foxex: No Reckoning

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Thursday's Headlines

1. U.S. Markets Mostly Flat But S&P 500 Reaches New Record High
2. Fed Chair Powell Says 'No Reckoning in Sight' for U.S. Economy
3. Tesla Gets Thumbs Up from Consumer Reports

4. States' Antitrust Probe of Google Extends to Search and Android

5. Buffett's Berkshire Adds and Subtracts New Positions

Markets Closed

Dow
27,781.96 -0.01%

S&P
3,096.63 +0.08%

Nasdaq
8,479.02 -0.04%

VIX
13 +0.00

Bitcoin
$8,715.02 -1.09%

US 10-Yr Yield
1.815 -2.94%

Image: Getty Images

Markets Today

U.S. markets were relatively flat today, although the DJIA managed to come back from a 100 point decline. The S&P 500 crawled to a new record high...barely. Tech giant Cisco Systems dragged down tech shares, falling 7%, while Walmart shares rose more than 1% on strong earnings results, then gave up those gains by day's end. Trade talks took a backseat to the Fed Chair's second day of testimony on the economy to Congress and other political proceedings in the nation's capitol.

Headlines

Shares of Cisco Systems (CSCO) fell 7% today as the company reported fiscal second quarter results that missed expectations. CEO Chick Robbins said the company's biggest customers were holding off on large IT purchases given the uncertainty around the U.S.-China trade war and Brexit. Cisco is the 24th heaviest weighted stock in the S&P 500, accounting for 0.8% of the index's overall market capitalization.
U.S. Federal Reserve Chairman Jerome Powell told Congress that he does not think a 'day of reckoning' is approaching the U.S. economy, despite a growing debt and deficit. He said the current economic trajectory of the U.S. is a 'pretty sustainable picture." More on that later...
Shares of Tesla (TSLA) climbed more than 1% today as Consumer Reports put the Model 3 and the Model S sedans back on its recommended list. The magazine is recommending the two models after leaving them off the list last year due to reliability issues that involved problems like faulty doors and in-car electronics. Consumer Reports is still not recommending the Model X SUV.
U.S. Attorneys General are reportedly expanding their probe of Google's advertising business to include its search and Android businesses, according to CNBC. The 50 states launched a probe into Google's advertising practices in September, but extending the probe into Android, Google's mobile platform, and search, where Google makes most of its money, would be a significant expansion of the antitrust probe. Shares of Alphabet (GOOGL), Google's parent company, closed 1% higher on the day.
Warren Buffett's Berkshire Hathaway (BRK.A) revealed a 1.2 million share stake in Restoration Hardware (RH), sending the shares up 7.2% on the news. See below for more moves made by the Oracle of Omaha.

photo: Getty Images

No Reckoning in Sight

Fed Chair Jerome Powell told Congress today that he does not think 'a day of reckoning' is coming for the U.S. economy, despite the rising national debt and deficit.

Powell has good reason to say that given that the U.S. economy is still growing, albeit at a 1.9% rate, which is not exactly a bonfire. Unemployment is near a 50-year low, inflation is in check, and consumers are still spending. Still, Fed chairs don't have a great track record of making broad predictions about the future, which is why they usually don't.

We can't help but remember back to Alan Greenspan's infamous Irrational Exuberance speech to the American Enterprise Institute on December 5, 1996. In the speech, Greenspan warned, "... But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?"

You can watch the speech here.

While Greenspan was trying to make a comparison to the stagflation that plagued Japan for more than a decade to what could happen to the U.S. economy given the high prices of internet and tech stocks, his timing was way off. The S&P 500 rose 34.5% over the course of the next year, and anyone that fled the market on Dec 5, 1996, missed a spectacular return.

image courtesy C-Span

On the flip side, Ben Bernanke, the Fed Chair from 2006-14, infamously said in May of 2007 that he did not believe that the growing number of mortgage defaults would seriously harm the economy. His actual words: "We believe the effect of the troubles in the subprime sector on the broader housing market will be limited and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system..."

image courtesy C-Span

The S&P 500 fell nearly 7% over the course of the next year, but that was just the beginning. The S&P 500 fell 56.4% from peak to trough from October of 2007 to March of 2009. Millions of homes were foreclosed upon, unemployment spiked to 10% in 2009, and many people are still recovering from the impact of the financial crisis.

While Fed chairs have more perspective on the economy than any of us ever will, even the smartest of them can call it wrong.

Berkshire Hathaway's Money Moves

When Warren Buffett's Berkshire Hathaway takes an equity stake in a company, it is traditionally seen as a stamp of approval that sends the stock soaring. Berkshire's track record of late, however, has been a little suspect, and Buffett would be the first to admit it. Berkshire's ownership stake in Kraft Heinz, for example, has been a disaster. Its investment in Wells Fargo, has also been scrutinized, given the company's ethics breaches over from 2016-18.

Still, Buffett's track record is phenomenal overall, and no one can dispute that.

Berkshire proved today that it still has the Midas touch by taking a 6.5% equity position in RH, formerly known as Restoration Hardware. The upscale furnishing store's shares spiked 7.2% on the news.

Berkshire also did some rejiggering of its equity portfolio, according to its most recent 13-F filing.

Here are some of the other moves Berkshire Hathaway made in the last quarter:

Revealed a stake in Occidental Petroleum of $332 million
Decreased its stake in Wells Fargo by 7.7%
Reduced stake in Phillips 66 by 6.7%

More News:

Top Industrial Stocks for November 2019

What You Need to Know About Your 2020 Taxes

5 Warning Signs of Market 'Euphoria'

(chart courtesy YCHARTS)

Fertilizer company Mosaic bounced up 3.2% after yesterday's drop. IT services company NetApp rose 3.1% on a decent earnings report.

Tech conglomerate Cisco Systems fell 7.3% after it offered disappointingly low guidance. Packaged food maker Kraft Heinz fell 7.1% today after Goldman Sachs downgraded their stock from "neutral" to "sell."

Word of the Day

SEC Form 13-F
SEC Form 13F is a quarterly report that is filed by institutional investment managers with at least $100 million in equity assets under management. It discloses their U.S. equity holdings to the Securities and Exchange Commission (SEC) and provides insights into what the smart money is doing.

Today in History

November 14, 1972

Today in 1972, the Dow Jones Industrial Average hit 1000 for the first time. It would hit 2000 in 1987, 10000 in 1999, and crossed the 27,000 mark this year. Remember, however, that when the Dow hits 28,000, that's only a percentage increase of 3.7% from 27,000. 1000 points isn't what it used to be.

Source: https://www.marketwatch.com/story/all-of-the-important-dow-milestones-in-one-chart-2019-07-12