Cover:
-Luxury goods makers are facing a decline in demand due to the economic downturn and the stock market hitting record highs. The Roundhill S&P Global Luxury exchange-traded fund has dropped 7.2%, with companies like LVMH Moët Hennessy Louis Vuitton, Gucci-owner Kering, and Moncler struggling. The sector's sales growth is slowing, and Wall Street worries that the sluggishness will not let up. The wealthy are not alone in this issue. In China, moneyed shoppers are experiencing a severe economic malaise, but the problem is not limited to the wealthy. The pandemic in 2020 led to a surge in luxury shoppers, leading to unsustainable sales booms and fears that brands' exclusivity would be taken. As a result, luxury products now cost 50% to 100% more than in 2019, shutting out many aspirational shoppers and turning off core customers, including the truly rich.
Interview:
-Ocean Park Investments, founded by Dennis Jean-Jacques, is a value manager who has adapted Warren Buffett's advice to be greedy when others are fearful. Jean-Jacques, who launched the company in 2016, has a shortlist of industrial stocks he plans to buy or buy more of in the face of market turbulence. The Omaha Dislocation strategy, which focuses on Berkshire Hathaway CEO Buffett's long-term approach to investing and hedge fund strategies, has returned 22% in the past 18 months, compared to 13.5% for the HFRX Equity Hedge Fund Index. The strategy has been supported by gains in Super Micro Computer, GE Aerospace, and Advanced Drainage Systems. The Omaha Dislocation strategy aims to generate midteens average annual returns over the long term by outperforming during market downturns, shorting stocks when markets are frothy, and investing in 10 to 12 industrial companies.
Tech Trader:
-CEO Warren Buffett likes Sirius XM Holdings' satellite radio service, Siriusly Sinatra, which plays American standards. Berkshire Hathaway has increased its stake to 31% of the company's shares, worth around $2.6 billion. However, Buffett's enthusiasm for the service and Berkshire's investment have not helped Sirius XM shares, which are down over 50% this year. The stock is now trading at a 12-year low and looks inexpensive at about eight times this year's estimated earnings and with a 4.5% dividend yield. Jeff Wlodarczak, an analyst at Pivotal Research, believes the business is durable and should generate ample free cash flow. He suggests a 50% boost to the dividend in the fourth quarter. Sirius XM, which is over 20 years old, began as an alternative to commercial AM and FM radio with dozens of ad-free music stations and talk radio featuring stars like Howard Stern.
The Trader:
-Investors were initially uncertain after the Federal Reserve lowered interest rates, but by Thursday, stocks had rebounded, with the S&P 500 and Dow Jones Industrial Average hitting new records. The Fed's decision to make a "jumbo" rate cut of 50 basis points, half a percentage point, means that the Fed is "all in" on keeping the economy aloft. This realization is forcing investors off the sidelines, with the Magnificent Seven ETF and other tech stocks being the top picks.Tech stocks, particularly the Magnificent Seven, are seen as the easiest way to get "highly liquid exposure" to the highest-flying parts of the market. Some strategists are betting that tech can continue leading the market higher, as the NASDAQ was the only major index not to hit a record high on Thursday. With the broader economy slowing down, investors will be looking for companies that can still grow, potentially leading them back to their old favorites.
-Energy stocks are experiencing a shift in sentiment, with oil producers and refiners falling out of favor. Crude oil prices have fallen due to declining global demand for gasoline and diesel, and China's economy decelerating. The supply-demand setup for next year is even more bearish, with oil production on track to surge globally in 2025, and demand growth appears tepid. Analysts have been reducing their outlooks for oil prices, with some suggesting crude oil could fall to around $60 per barrel by the end of next year. At $60, most American producers will still make money, but they will have to slow down shareholder-friendly policies like stock buybacks. Refiners are also struggling, making less money from selling products like gasoline and diesel. On the Gulf Coast, where the bulk of US fuel is processed, margins are less than half what they were in 2023. When margins drop, refiners tend to curtail production, but there are signs that they are continuing to operate at high utilization rates, ensuring a longer period of weak margins.
Features:
-China is experiencing slower economic growth, with a significant decline in real estate value, affecting most citizens' savings. The property market is also experiencing declines, with slowdowns in retail sales, fixed asset investment, industrial production, and an increase in unemployment. The property sector, which accounts for a third of China's GDP, is unable to stabilize despite government efforts. Since Evergrande Group's 2021 debt default, the sector has been in contraction, with apartment prices expected to drop at least 30% in major cities before stabilizing. Officials have implemented measures to boost home buyer demand, including lowering mortgage borrowing costs and easing purchase restrictions. However, a small turnaround in June proved fleeting, as property buyers anticipated a fall in new home prices. The slow pace and small scale of policies have led to protests across the country.
-Tesla stock fell by 2.3% on Friday, closing at $238.25, while the S&P 500 dropped 0.2% and the Dow Jones Industrial Average added 0.1%. EV start-up VinFast Auto dropped 7.6% after reporting weaker-than-expected second-quarter numbers, but this likely didn't affect Tesla stock as VinFast is a smaller company. Mercedes shares fell 6.8% in overseas trading due to a cut in profit guidance, mainly related to weak sales in China. Tesla stock jumped along with the market as investors digested the 0.5 percentage point cut announced by the Federal Reserve Board on Wednesday. Lower rates help businesses by lowering the cost of borrowing and making cars more affordable, easing pressure to lower prices and boosting demand. Tesla sold about 831,000 cars in the first half of 2024, down about 7%. However, Tesla shares have made a remarkable comeback, up 75% from the intraday 52-week low reached in April and about 13% since the company reported weaker-than-expected second-quarter earnings in July. Thursday was the stock's first close over $240 since July, just before the earnings report.
European Trader:
-Novo Nordisk's obesity drug Wegovy has been recommended by EU regulatory authorities for treating obesity-related heart conditions. The European Medicines Agency (EMA) has also recommended the update of the EMA label for Wegovy to reduce heart failure symptoms and improve physical function. This move is seen as a significant step forward for people with obesity-related heart failure who currently have limited treatment options. The battle for market share in the obesity drug industry is ramping up, with Novo and its main rival Eli Lilly dominating the sector. Both companies have struggled to keep up with soaring demand for their drugs, which remain on FDA's drug shortage list. A recent study by Morningstar predicts that 16 new obesity drugs could launch by 2029, trimming Novo and Lilly's combined market share to about two thirds. Challengers include Roche, Viking Therapeutics, AstraZeneca, and Zealand Pharma. The EMA's backing of Novo's label update is crucial as it strengthens the case that obesity medicines can provide health benefits beyond weight-loss and expand the already huge market. Novo expects the label update to be implemented shortly and plans to resubmit to the FDA for inclusion of data from these trials in the Wegovy label in the USA in 2025.
Emerging Markets:
-No update
Commodities:
-The S&P 500 energy stocks have returned about 6% year to date, including dividends, trailing the 19% result for the broader index. Sagging oil and gas prices, concerns about too much capacity, and worries about a weakening global economy have weighed on these stocks. However, income investors can find attractive dividend yields that look pretty secure. Many energy companies have changed their tune from previous cycles, focusing more on returning capital to shareholders via buybacks and dividends. A Morningstar report on large integrated energy companies suggests that a focus on capital discipline should underpin continued strong returns on capital and allow for robust cash returns to shareholders. Alastair Syme, an analyst covering global energy firms at Citi Research, points out that a key overhang for these stocks is excess spare capacity in the system, which has resulted in sharp price declines. Crude is down 23% over the past year, and natural gas is off 9%. Spot prices for Brent and West Texas Intermediate crude were recently in the low $70s per barrel.
Streetwise:
-The Federal Reserve has cut interest rates for the first time in four years to stimulate the economy. The rate has already reduced financing for young families purchasing homes near city centers to 6.1%, down from 6.5% a month ago. The next step is expected to be a strong stock market rally, as falling rates boost company profits and reduce the appeal of bonds. However, JP Morgan warns that returns over the next decade may be low due to investors' over-investment. Additionally, BofA Securities reports that earnings growth forecasts for AI exchange-traded funds have fallen from 18% last year to 5%, slower than the broad stock market's expected earnings growth. The Fed has cut its target federal-funds rate by a half-point to a range of 4.75% to 5%, affecting short-term rates earned by savers and businesses, mortgage and credit-card rates, and longer-term bond yields. The average effective fed-funds rate is 4.6% since 1954.