Basis Points – August 21, 2018

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Above the Fold

  • The White House is complaining again about Federal Chairman Powell and the Fed board’s ongoing plan to raise the fed funds rate gradually. President Trump told a group of political donors that he was hoping for easier monetary policy. Speaking at a fundraiser on Friday, Trump said he thought Powell would favor cheaper money and not have such a heavy hand when it comes to interest rate hikes. “He was questioning why it was happening,” one person at the event said. “He made a reference to things going so well, so why bother” raising rates.
  • PepsiCo announced on Monday that it plans to buy SodaStream, the popular maker of home-carbonation machines, for $3.2 billion, as Pepsi tries to extend its products to drinks that are not sugary sodas. Under its soon-departing CEO, Pepsi has shifted more and more attention to products like premium bottled water, baked food and veggie chips. The merger also gives Pepsi another potential source of revenue, refills of flavored syrups and carbon-dioxide gas, generating recurring revenue over time. SodaStream has emphasized its products’ ability to make flavored sparkling water, rather than sodas. That provides an important avenue for Pepsi to tap into a growing market, as brands like La Croix have grown in popularity.



Three Things

  • Data released last Friday show very strong future economic activity is on the horizon. The Composite Index of Leading Indicators, also known as the LEI, is used to predict the direction of global economic movements in future months. The index is composed of 10 economic components whose changes tend to precede changes in the overall economy. The LEI jumped 0.6 percent in July, much higher than expected, and shows that overall growth in the economy will be robust for the next nine months. U.S. business and consumer confidence remains at a 35-year high, and formerly weak sectors like clothing stores showed industry sales up a very strong 6.5 percent, and restaurant industry sales are also booming, with sales up 10 percent year over year. The increase in consumer income from lower payroll tax rates looks like it is finally filtering into consumer spending numbers.
  • Rob Gronkowski (Gronk), the superstar tight end for the New England Patriots, earned $10.5 million last season, including a $2.5 million bonus for being named an All-Pro. But Gronk hasn’t spent a penny of his contract money from last season. In fact, he says he hasn’t touched any of his career NFL earnings, including the six-year $54 million contract he signed in 2012. Gronk is typically the life of the party, but he is very savvy with money and incredibly careful about how he spends it. Gronk says he spends only the money he earns from endorsement deals with brands like Dunkin’ Donuts, Nike and BODYARMOR sports drink. This money savvy is especially rare for someone in the NFL, where careers tend to last only a few years and bankruptcies are notoriously common among retired players.
  • Coca-Cola, which owns Powerade, is buying a stake in BODYARMOR, the sports drink startup backed by Kobe Bryant and other athletes. While Gatorade is owned by Pepsi, Coke is again trying to break Gatorade sports drinks’ lock on the sports drink market. BODYARMOR has marketed its products as healthier alternatives and has signed on younger athletes like Mike Trout and James Harden to invest in the company and appear in its ads. However, Gatorade still dominates the sports drink market and sells 75 percent of the industry sales of $8 billion a year. BODYARMOR is expected to see sales of about $400 million this year, so still has only a small sliver of the market but could gain share with help from Coke’s distribution system.

Did You Know

The New York Times published an article last week titled, “The stock market is shrinking. That’s a problem for everyone.” The author is correct in reporting that the number of publicly traded stocks has declined markedly over the past 20 years, from about 7,500 stocks in 1997 to about 3,600 today. However, a statistic regarding the profitability of the remaining companies is very misleading, and may scare some investors. The article states that “Profits are increasingly concentrated in the cluster of giants that dominate the market. For a far larger assortment of smaller companies, though, profit is often out of reach. In 2015, for example, the top 200 companies by earnings accounted for all of the profits in the stock market. In aggregate, the remaining 3,281 publicly listed companies lost money.”

This statistic certainly sounds scary, but it misstates the health of the average publicly traded company, due to the use of the term “in aggregate” to summarize the total profits of the smaller 3,281 public companies. For example, let’s say that on a summer Sunday, there are 20 lemonade stands on your street. One kid is a hustler, and makes $100 a day. Eighteen lemonade stands are profitable, and earn $5 a day per stand. However, the 20th lemonade stand is run by a very irresponsible slacker who just sits around and gives his product away for free, so he loses $91 a day. So with this author’s “in aggregate” logic, the only kid who made money is the one who made $100, as in aggregate everyone else loses money (18 kids made a total of $90, while the 19th kid lost $91). However, we could say that the health of the lemonade business on that street is very good, as 19 out of 20 kids were profitable. Using an aggregate number for profitability of a large group of companies says nothing definitive at all about the economic health of the group of companies individually.

In fact, looking at the profitability of the companies individually shows a much healthier picture of profitability. Of the 1,000 large companies in the Russell 1000 index, 92 percent of them were profitable in 2017. Of the 2,000 small companies in the Russell 2000 index, 75 percent were profitable last year.






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