November 6, 2017

Stocks finished higher again on Friday as the leading averages rose for the 8th straight week. All three leading averages have now set new records at least 50 times this year. This week will be a much slower week for data and earnings than last week, although about 40 S&P 500 companies are scheduled to report.

Overseas, there is attention being paid to the President’s Asian trip and to the purge of over five dozen princes, ministers and businessmen in Saudi Arabia over the weekend. The President’s trip is off to a non-controversial start in Japan and South Korea but the bigger events, meetings with Xi and Putin, lie ahead. So far Trump’s tweets have followed the usual pattern of past meetings with international leaders. His themes of improving our trade balance and bringing more business to the US continue. As for the Saudi purge, one should note that the new Crown Prince, Mohammed bin Salman, is far different than Saudi leaders of recent decades, most of whom were both elderly and infirmed. He is just 32 years old, well educated and progressive. He does not appear to be a religious fundamentalist. His goal is to elevate Saudi to be a regional political, religious and economic power. Because of the weakness at the top of the political chain in Saudi Arabia for a very long time, corruption has escalated and become the rule of the land. In one gesture, the Crown Prince is trying to counter corruption, but like Xi in China, he is also using the anti-corruption message to consolidate power. Pure Machiavelli. Obviously, this move will leave a lot of question marks over the near term and might even question the timing of the proposed IPO for Aramco. It clearly will take time for the dust to settle and the consequences understood more clearly. Because of Saudi Arabia’s importance in the economic and political world, events there bear close scrutiny.

Back home, the big news this morning is Broadcom’s $130 billion bid for Qualcomm#. If successful, this merger would be the largest in tech history and make Broadcom the third largest semiconductor company in the world. Qualcomm is expected to reject the hostile offer but that probably won’t be the end of the saga. For purposes of this letter, I won’t go into any further details of the merger bid. Rather, the point I wish to make is that a combination of slow economic growth, high market values, low interest rates, and an administration that might be more receptive to large mergers than the previous one, mergers are a way to accelerate bottom line growth. In this particular case, for instance, there is significant opportunity for cost savings given the overlap of segments of both businesses. Mergers in some cases, not necessarily this one, also serve to consolidate and reduce price competition. Also over the weekend, talks of merger broke down between T-Mobile# and Sprint. Note that as a consequence of that breakdown, the prices for the stocks of Verizon# and AT&T# are both likely to fall this morning. Why? Because the merger, if it had occurred would combine the two most price aggressive companies in what is essentially a four company industry.

Thus, if slow business prevents you from growing the top line, mergers and consolidation afford opportunities to increase profit margins and grow the bottom line. One should note that, so far, the Trump administration has not weighed in on controversial mergers. Given Trump’s business friendly attitude, it has been presumed that he would interfere very little. But Trump could be more of a populist than one thinks and, therefore, push his Justice Department to ensure that competition remains intact. He has already inserted himself into AT&T’s proposed merger with Time Warner. I’m not sure if this isn’t simply a follow through from a campaign pledge or a serious statement of policy. That merger might yet happen.

Elsewhere, NY Federal Reserve Chairman William Dudley is going to resign. The head of the NY Fed sits on the Federal Reserve’s Open Market Committee (FOMC) and has a standing vote every meeting. The Fed now also has three open positions. Thus, President Trump has the opportunity to nominate four new members to the FOMC. His first nominee, Randal Quarles, was confirmed last week. The Vice-Chairman of the FOMC remains an open position. With the elevation of Fed Board member, and non-economist, Jerome Powell to Chair in February, it is expected that an economist will be selected to be Vice-Chairman. Trump, genetically, is a real estate investor and real estate investors like low interest rates. Inflation is often more of a friend than a foe. Thus, while Mr. Trump leans in a conservative direction on many issues, as far as the Federal Reserve composition, he is not likely to back a hard-line Board that would rather raise rates than support economic growth.

As for the markets, after 8 straight up weeks, you would think it is time for a pause. But economic data continues strong. There isn’t any real catalyst clearly visible to support a significant recession. Obviously, talks in Asia this week have the potential to raise eyebrows and cause some short term consternation. But while the rhetoric can be cranked up a bit, especially when North Korea becomes the subject, there is little reason to expect more than a war of words. The one other item of note that I would offer is that bond yields have been quietly backing down over the last week or two, both a sign of low inflation expectations, and worldwide calm.

Today Emma Stone is 29. Sally Field is 71.

James M. Meyer, CFA 610-260-2220

Additional information is available upon request.
# – This security is owned by the author of this report or accounts under his management at Tower Bridge Advisors.

Additional information on companies in this report is available on request. This report is not a complete analysis of every material fact representing company, industry or security mentioned herein. This firm or its officers, stockholders, employees and clients, in the normal course of business, may have or acquire a position including options, if any, in the securities mentioned. This communication shall not be deemed to constitute an offer, or solicitation on our part with respect to the sale or purchase of any securities. The information above has been obtained from sources believed reliable, but is not necessarily complete and is not guaranteed. This report is prepared for general information only. It does not have regard to the specific investment objectives, financial situation or the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed in this report and should understand that statements regarding future prospects may not be realized. Opinions are subject to change without notice.

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