Seven (or so) Things That Grabbed My Attention This Week

There were many interesting items in the news this week. Instead of focusing on one idea in detail, I’ll briefly discuss several ideas that merit your attention.

Negative interest rates are more prevalent around the globe. We’re now used to government bonds in Europe and Japan having negative interest rates, effectively charging investors for the privilege of lending the government money. But now some banks are joining the trend. Banks in Scandinavian countries are considering charging negative interest rates on bank deposits.

And at least one Danish bank is charging a negative 0.5% interest rate on mortgages. On Wednesday, The Wall Street Journal reported that Germany sold 30-year bonds at a negative interest rate.

Negative interest rates mean economic growth and inflation are low around the globe, and most investors don’t expect them to accelerate for years. Investors who lend at negative rates are giving up on growth and simply want most of their principal to be safe.

While U.S. rates aren’t negative, they’ve declined significantly this year. Central banks have limited tools to combat slow growth and falling inflation, so they need to develop new policy tools and encourage governments to change fiscal and regulatory policy to stimulate growth.

Investors in Europe aren’t going to be optimistic any time soon. The Italian government collapsed. That makes it difficult for Italy and the European Union to make a new deal on Italy’s fiscal situation by the October deadline. Also, politics in the United Kingdom make it likely that the United Kingdom will leave the European Union this fall without any agreement to cushion the transition.

The U.S. housing market was showing signs of recovery in the last few months. Those signs, plus lower interest rates, were helping home builder stocks. But those stocks tumbled Wednesday after Toll Brothers (TOL) reported an unexpected 3% decline in purchase agreements.

Toll Brothers focuses on luxury homes, and the biggest hit to the company was in California. The Toll Brothers report and other data show that the areas of the country that have had the highest and fastest-rising home prices are reversing course.

That’s going to reduce housing’s contribution to economic growth the rest of the year. More importantly, it’s a sign that upper-income households are concerned about the economy and stock market.

But the economic news isn’t all bad. The recent increases in retail sales found their way into the earnings reports of major retailers. Better-than-expected earnings were reported in the last few days by Lowe’s (LOW), Target (TGT), BJ’s (BJ), Dick’s (DKS) and Nordstrom (JWN), among others. Their stock prices responded accordingly, with Target jumping more than 20% yesterday and Lowe’s rising more than 10%.

I’ve been watching corporate stock repurchases for some time. They’ve increased steadily, beginning in 2010 and accelerated in 2018. Corporate stock buybacks clearly have been a significant support of stock prices in this bull market.

The Wall Street Journal reports that there has been a significant decline in buybacks over the last 18 months. Also, unlike in prior periods of market volatility, corporations didn’t increase their stock purchases after recent price declines. At the same time, as I’ve been reporting each week, business capital expenditures have been weak.

It looks like corporations are conserving cash and are worried about near-term economic growth.

The protests in Hong Kong continue and are likely to have global ramifications.

The protests began as an objection to a proposed law that would allow Hong Kong residents accused of crimes to be extradited to mainland China for trial. The law was tabled, at least temporarily, but the protests have continued.

The protests are a significant problem for China’s leaders, because the protests have expanded from opposing a specific law to a broader pro-democracy agenda. The protestors appear to be set for the long haul. As this article explains, one of the protestors’ goals is to be peaceful so that China’s leaders have little excuse to crackdown on either the protests or general liberty.

The protests also are affecting China’s negotiating strategies on its conflicts with the United States and other Western nations. China’s leaders apparently feel pressure not to appear to be weak against the protestors. They don’t want any perceived weakness to be transferred to its other negotiations. That could make agreements on trade and other issues less likely in the near term.

In tax news, the IRS ruled that a retirement plan distribution is taxable even when the plan beneficiary doesn’t cash the check. In that ruling, a plan participant received a distribution check from a 401(k) plan. The participant declined to cash or deposit the check.

The IRS ruled that the distribution is taxable to the participant in the year the check is received, whether it is cashed or not. The employer or 401(k) trust must withhold taxes on the distribution as required by law and report the distribution to the IRS and the participant. (Revenue Ruling 2019-19)

The Data

Consumer Sentiment as measured by the University of Michigan tumbled in August to 92.1 from 98.4. Respondents said they were concerned about the new tariffs imposed on Chinese goods. Also, the Federal Reserve’s interest rate cut raised fears that the economy was weak.

The Leading Economic Indicators Index from The Conference Board bounced back. It rose to 0.5% for July from negative 0.3% in June. The index had declined in both May and June, increasing recession worries among some analysts. The July level indicates modest growth in the second half of 2019. Manufacturing is weak, according to The Conference Board.

The Housing Starts data were mixed. Housing starts declined 4.0% in July from June but are up 0.6% over 12 months. The July decline was centered in multi-family housing. Single-family homes, which are considered to provide more of a boost to the economy, increased 1.3% for July and now are up 1.9% over 12 months. In addition, permits increased for both multi-family homes and single-family homes.

Existing home sales increased 2.5% in July. That gives them a 0.6% increase over 12 months, which is the first positive 12-month number since February of 2018. The median price was unchanged for the month and is up 4.3% over 12 months.

Economic growth declined a bit in August, according to the PMI Composite Flash Index. The manufacturing sector declined to 49.9 from 50.0. A level below 50.0 indicates contraction in the sector. The services sector decreased to 50.9 from 52.2. They combine for a composite level of 50.9, down from 51.6 in July. All the levels were below expectations.

New unemployment claims declined by 12,000 to 209,000. The four-week average is 214,500. Both figures remain near historic lows.

The Markets

The S&P 500 rose 3.01% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 2.99%. The Russell 2000 added 2.95%. The All-Country World Index, excluding U.S. stocks, increased 2.85%. Emerging market equities climbed 3.67%.

Long-term treasuries fell 0.78% for the week. Investment-grade bonds increased 1.10%. Treasury Inflation-Protected Securities (TIPS) declined 0.20%. High-yield bonds rose 1.44%.

In the currency arena, the dollar increased 0.26%.

Energy-based commodities rose 0.95%. Broader-based commodities fell 0.14%, while gold declined 0.83%.

Bob’s News & Updates

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