Bob’s Journal for 10/31

Negative interest rates finally are hitting deposit accounts.

Negative interest rates have been a fact in much of the developed world, especially in Europe and Japan, over the last few years. However, negative rates are concentrated in bonds, especially government bonds.

Thus, banks have been hesitant to pass negative rates on to their customers, but that reluctance is changing. Switzerland has had negative interest rates longer than most countries and generally has the lowest rates. One of its major banks, Credit Suisse, recently announced it will pass negative rates on to wealthy customers who have large cash deposits in Swiss francs.

The bank will charge a 0.75% rate to individual depositors with cash balances exceeding two million Swiss francs beginning Jan. 1 and to business customers with balances exceeding 10 million Swiss francs starting Nov. 1.

The other banks that pass negative interest rates on to customers generally do so only with business customers. It still is rare for European banks to impose negative rates on individual depositors, even wealthy ones. That is likely to change, because it is probable that negative interest rates will be around for a while.

It also appears that the internet, and especially Amazon.com (AMZN), isn’t going to put all retailers out of business.

Of course, many retailers have reduced operations or gone out of business over the last few years. But well before Amazon.com became a household word, analysts had warned that there were too many retailers and shopping centers and that America was “over-stored.” Thus, retailers were going to have trouble, regardless of the internet and AMZN.

While AMZN’s stock price appreciated at a rapid rate over the last 10 years, the appreciation has started to slow and other retailers are fighting back. Most notably, we can see the continuing success of a number of retailers, which has become especially apparent over the last 12 months.

During the last 12 months, AMZN’s stock has basically remained unchanged while the S&P 500 is up about 11%.

What is more interesting is the fact that Walmart (WMT) is up 24%, Target (TGT) gained 37%, Ross Stores (ROST) rose 16% and Costco Wholesale (COST) appreciated 32% in the last 12 months. That’s not even a comprehensive list of traditional retailers that have done well recently.

The experience shows that investors should be skeptical of broad statements, such as “the internet and Amazon will kill traditional retail.” A large company with a lot of capital and skilled, flexible management can adapt to changing circumstances and competitors.

Also, keep in mind that a lot of the appreciation in AMZN was due to investors choosing to favor growth and momentum stocks for a considerable time. Over time, the prices of those stocks were pushed too high and investors began to switch their preference to value stocks.

The once-ubiquitous Money magazine is another victim of the internet and mismanagement. The magazine, which was once owned by its founder, Time Inc., halted its print edition under new owner Meredith with the June 2019 issue. More recently, Meredith sold the brand, including the website money.com, to a three-year-old firm that is helmed by a former Google executive.

The new buyer’s main website publishes articles on a range of topics that can be read without charge. The company makes money by collecting a fee each time a reader buys a product through a link or telephone number listed in one of its articles.

Since this is the parent company’s business model, it is likely to be continued at money.com. My expectation is that you aren’t likely to find much original or independent research on that site in the future.

The Data

The Dallas Fed Manufacturing Survey declined after two months of increases. The General Activity Index was reported at negative 5.1 in October, compared to 1.5 in September. The Production Index declined to 4.5 from 13.9. Despite the declines, expectations of future business conditions were more optimistic in October.

This manufacturing report is the only one to report before the Nov. 1 releases of the ISM Manufacturing Index and PMI Manufacturing Index. The ISM Manufacturing has been very weak over the last two months amid increased talk of an imminent recession. That report will be important to many investors.

The Chicago PMI indicates that the economy in that region continues to tumble. The index was reported at 43.2 for October, compared to 47.1 for September. Below 50.0 indicates the economy is contracting. That’s the lowest level since December 2015 and the second-lowest level since 2010.

Home prices declined in August, according to the S&P Corelogic Case-Shiller Home Price Index. Prices dipped 0.2%, compared to remaining unchanged in August. Over the past 12 months, prices rose only 2.0% to mark a seven-year low.

This index isn’t as up-to-date as other housing market measures. Since it only goes through August, it doesn’t reflect responses to the sharp drop in interest rates.

Pending home sales increased 1.5% in September, according to the National Association of Realtors. The Pending Home Sales Index is at 108.7, hitting its highest level in two years.

Consumer Sentiment, as measured by the University of Michigan, increased to 95.5 in October from 93.2 in September. The measure was at 96.0 in the mid-month update. Both current conditions and expectations improved from September, but current conditions brightened more substantially and were responsible for much of the increase in the index.

Consumer Confidence, as measured by the Conference Board, was a mixed report. September’s measure was revised upward to 126.3 from 125.1. October’s reading was 125.9. So, October’s figure was higher than the initial September index but lower than the revised index. The employment market appears to be weakening, with a steady increase in the percentage of respondents who have said that jobs are hard to get.

In the Consumer Confidence report, 31.7% of respondents said that they expect stock prices to rise over the next 12 months, while 32.2% expect stock prices to decline. This is only the ninth time that bears exceeded bulls in the same month that the S&P 500 hit a record high.

Personal Income increased 0.3% in September, and August’s income was revised higher to a 0.5% gain. Wages and salaries were unchanged in September following a 0.6% rise in August. Consumer spending increased 0.2% in September following a 0.2% climb in August.

Inflation remains low, according to the PCE Price Index. Both the headline index and the core index (which subtracts food and energy) were unchanged in September. Over 12 months, they jumped 1.3% and 1.7%, respectively.

The ADP Employment Report found that 125,000 new private sector jobs were created in October. Last month, ADP estimated that 135,000 new private sector jobs were created in September, but this month revised that figure down to 93,000. The monthly government employment reports have consistently reported fewer jobs than ADP in recent months.

New unemployment claims increased by 5,000 to 218,000. The four-week average declined a little. Both measures remain near historic lows.

The first estimate of gross domestic product (GDP) for the third quarter reported growth a little higher than estimates but less than second quarter gains. GDP grew at a 1.9% annual rate in the third quarter, according to the first estimate, compared to 2.0% in the second quarter.

Since consumer spending led the growth with a 2.9% increase, it was able to build on the already strong level from the second quarter. The major negative feature of the report was a 3.0% decline in nonresidential fixed investment. Businesses clearly reduced their investments in the third quarter.

The Markets

The S&P 500 rose 1.42% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 1.30%. The Russell 2000 added 1.25%. The All-Country World Index (excluding U.S. stocks) increased 1.15%. Emerging market equities improved by 1.23%.

Long-term treasuries declined 0.09% for the week. Investment-grade bonds dropped 0.16%. Treasury Inflation-Protected Securities (TIPS) fell 0.28%. High-yield bonds lost 0.13%.

In the currency arena, the U.S. dollar increased 0.08%.

Energy-based commodities declined 0.45%. Broader-based commodities rose 0.81%, while gold gained 0.35%.

Bob’s News & Updates

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