tesla’s chairman, CEO and largest shareholder said he had met with the board and “let them know that I believe the better path is for Tesla to remain public. The Board indicated that they agree.” The take-private plan was scrapped and Tesla Inc. is not going private after all.
Junking the controversial plan was inevitable because it became obvious that Musk didn’t have the funding as claimed. However, the investigation is likely to proceed since his claim sent the Tesla shares soaring.
The final word came from Ross Gerber, CEO of fund manager Gerber Kawasaki and an ardent Tesla supporter. He said in a tweet, “Only Elon wanted to go private. No other shareholders wanted to. We’re all holding our shares either way.”
The Week Ahead
The gains in the U.S. stock market this week showed that investors remain optimistic despite the rising political uncertainties. The still-solid fundamentals outweighed the headline risks. Investors also welcomed the plan of the Feds to raise interest rates at a gradual pace. But the marking the longest bull run is the biggest headline.
The bull market has yielded a total return of 418% since it started on March 9, 2009. It was the longest and second-strongest run for the S&P 500. What it indicates is that the engine remains in good shape. The healthy economy and rising corporate earnings are fueling it.
Breaking down the gain, 93% came from dividends and 86% came from a rising price-to-earnings ratio. The largest portion came from the rise in corporate profits. Analysts believe the bull market is not at risk of breaking down.
Next week, the revised second-quarter GDP report is due on Wednesday while the consumer sentiment data is due on Friday.