Copyright © Daniel Cullinane CPA.
SEPTEMBER NEWSLETTER 3
JULY HOME PRICES GO UP
Farmers claim money from the federal government will not offset losses of income due to the trade war. According to The Wall Street Journal:
The Trump administration has started compensating U.S. farmers for damage tariffs are doing to their business.
Many farmers say the payments won’t make up for lost sales to China and other foreign markets they were counting on to buy the huge amounts of crops and meat being produced across the Farm Belt.
Bumper corn and soybean harvests and record pork production have pushed down prices for agricultural commodities. U.S. farm income is expected to drop 13% this year to $66 billion, according to the Department of Agriculture, extending a yearslong slump in the agricultural economy.
Jeff Bezos’s rocket company will sell engines to commercial companies. According to The Wall Street Journal:
Blue Origin LLC, the space-transportation company run by Jeff Bezos, has won a contract to provide engines for a potential rival’s next-generation rocket, according to people familiar with the matter, vaulting Mr. Bezos into the lucrative market for Pentagon satellite launches.
United Launch Alliance LLC—a joint venture between Boeing Co. and Lockheed Martin Corp. that launches U.S. military and spy satellites into orbit—is set to announce Thursday it has picked Blue Origin’s BE-4 engine for its Vulcan rocket, these people said. United Launch declined to comment.
McDonald’s Corp. (NYSE: MCD) is taking artificial ingredients out of some of its products. According to The Wall Street Journal:
McDonald’s Corp. is stripping artificial ingredients from more food to win over customers who, the burger chain believes, don’t want to eat things with names like calcium propionate and sodium benzoate.
Those and other ingredients found in the buns, cheese and sauce on some of McDonald’s best-known burgers are gone from its U.S. restaurants, the chain said Wednesday. The Big Mac, Quarter Pounder with Cheese and burgers in Happy Meals are now among items free from artificial preservatives, flavors and coloring.
Amazon.com Inc. (NASDAQ: AMZN) will open a store in New York City. According to The Wall Street Journal:
Amazon.com Inc. on Wednesday said it is opening a new bricks-and-mortar store that will feature a selection of goods curated partly by local consumers’ online shopping habits, part of its efforts to reshape the way people shop.
Amazon 4-star will open to the public on Thursday in the SoHo neighborhood of New York, the company said in a blog post. Items include those ranked four stars or above and will feature a variety of goods.
The euro dropped because of economic problems in Italy. According to CNBC:
The euro is under pressure on Thursday morning after media reports suggested that Italy’s coalition government is pushing for a deficit of 2.4 percent for 2019.
The euro fell 0.3 percent against the dollar to $1.17 at around 7.13 a.m. London time. Bond markets were also nervous about the spending plans in Italy, with the yield on the 10-year government bond moving higher to about 2.968 percent.
Facebook Inc. (NYSE: FB) is releasing a new virtual reality headset. According to CNNMoney:
Facebook is launching another virtual reality headset that doesn’t need a PC to work. This one might make serious gamers happy. The Oculus Quest will be released next Spring and retail for $399.
CEO Mark Zuckerberg unveiled the new hardware at the Oculus Connect conference in San Jose, California, on Wednesday.
The S&P CoreLogic Case-Shiller national home price index rose 6% year over year in July to a non-seasonally adjusted (NSA) index of 205.35. That’s 0.2 percentage points lower than the month-over-month increase posted in June.
In all U.S. cities included in the 20-city home price index, July house prices increased year-over-year, and all 20 also posted NSA month-over-month increases. Las Vegas (13.7%), Seattle (12.1%) and San Francisco (10.8%) posted the largest year-over-year gains. Las Vegas and Cleveland (1.4%) posted the largest month-over-month increase, followed by Phoenix (0.7%) and San Francisco and Tampa (0.6%).
The S&P CoreLogic Case-Shiller NSA home price indexes for July increased by 5.9% year over year for the 20-city composite index and by 5.5% for the 10-city composite index. Economists had estimated an NSA year-over-year gain in the 20-city index of 6.3%.
The Case-Shiller index tracks prices on a three-month rolling average. July represents the three-month average of May, June and July prices.
Average home prices for July remain comparable to their levels in the winter of 2007.
The S&P index committee chair, David M. Blitzer, said:
Rising homes prices are beginning to catch up with housing. Year-over-year gains and monthly seasonally adjusted increases both slowed in July for the S&P Corelogic Case-Shiller National Index and the 10 and 20-City Composite indices. The slowing is widespread: 15 of 20 cities saw smaller monthly increases in July 2018 than in July 2017. Sales of existing single family homes have dropped each month for the last six months and are now at the level of July 2016. Housing starts rose in August due to strong gains in multifamily construction. The index of housing affordability has worsened substantially since the start of the year.
Since home prices bottomed in 2012, 12 of the 20 cities tracked by the S&P Corelogic Case-Shiller indices have reached new highs before adjusting for inflation. The eight that remain underwater include the four cities which led the home price boom: Las Vegas, Miami, Phoenix and Tampa. All are enjoying rising prices, especially Las Vegas which currently has the largest year-over-year increases of all 20 cities. The other cities where prices are still not over their earlier peaks are Washington DC, Chicago, New York and Atlanta.
Compared to their peak in the summer of 2006, home prices are now 0.3% higher on the 10-city index. On the 20-city index, home prices are now 3.5% higher. Since the low of March 2012, home prices are up 55.0% and 59.4% on the 10-city and 20-city indexes, respectively. On the national index, home prices are now 11.2% above the July 2006 peak and 53.2% higher than their low-point in February 2012.
6 IMPORTANT EVENTS
With the third quarter ending, and the final three months of 2018 now in view, many investors are resetting for what could be a more volatile quarter as the midterm elections and ongoing trade issues could stir the pot. One thing is certain, it makes sense to stick with large-cap leaders, especially in sectors like technology, for the rest of 2018 and into 2019.
One of Wall Street’s most respected collections of stocks is the Goldman Sachs Conviction List. These are the firm’s top picks for high net worth and institutional accounts spread across 10 sectors. We screened the list for the technology companies currently residing on it. Then we looked for the large-cap names that Goldman Sachs prefers. These five that look like outstanding choices for investors.
The search giant continues to expand and, while search is king, the cloud presence is growing fast. Alphabet Inc. (NASDAQ: GOOGL) is a global technology company focused on key areas, such as search, advertising, operating systems and platforms, enterprise and hardware products. It generates revenue primarily by delivering online advertising and by selling apps and contents on Google Play, as well as hardware products. The company provides its products and services in more than 100 languages and in 190 countries, regions and territories.
Alphabet offers performance and brand advertising services. It operates through Google and Other Bets segments. The Google segment includes principal internet products, such as Search, Ads, Commerce, Maps, YouTube, Apps, Cloud, Android, Chrome and Google Play, as well as technical infrastructure and newer efforts, such as virtual reality.
The company blew out the latest earnings numbers, and with a wide and bountiful silo of products and services, the stock remains almost unchallenged. It should be noted that traffic acquisition cost relief drove 20% gross profit growth, despite heavy cloud infrastructure and YouTube content investment.
At a recent conference, Google outlined expanding capabilities to facilitate commerce, capitalizing on the “treasure trove” of data provided by seven different properties, each with at least a billion active users (Android, Search, Chrome, Maps, Play, YouTube and Gmail). Smart shopping campaigns leverage machine learning to make sense of touch points along the consumer purchase path, including better offline attribution capabilities (locally oriented searches up 200% over past two years) and improved purchase conversion rates (20% on average).
The Goldman Sachs price target for the stock is $1,450, and the Wall Street consensus target is $1,385.10. The shares closed Thursday trading at $1,207.36.
This is the absolute leader in online retail and a dominant player in cloud storage business, and it remains the top pick on Wall Street. Amazon.com Inc. (NASDAQ: AMZN) serves consumers through retail websites that primarily include merchandise and content purchased for resale from vendors and those offered by third-party sellers.
The company serves developers and enterprises through Amazon Web Services, which provides computing, storage, database, analytics, applications and deployment services that enable virtually various businesses. AWS is also the undisputed leader in the cloud now, and many top analysts see the company expanding and moving up the enterprise information value chain and targeting a larger total addressable market.
Consistent with data from earlier in 2018, digital marketing users overwhelmingly cited Amazon as the fastest-growing channel for advertising budgets, while many retailers are also leveraging their Amazon advertising data to retarget users on other channels (namely Facebook) to drive traffic/ sales to their own websites (bypassing Amazon marketplace/FBA fees).
Goldman Sachs has a $2,300 price target, and the consensus target is $2,123.77. The stock closed on Thursday at $2,012.98.24/7 Wall St.
It’s Finally Time to Be Bullish on IBM — for 2020
This top mega-cap technology company recently reported an outstanding quarter. Cisco Systems Inc. (NASDAQ: CSCO) designs, manufactures and sells internet protocol (IP) based networking products and services related to the communications and information technology industry worldwide.
It provides switching products, including fixed-configuration and modular switches, and storage products that provide connectivity to end users, workstations, IP phones, wireless access points and servers, as well as next-generation network routing products that interconnect public and private wireline and mobile networks for mobile, data, voice and video applications.
Cisco reported a 4.4% rise in quarterly revenue, more than expected by analysts, according to Thomson Reuters, and it was its second straight quarterly rise, driven by strong growth in its newer businesses, such as security. The company’s net income of $2.69 billion, or $0.56 per share, in the fiscal third quarter ended April 28 was higher year over year as well. Toss in a massive $25 billion share buyback plan and investors should be well rewarded going forward.
Shareholders receive a 2.73% dividend. The $56 Goldman Sachs target price compares with the $51.08 consensus estimate. The stock closed Thursday at $48.33.
This top software stock has had a very difficult year but offers a very good entry point. Oracle Corp. (NYSE: ORCL) develops, manufactures, markets, sells, hosts and supports database and middleware software, application software, cloud infrastructure, hardware systems and related services worldwide.
The company licenses its Oracle Database software to customers, which is designed to enable reliable and secure storage, retrieval and manipulation of various forms of data. Its Oracle Fusion Middleware software aims to build, deploy, secure, access and integrate business applications, as well as automate their business processes.
Shareholders receive a 1.47% dividend. The Goldman Sachs price objective is $55. The consensus price target is $53, and the stock closed Thursday at $51.69.24/7 Wall St.
It’s Finally Time to Be Bullish on IBM — for 2020
This stock has long been a Goldman Sachs and Wall Street favorite. PayPal Holdings Inc. (NASDAQ: PYPL) is a global, technology-driven payment platform with greater than 210 million direct customer relationships in more than 200 countries. PayPal empowers a streamlined digital and mobile payment experience in-browser, on mobile devices and in-app. It is accepted at more than 75% of the largest 100 internet retailers.
PayPal enables businesses of various sizes to accept payments from merchant websites, mobile devices and applications, as well as at offline retail locations through a range of payment solutions across company’s payments platform, including PayPal, PayPal Credit, Venmo and Braintree products.
The company is still ramping Venmo monetization, which has developed slower than some previously anticipated and is now expected to gradually flow through the model. Material changes in the model are approaching: U.S. consumer credit portfolio comes off next quarter and the eBay contract is expiring mid-2020. Most on Wall Street believe the company has sufficient levers to deliver toward its three-year to five-year target of 17% or so revenue growth.
Goldman Sachs has set its price objective at $98. The consensus target price is $97.27, and shares closed on Thursday at $88.99.
The U.S. Securities and Exchange Commission (SEC) has filed charges against Tesla Inc. (NASDAQ: TSLA) CEO Elon Musk that claim he committed fraud at the time he said he could the car company private and had the funds to do so. The government wants Musk out. If it prevails, who could take his job?
To run Tesla and simultaneously calm investors and convince them the company continues to have the opportunity to be among the industry’s greatest innovators, the count of potential candidates is tiny. Ideally, a new CEO would need an engineering background, a great reputation on Wall Street and a reputation that would also bring in other impressive executives.
First among the candidates has to be Alan Mulally, the CEO who turned around Ford. He has an engineering background and was in senior management at Boeing. He ran America’s second largest car company from 2006 to 2014. He is only 73. There is hardly a global car company in the world that would not like to have him as its chief executive officer. He would walk in the door with everything Tesla needs.
Dieter Zetsche is about to retire as CEO of Daimler and the head of its Mercedes car unit. Mercedes is considered one of the leaders in the chase to catch Tesla in the luxury electric car space. A trained engineer, he might reject an offer outright because of his allegiance to Daimler, where he has worked since 1976.
John Krafcik is the CEO of Waymo, the self-driving car division of Alphabet. It is considered one of the few companies that can compete head to head in the autonomous car sector. He has an engineering degree from Stamford and a management degree from MIT. Waymo’s huge investment in technology and years of testing on open roads have made Krafcik among the most visible leaders in the industry.
Tesla has a management problem, but not one that can’t be fixed.
Daniel Cullinane CPA
25 Plaza 5 25th fl Jersey City NJ phone 732-516-1648 fax 732-516-9778
2500 Plaza 5 25th fl Jersey City NJ 07311 phone 732-516-1648 fax 732-516-9778