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JANUARY NEWSLETTER 6
Now that 2017 is gone and 2018 is here, investors have to contemplate what to expect ahead. After all, this raging bull market is now nearing nine years old, and it has been the strongest bull market that most investors have ever seen. The Dow Jones Industrial Average (DJIA) rose 25% and the S&P 500 rose almost 19.5% in 2017. Wall Street is by and large calling for tax reform, earnings growth and higher gross domestic product growth to continue the stock market gains in 2018.
24/7 Wall St. just came out with its annualized forecasting tool showing that DJIA 26,400and at least 2,855 on the S&P 500 are the baseline targets for 2018. For the Dow to make its targets, Boeing Co. (NYSE: BA) is going to have to do its part.
As far as what other strategists are calling for in the broader market, Credit Suisse is now targeting 3,000 and Oppenheimer is targeting 2,900 for the S&P 500 in 2018. At the end of 2017, the forward valuation for the S&P 500 Index was 18.5 times earnings to 19.0 times expected earnings per share according to two main sources.
Boeing was the DJIA’s best-performing stock of 2017 with a share price increase of 89.4%, 20 points higher than the second-best performer and nearly double the third-best. The stock closed 2017 at $294.91, above the 12-month consensus price target of $292.83. Boeing raised its annual dividend to $6.84 in December, a 20% boost on top of a 30% boost a year earlier.
Investors who stuck with Boeing for the full 2017 calendar year received a total return of nearly 91%, and the company didn’t even have to add “blockchain” to its name. Only a hopeless Pollyanna would expect Boeing to duplicate its 2017 performance in the new year, but analysts don’t seem to believe that performance will fall all that much. The company’s forward price-earnings (P/E) ratio of 26.88 remains quite optimistic, although it is lower than the company’s trailing 12 month P/E of 27.44.
Boeing closed 2017 with net new orders of more than 850 and operating cash flow north of $12 billion. When the company reports earnings later this month, it is expected to report total commercial jet sales of around 760. With a ratio of new orders to sales (the book-to-bill) greater than one, Boeing has strengthened a backlog that will carry it through the next decade.
The company is considering whether to launch a new commercial jet to fit into the gap between the 737 and the 787. Among the considerations is whether to go with a clean-sheet design that would be leveraged later when the company finally decides to replace the 737. That is essentially what Boeing did with the 787, and development for that plane went horribly over budget and took much longer to get in the air than planned. Boeing has to avoid a repeat of that scenario.
The company’s 52-week trading range is $156.67 to $299.33 and its market cap of $177.36 billion is the largest of any U.S. industrial firm. At 8.23%, it is currently the most heavily weighted on all the equities in the DJIA and ranks 28th among the S&P 500 measured by market cap.
As far as how investors should be positioned for 2018, there are at least some risks and hurdles that should be given some thought. We have offered up 10 serious risks to the bull market in 2018. Investors might want to also consider lower volatility strategies in case a big correction looks more likely.
Taxpayer representatives are now being asked for their Social Security number and date of birth, in addition to their Centralized Authorization File (CAF) number, so that IRS agents can verify their identity when they call the IRS. The new questions result from an updated version of Internal Revenue Manual (IRM) Section 18.104.22.168, which took effect Jan. 3.IRM Section 22.214.171.124, titled “Third Party (POA/TIA/F706) Authentication,” instructs IRS agents on how to “complete the appropriate research” to verify the identity of taxpayer representatives who indicate that they have a third-party authorization on file with the IRS, such as Form 2848, Power of Attorney and Declaration of Representative, or Form 8821, Tax Information Authorization. In the previous version of IRM Section 126.96.36.199, updated in October 2017, agents were told to ask the representative for the taxpayer’s name and taxpayer identification number (TIN), for the tax period and forms in question, and for the representative’s name and CAF number.Under the updated procedures, however, the agent requests the representative’s Social Security number and date of birth as well. An IRS representative says this is being done to protect taxpayer information and mitigate risk to practitioners.Although the new IRM section is not yet available on the IRS’s website, its existence has been verified by IRS personnel. The IRS says it plans to communicate the changes to practitioners in the near future.
GOAL IS SMOOTH
Alphabet Inc.’s (NASDAQ: GOOGL) self-driving car company Waymo is about to get way bigger. It has set a deal to buy several thousand Fiat Chrysler Automobiles N.V. (NYSE: FCAU) minivans. The Pacifica is one of the automakers most successful models. Waymo has tested it before. The primary challenge the alliance faces is that much of the public still worries about self-driving technology.
While neither company will say how many vans will be involved, several thousand would sharply increase Waymo’s fleet. Neither company would say whether the Pacificas will be used for a large test or will be sold to a small number of people to use on closed roads. The Waymo technology has not been approved for driving on open roads.
Self-driving technology is still in its infancy. A number of small tech companies and very large car companies are rushing to test and deploy self-driving cars. However, it may take years before they are sophisticated enough to operate on any and every road in the United States. Several pieces of research, including extensive ones from Intel Corp. (NASDAQ: INTC) and AlixPartners, show the acceptance of self-driving cars is limited. Ironically, this is because a number of people do not think they are safe. Self-driving car companies maintain the primary reason for the technology is safety. There have been a very small number of accidents with cars in auto pilot mode. The most visible of these have involved Tesla Inc. (NASDAQ: TSLA) vehicles.As a division of Alphabet, Waymo has huge amounts of capital available to it that other tech startups do not. On the other hand, the world’s largest car companies, each of which is driving into the business, have capital, product development, R&D capacity and distribution networks.
Even if the public comes to accept self-driving cars, there is no guarantee and a Waymo partnership with Chrysler will be a winner.
The federal government may build the nation’s first 5G wireless network. According to Reuters:
President Donald Trump’s national security team is looking at options to counter the threat of China spying on U.S. phone calls that include the government building a super-fast 5G wireless network, a senior administration official said on Sunday.
The official, confirming the gist of a report from Axios.com, said the option was being debated at a low level in the administration and was six to eight months away from being considered by the president himself.
The chief of Ford Motor Co. (NYSE: F) in China quit. According to The Wall Street Journal:
The head of Ford Motor Co. in China resigned Monday after less than six months on the job, compounding the U.S. auto maker’s challenges as it tries to rev up flagging sales in the world’s largest car market.
Jason Luo quit “for personal reasons” and his departure “was not related to the business strategy or performance of Ford China,” Ford’s Asia-Pacific President Peter Fleet said in a statement. No replacement was immediately named.
Lewis D’Vorkin, the editor-in-chief of the L.A. Times, owned by Tronc Inc. (NASDAQ: TRNC), left the paper after contentious relations with his staff. According to The Wall Street Journal:
The Los Angeles Times will replace editor-in-chief Lewis D’Vorkin just months into a tumultuous tenure marked by tensions surrounding a newsroom unionization push and misconduct allegations against the newspaper’s publisher, according to a person familiar with the matter.
Mr. D’Vorkin, who was named the Times’ editor in October, will become chief content officer for the paper’s parent company, Tronc Inc., the person said.
He will be replaced by Jim Kirk, the former editor and publisher of the Chicago Sun-Times, the person said.
“Maze Runner: The Death Cure” was number one at the box office this past weekend. According to Box Office Mojo:
Despite a 25% decline compared to the opening for its predecessor, Fox’s Maze Runner: The Death Cure still managed a #1 finish at the weekend box office. Meanwhile, Entertainment Studios saw Hostiles deliver a solid performance as it expanded nationwide, Sony’s Jumanji: Welcome to the Jungle and The Greatest Showman continue to hold strong, The Shape of Water expands with strong numbers on the heels of its 13 Oscar nominations and Viva’s Padmaavat secures a spot in the top ten despite playing in just 324 theaters. All told, the weekend’s top twelve was still down ~7% compared to last year as January has slowed to a crawl.
U.S. energy exports have surged. According to CNNMoney:
The resurgence of the oil industry can be traced back to what happened in Congress one day in December 2015.
That’s when lawmakers ended the 40-year ban on U.S. oil exports. Crude pumped in Texas, Oklahoma and North Dakota could suddenly be shipped overseas.
At the time, a glut of supply was wreaking havoc on the energy industry. Crude eventually crashed to $26 a barrel.
But that glut is disappearing, thanks in part to booming oil exports from the United States. Crude that was once trapped inside the country is now going to Europe, Latin America and even China.
The United States exported a record 1.7 million barrels of oil per day in October 2017, according to the most recent stats from the Energy Information Administration. That’s four times as much as in 2015, when federal law prohibited shipping oil to most places except Canada.
Elon Musk may start selling flamethrowers. According to The Mercury News:
Elon Musk, the mastermind behind PayPal, Tesla and SpaceX, has another innovative product up in his sleeve: a $500 flamethrower.
Musk announced the flamethrower on Saturday, after weeks of teasing a possible flamethrowing product for his newest venture, The Boring Company. The Boring Company’s mission is to excavate a low-cost but fast-digging tunnel through Los Angeles to help alleviate its notorious car traffic.