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Below are articles featuring economic and business news affecting our local community.

Financial Report for 4th Quarter 2018 – Dr. Robert Patton

ROBERT T. PATTON, PH.D.
FINANCIAL AND ECONOMIC CONSULTANT
1100 CHUCKANUT CREST LANE
BELLINGHAM, WA 98229s
(360) 676-9055
December 31, 2018

The S&P 500 index lost 7.78% during the fourth quarter of 2018. The NASDAQ 100 index ended the quarter with a loss of 10.10%. The correction in stock prices was overdue after nearly ten years of rising equity prices. Stock prices had become obviously overvalued and a correction was needed to bring valuation levels back down to more reasonable levels.

2018 financial report

The performance numbers for the fourth quarter are shown below.

4th QUARTER, 2018 – EQUITY MARKETS

INDEXES

QTR %

YTD %

H to L %

OFF 07 High

OFF 09 Low

DJIA 

-11.83%

-5.63%

-54.10%

+64.59%

+257.95%

S & P 500

-7.78%

-6.24%

-57.69%

+59.06%

+275.96%

NYSE Comp

-9.04%

-11.20%

-59.74%

+9.50%

+172.00%

NASDAQ 100

-10.10%

-1.04%

-54.50%

+182.68%

+521.28%

VALUE LINE A

-14.66%

-11.60%

-60.41%

+114.78%

+442.70%

XAU

-13.40%

-17.13%

-69.65%

-66.24%

+11.24%

XOI

-23.54%

-13.21%

-55.25%

-30.34%

+55.47%

Fourth quarter estimated earnings for the S&P 500 are projected to be $36.71. This converts to an annualized figure of $140.14. This implies a price/earnings ratio of 17.89. This is still a little higher than the historical norm of approximately 15. However, analysts have proven that they consistently over-estimate earnings and estimated earnings should not be used to measure market valuation. Look at data for the last fifteen quarters.

QUARTER

EST. EARNINGS

ACTUAL EARNINGS

% SHORTFALL

2015-1

$24.69

$21.81

-12.00%

2015-2

$26.28

$22.80

-13.00%

2015-3

$26.46

$23.22

-12.00%

2015-4

$27.64

$18.70

-33.00%

2016-1

$24.74

$21.72

-12.00%

2016-2

$26.38

$23.28

-12.00%

2016-3

$26.95

$25.39

-6.00%

2016-4

$29.03

$24.16

-17.00%

2017-1

$26.89

$27.46

+2.10%

2017-2

$28.23

$27.01

-4.30%

2017-3

$28.97

$28.46

-1.80%

2017-4

$31,77

$26.96

-15.00%

2018-1

$32.37

$32.81

+1.40%

2018-2

$37.20

$34.05

-8.47%

2018-3

$36.82

$36.36

-1.25%

Using the actual earnings for all of the last four quarters the P/E ratio would be 19.26 (2507/130.18). The market remains slightly over-valued by historical standards. The current downtrend in stock prices could continue into 2019. This would complete a stock market correction that would restore more normal valuation levels. The increase in fixed income rates is contributing to the flow of cash out of equities into fixed income securities. Higher interest rates obviously make fixed income markets more competitive attracting a flow of investor funds in that direction. If the S&P were to settle back to a more normal P/E level of 15, the S&P would need to drop another 16% to approximately 2100 based on trailing 12-month earnings.

The FED has raised the FED funds interest rate nine times since December 2015, each time by 25 basis points. The FED funds rate is now in a range between 2.25% and 2.50%. Additional rate increases are projected in 2019. The Fed implies that this benchmark rate will reach at least 3.0 % by the end of 2019. However, the Fed has softened their statements suggesting that further rate increases could be delayed or even avoided completely depending on the economy. The current inflation rate is hovering around 2.2%. In the meantime, the 10-year Treasury yield closed at 2.69% at the end of the fourth quarter. The longer-term rates are still not moving up significantly with the FED interest rate increases. In fact the yield curve continued to flatten out over the past three months. The fixed income markets are not signaling investor belief in longer term increases in interest rates. However, at least some of the flattening of the yield curve is due to investors transferring funds out of the falling equity market over to fixed income investments.

The U.S. Dollar resumed the uptrend in the fourth quarter. The softening economy in China and continuing problems in the EU are contributing factors. There is an ongoing flow of capital into the US, supporting a strong dollar. However, the recent decline in US equities has caused at least a temporary halt to the uptrend in the dollar. The strength in the dollar throughout much of 2018 has taken a toll on both energy and metal prices during the year. Gold closed at $1,284 and Silver closed at $15.56 at the end of the fourth quarter. Investors who desire to have some exposure to the metals markets should limit their exposure to the physical metal or securities directly tied to the metal prices. Investments in the common stock of the mining companies should be avoided. These companies are using their common stock to supplement the compensation of officers and directors causing noticeable dilution to the ownership structure. Even when metals prices improve the miner’s stock prices do not reflect the effect of higher product prices in their earnings per share because of this dilution. Therefore, the market price per share suffers.

Oil prices have slid dramatically during the fourth quarter. Oil closed Monday at $45.81 per barrel, down 38% since September. This is a result of oil production at record levels while economic activity is slowing especially in China. The trade disputes are having a negative effect on economic growth in affected countries. After decades of predatory trade practices on the part of several of our trading partners the administration has drawn a hard line to bring a halt to these practices. The US is in a better position to deal with the effects of trade disruptions than other trading partners. This situation will be resolved, and the US will be in a more equitable position when the resolution is in place. In the meantime, American consumers are enjoying low energy prices.

Respectfully,
Robert T. Patton

Seattle’s Head Tax made national news before approval, as approved, after approval, and after repeal of the new tax on businesses who gross over twenty-million dollars. The Seattle City Council cited a McKinsey & Company report, The Economics of Homelessness in Seattle and King County, to justify their approval of the new tax on jobs even though it was soon revealed that this report was flawed and the Council had not actually read the report. The report cited aggressive growth in Seattle as the main cause to the growing homelessness, yet the reports focus was on the increase in money spent by Seattle to alleviate homelessness vs. the growth of the number of homeless.

Below is an image of people in Seattle on both sides of this issue filling a hallway before a Seattle City Council meeting where the council was expected to vote on a "head tax" Monday, May 14, 2018.

homelessness

This problem did not occur overnight and cannot be fixed anytime soon, but it is clear that spending money to alleviate homelessness has not curbed the issue. Is it time to shake up the status quo and work with business and communities to find a win-win before Seattle (and Bellingham) are the hot spots for homeless migration? What do we have to lose?

These articles from Forbes, McKinsey & Company, and the Seattle Times, are a good place to start educating yourself on the problem in Seattle and how their issue is our issue, too

https://www.forbes.com/sites/rogervaldez/2018/05/23/seattle-a-tax-on-jobs-400-million-and-the-report-that-never-was/#7f7466375107

http://www.seattleforgrowth.org/wp-content/uploads/2018/05/The-economics-of-homelessness-in-Seattle-and-King-County.pdf

https://www.seattletimes.com/seattle-news/politics/lots-of-blame-for-seattles-head-tax-debacle-except-where-it-belongs/

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