Anxiety in the Market

Stocks slip for the week…..The predictions of impending ‘doom’ from Wall Street’s talking heads continued this past week. The reasons for a pull-back are many. The stock market has rallied and rallied for too long and has gone up too smoothly, the Federal Reserve is about to remove the bond-buying that has helped prop markets up, taxes are ready to rise, and economic data are slowing down. None of it really left a mark! But then the S&P 500 dropped 0.6%, to 4432 over the week, while the DowJones Industrial Average slipped 0.1% to 34584, and the Nasdaq Composite slumped 0.5% to close at 15043. The quiet Russell 2000 was pretty much even, closing at 2236, with a .018% gain for the week….a great barometer made up of smaller companies with very positive growth equities. Meanwhile, the 10-year Treasury note’s yield rose to 1.380%–nearly a two-month high from 1.331% Thursday. It finished the week at 1.369%. The move-in stocks and bonds show investors grappling with mixed economic data in both the U.S. and China. A report from the University of Michigan showed consumer sentiment subdued and about where it was in August, with inflation expectations still high. A reading of the Michigan consumer-sentiment index for September came in at 71.0, slightly up from 70.3 in August and below the 72.0 consensus forecast from economists polled by The Wall Street Journal. Think Markets analyst Fawad Razaqzada said that if economic growth in the U.S. and China is weak and inflation is rising, that will put investors in a bind, especially in the U.S. where equities’ valuations are at near-record levels. “Investors are just starting to wake up to the risk facing them.”

Canadian Pacific Railroad successfully clinched a deal to acquire Kansas City Southern Railroad, avoiding a potential “train-wreck.” Rival Canadian National Railway Company bowed out after submitting a tastier deal of $30 billion, topping Topping Canadian Pacific’s bid of $27 billion. After months of battling before a regulatory panel that must bless railroad mergers, they denied Canadian National’s bid. Canadian National’s plans to use a temporary voting trust, a key element of its proposal failed. In the wake of that decision, Kansas City Southern on Sunday (9-12-2021) said they favored a sweetened cash-and-stock offer from Canadian Pacific, which had already received the go-ahead from a similar trust. Canadian National had five business days to ‘clean-up’ its offer or walk away, which they did. Canadian National will receive a $700 million termination fee as well as a $700 million reimbursement of a previous termination fee it covered. Hefty premiums for a failed merger! Kansas City Southern and Canadian Pacific said that their planned deal will create a railroad with roughly $8.7 billion in annual revenue. This would mark the first major merger in the rail industry in the U.S. in about two decades and would create the first rail network linking Canada, the U.S., and Mexico. The deal values Kansas City Southern at $300 a share. Shareholders would receive 2.884 Canadian Pacific shares and $90 cash for each KCS share. To fund the deal Canadian Pacific will issue 262 million shares.

Steel Prices Squeeze Companies….Manufacturers are facing the highest steel and aluminum prices in years, another hurdle for U.S. companies already saddled with making enough products: cars, cans, and a plethora of products. The rising metal costs are pushing manufacturers to take what steel they can get, and hire more people to seek out available supplies, company executives said. The rising costs are flowing through to some producers of consumer goods. “It’s crazy for steel,” said Brian Nelson, president of HCC. Inc., which sells large metal accessories to tractor manufacturers. “I can’t even get material at times.” A midwest steel index calculated by CRU group estimated prices at $1,940 a ton at the start of September, up from around $560 in September for both 2019 and 2020. A U.S. government index tracking the price of steel and iron nearly doubled from the year before, the biggest relative increase since records began in the 1920s. The higher costs are already hitting consumers, especially for products like cars and appliances. Household appliance prices rose by 6.8% in August, the highest year-over-year increase in a decade, according to Labor Department data. Steel production in China, which makes more than half the world’s steel, is projected by analysts to decline in the months ahead, partially because of that country’s efforts to cut carbon emissions. Steel buyers said U.S. producers could be doing more to boost production to meet the rising demand, such as restarting idled plants. Kevin Dempsey, the Washington, D.C.-based trade group’s chief executive, said “steel imports have risen this year, and steel production capacity is expected to increase as more mills come online.” There is definitely optimism that more production, and stabilization in the U.S., will lower steel and iron prices.

RUMBLINGS ON THE STREET

President Joe Biden announcing broad federal mandates for Covid-19 vaccinations, Barron’s “We’ve been patient. But our patience is wearing thin.”

Larry Shustack, Investor, Manchester. Conn, as quoted in Barron’s “Wage stagnation is behind us and wage inflation is ahead of us. Long term, that is a win for Americans.”

Janet Yellen, U.S. Treasury Secretary, commenting about the prospect of giving the Internal Revenue Service more information about taxpayers’ bank accounts, as the Biden administration tries to salvage its tax-compliance proposal. WSJ “A reporting regime that is broad-based will better assist the IRS in targeting enforcement priorities on the high-end who accrue income in opaque ways,” says Ms. Yellen.

Michael Moritz, partner of Sequoia Capital, Barron’s “SpaceX….is easily more important than Tesla. SpaceX is going to change the world of communications.”

Senator Elizabeth Warren (D., Mass.) Barron’s Disclosures by Kaplan and Rosengren stood out because of the Fed’s extraordinary response last year to the financial markets’ disarray from the steep economic downturn caused by the pandemic. Senator Warren, a frequent critic of the Fed and financial institutions, called on all 12 Fed district banks “to change their codes of conduct to prohibit stock trading by their heads.”