foxex: Stasis

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Wednesday's Headlines

1. U.S. markets barely move as Fed leaves interest rates unchanged

2. Saudi Aramco pops 10% in trading debut as shares reach limit

3. Home Depot cuts its 2020 sales forecast

4. What are CEOs scared of?

5. Madoff's felonious anniversary

Markets Closed

Dow
27,911.30 +0.11%

S&P
3,141.63 +0.29%

Nasdaq
8,654.05 +0.44%

VIX
14.99 -4.40%

Bitcoin
$7,208.99 -0.85%

US 10-Yr Yield
1.79 -2.35%

Markets Today

U.S. markets tread water today, edging slightly upward as the Federal Reserve left interest rates unchanged and indicated it would stay the course through 2020 barring unforeseen circumstances. The FOMC put out as bland a statement as you may ever read, citing inflation and employment levels on target with its objectives as its motive for doing nothing. Not that anyone was expecting the Fed to move on interest rates, but the FOMC provided no commentary on the global economy, the decline in U.S. manufacturing activity and business spending, or the health of the U.S. consumer. CEOs, however, have been commenting on those topics, as you will read further down.

Headlines

The Wall Street Journal revealed today that the Federal Aviation Administration let Boeing continue flying its 737 Max jet after its first crash, despite their analysis showing that it would average one fatal crash every two-to-three years.
Shares of Saudi Aramco shares climbed 10% in Riyadh on Wednesday, touching their upper limit as investors rushed to take part in the biggest initial public offering in history. The shares increased from an IPO price of 32 Saudi riyals ($8.53) to 35.2 riyals in initial trading, with the increase capped by an upward limit set by the exchange. Aramco's underwriters can exercise an option to sell up to 15% more shares during the first 30 days should demand prove higher than expected. That would increase the money raised to nearly $30 billion and could value the company at close to $2 trillion.
Chevron Corp., the world's second largest oil producer, is writing down the value of its assets by more than $10 billion. It's the largest write-down by an energy producer in years, and Chevron said Tuesday that it was cutting the value of a number of properties and considering the sale of other assets. The properties it is writing down include its shale gas play in Appalachia in the U.S., and its Gulf of Mexico deepwater project called Big Foot. The company will be restructuring its operations to focus on fewer prospects in the face of low natural gas prices.
Home Depot cut its sales forecast for 2020, just weeks after trimming its sales forecast for 2019. The company forecast preliminary fiscal 2020 sales growth of about 3.5% to 4% ahead of its analyst day on Wednesday. That was lower than analysts' forecasts, and shares fell 2% today, and are down 9% in the past month.
A study by Georgia Tech University said that power failures caused by wire failures could dramatically increase unless PG&E increases the rate at which they replace their electric lines. The study, commissioned by PG&E, found that PG&E customers could expect a doubling of power outages in 15 years, and a quadrupling in 30.

Where the Fed Sees Interest Rates Headed

The Federal Reserve is notorious for playing its cards close to its chest. It's better that way given the influence of interest rates on asset prices, especially stocks and bonds. While the FOMC did not mention what it might do with interest rates in 2020, it indicated their future path through dots - more specifically, what is known as the Fed's Dot Plot. The Dot Plot is essentially points on a graph that indicate where the various members of the Federal Open Market Committee expect interest rates to be over the next several years. By looking at it, we can surmise that the FOMC sees no change to the current federal funds rate throughout 2020, but then a gradual rise into 2021, 2022, and beyond.

Warning - the Dot Plot is about the least creative use of charts imaginable, but that goes right in line with the Fed's desire to keep a low profile and stay out of the limelight.

It's better that way.

chart courtesy FederalReserve.gov

CEOs are Losing their Swagger

The Business Roundtable, which is an association of chief executive officers of America's leading companies, today released its Q4 2019 CEO Economic Outlook Survey. The survey is a composite of CEO plans for capital spending and hiring and expectations for sales over the next six months. The takeaway: The top bosses are pretty cautious.

The Index decreased 2.5 points from last quarter to a value of 76.7, which remains below the Index's historical average of 82.7 – an indication of continued moderation in the pace of economic growth.

chart courtesy The Business Roundtable

So what's bothering America's CEOs? Plenty, as it turns out, but we can start with trade. CEOs in the survey almost universally agreed that there needs to be a fair and equitable resolution to trade conflicts, which are further reducing global growth and causing a slowdown in the U.S. manufacturing sector. Here is a breakdown of the components of the survey:

CEO expectations for sales increased 7.0 points to 98.6, which is lower than the sales sub-index's historical average of 112.6.
CEO plans for hiring decreased 5.5 points to 67.1, which is higher than the employment sub-index's historical average of 58.7.
CEO plans for capital investment decreased 8.9 points to 64.5, which is lower than the capital investment sub-index's historical average of 76.7.

It's the last two points that are the most concerning. If hiring plans are decreasing, that could throw the brakes on one of the strongest parts of the U.S. economy. The robust jobs market is helping shore up consumer confidence and spending. As soon as that goes, economic growth could really slow since business spending and manufacturing are already in low gear. The decrease in capital spending, which we already knew about, looks to be worsening from last quarter. Capital spending is a core part of U.S. GDP, but it's also key to companies improving their organic growth and thus, their profitability. We know that corporate profits and stock prices are already bifurcating as we mentioned in yesterday's note, so an extension of this trend could be troubling.

More News:

Ten Stocks That Can Win with the USMCA Deal

Consumer Discretionary Sector Poised to Move Higher

Kroger Missed on Earnings but Has Positive Weekly Chart

chart courtesy YCHARTS

Electronic component makers Skyworks Solutions and Qorvo received a double upgrade from BofA Global Research analyst Vivek Arya, sending them up 4.7% and 3.8% respectively. Arya argued that the adoption of 5G phone networks will significantly raise demand for the components that Skyworks and Qorvo make. It was also a good day for semiconductor companies with Applied Materials, Micron Technology, and Xilinx jumping 4.6%, 3.9%, and 3.0% respectively.

Struggling fashion firm L Brands fell 3.1% and clothing retailer Gap fell 2.8%. Marathon petroleum group fell 3.0% ahead of earnings releases today. Truist Financial corp, recently merged from BB&T and SunTrust Banks fell 2.6% today.

Word of the Day
Federal Open Market Committee
The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve Board that determines the direction of monetary policy. The FOMC meets several times a year to discuss whether to maintain or change current policy. A vote to change policy would result in either buying or selling U.S. government securities on the open market to promote the growth of the national economy.

Image Source: Timothy A. Clary / AFP / Getty Images

Today in History

December 11, 2008

Today in 2008, Bernie Madoff was arrested for running the largest Ponzi scheme in history. Madoff had been in the investment business since 1960, eventually starting his Ponzi scheme by the 1990's. His scheme fell apart in 2008 when the financial crisis led to clients withdrawing money faster than he could take in new people into his scam. The fraud hit many prominent people including Holocaust survivor and Nobel Peace Prize winner Elie Wiesel. On March 12, 2009 Madoff plead guilty to 11 counts including fraud and money laundering. On June 29, 2009, he was sentenced to 150 years in prison.

Source: https://www.history.com/this-day-in-history/billionaire-conman-bernard-madoff-arrested