August is behind us and now September has begun with a strong rally. The huge stock market advance continued as the Dow Jones Industrial Average has climbed within 2% of its all time high, as of September 6. Meanwhile, the bond market continues to see lower yields around the world. Negative yielding debt reached the $17 trillion level after Labor Day. In fact, Germany now sees its yield curve entirely with a negative yield. Last month, Germany issued a 30 year bond with a zero coupon and was priced to yield a negative 0.11%.
The Federal Reserve is set to meet September 17-18 and is expected to cut rates by a quarter point at this meeting. The Fed’s final meetings of 2019 will be held Oct. 29-30 and Dec. 10-11.
US Treasuries are in high demand from portfolio managers around the world due to the positive yield offered. As a result, there is a good chance the yield on the 10 Year US Treasury will drop below the all time low of 1.35% reached in June 2016, after the Brexit vote. For 2019, the low yield on the 10 Year US Treasury is 1.43%.
GE was back in the news after Madoff whistleblower Harry Markopolos raised serious doubts about GE’s accounting. His 175 page report openly questioned the adequacy of GE’s reserves for its Long Term Care unit. As a Lawyer and CPA myself, I reviewed GE’s most recent 10-Q filing. As of June 30, 22% of GE’s assets are essentially worthless (goodwill & intangibles). Debt stands @ $105.8 billion, pension obligations total $32.7 billion and its annuity & long term care liabilities total $38.1 billion.
Earlier this year, GE agreed to sell its biopharma unit to Danaher for $21.4 billion. Note that this deal has yet to close although GE is saying it expects to close by the end of 2019. Thus, a large part of the proceeds from the Danaher deal may be used to bolster GE’s underfunded long term care obligations. GE’s debt is rated just above junk status so a debt offering seems unlikely. GE may need to do a massive secondary offering to strengthen its balance sheet. Amazingly, GE paid over $24 billion in share repurchases during 2016-17 rather than reduce its debt!!
The August Nonfarm Payroll Report released on Sept 6 showed continued strength in the US economy as 130,000 jobs were added while nearly 158 million Americans were employed, a record number. Interestingly, the labor participation rate rose to 63.2%, its highest level since Pres. Trump took office. The unemployment rate held steady @ 3.70% for August and may move even lower if the US and China can settle their trade dispute. The US and China agreed to resume negotiations in October in Washington, D.C.