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March 23, 2016

Stocks opened lower this morning (Dow -45 pts; SPX -.44%). Energy and materials sectors are down the most in early trading. Only consumer staples and utilities are in the green. The VIX Index (spot) is trading at 14, suggesting pretty low expected volatility for the next 30 days. VIX April futures are trading up around 17 though. Markets seem fairly unmoved by the Brussels terror attack. WTI crude oil is trading down to $40/barrel and most commodities are lower. The dollar, not surprisingly, is a bit stronger on the day. Bonds are slightly higher as yields tick down. The 5-year and 10-year Treasury yields are trading at 1.39% and 1.92%, respectively.

In a Bloomberg interview today, Federal Reserve Bank of St. Louis President James Bullard said the Fed should consider another short-term interest rate hike next month. “You get another strong jobs report, it looks like labor markets are improving, you could probably make a case for moving in April.” He is concerned that inflation is rising, and believes it will be over the Fed’s 2.0% target in 2017. The Fed’s preferred measure of inflation—Core PCE Deflator—recently came in at 1.7%.

The CEO of Schlumberger (SLB) said the recovery in oil drilling activity will take longer than expected. In fact, he says despite rising oil prices it will be a long time before oil exploration companies begin to invest again. They are simply too cashflow constrained. Transocean’s (RIG) CEO said oil drilling rig lease rates probably won’t recover until late 2017 or early 2018.

Nike (NKE) reported earnings of $.55/share, higher than the $.48/share forecast by Wall Street analysts. Revenue, on the other hand, came in slightly below expectations at $8.0bil (representing 7.7% y/y growth). Excluding currency effects, sales rose 14%. China wasn’t a problem; sales rose 27% y/y. And worldwide futures orders were up 17%. But North America is getting more competitive, and management said it is working to pare back excess inventory, which isn’t yet cleared out. Sales guidance was also a bit soft: expect high single digit sales growth in the coming 12 months. The stock is down about 4% this morning.

US new home sales rebounded 2.0% in February to an annualized rate of 512,000 units. January’s sales pace was revised up a bit as well. Strength was driven by a surge in transactions in the West. Unfortunately, sales volume fell in the South, Midwest, and Northeast. At least the inventory of new homes for sale increased a bit (by 1.7%). As a reminder, new home sales represent about 9-10% of the overall housing market in terms of transaction volume.

March 22, 2016

The major stock market averages held fairly steady following a terror attack in Belgium (Dow -32 pts; SPX flat; Nasdaq +.15%). It looks like two separate locations were bombed by ISIS; at least 200 people were injured. Not surprisingly, airline stocks are down about 2%. healthcare and technology sectors are modestly higher on the day. WTI crude oil is up to $41.50/barrel and Brent crude is very close to parity ($41.70/barrel). Oil’s rapid recovery flies directly in the face of most Wall Street analysts who say the actual demand/supply situation hasn’t changed at all. So the only thing that hasn’t changed is analysts’ inability to predict oil price moves. Bonds are roughly unchanged today (5-year Treasury yield 1.36%; 10-year yield 1.89%).

Now that the S&P 500 (trading at 2051) has recovered most of the ground lost in the recent selloff, the biggest question for traders is: where do we go from here? So many of the short-term investment community have been very bearish, unwilling to concede that economic data are actually getting a little better. Citigroup’s Economic Surprise Index is back up to mid-November levels. In addition, we’ve had some central banks around the world (i.e. Europe, China) reaffirm economic stimulus measures. Finally, a lot of the technical damage done in January has been healed. The index is now convincingly back above its 50-day, 100-day and 200-day moving averages. And it looks set to make a run at the next resistance level, about 2081, which is 1.5% higher.

The Federal Housing Finance Agency’s (FHFA) House Price Index rose .5% in January from prior month levels. December’s gain was revised up modestly as well. On a year-over-year basis, the index is rising at a very healthy 6.0% clip. As a reminder, this index covers only single-family home transactions with conforming conventional mortgages. This is yet another data point suggesting strong housing demand.

Markit Economics’ private estimate of US manufacturing business activity (“PMI”) edged up to 51.4 this month from 51.3 in February. While economists were anticipating a larger rebound in business activity, at least the numbers are moving in the right direction. As with other PMI data, any reading above 50.0 indicates business activity is expanding rather than contracting. Interestingly, this index has not gone sub-50 in recent months as softer global economic growth and a stronger dollar have hurt US manufacturers. A similar PMI gauge, the ISM Manufacturing Index, dipped below 50 last October and still hasn’t yet fully recovered.

Sherwin Williams (SHW) announced a deal to acquire competitor Valspar (VAL) for $11.3bil. They say combining the two companies will yield cost savings of $280mil within two years. Despite the fact that SHW is apparently paying up for VAL, the stock is up 4% in early trading.

March 17, 2016

Stocks surged in early trading this morning (Dow +92 pts; SPX +.3%). Energy, materials and industrials (sectors battered in 2015) are leading way, each up over 1%. Healthcare continues to lag, and now the health insurers are getting hammered. Bloomberg reports medical loss ratios are rising for insurers with a lot of Medicaid members. We already know they’re struggling to make a profit with the ObamaCare exchanges. WTI crude oil is trading up to nearly $40/barrel, dragging other commodities along with it. Bond prices surged in the wake of the Fed announcement yesterday (read below), and are roughly flat this morning. The 10-year Treasury yield is sitting at 1.9% and the 5-year is at 1.39%.

Peabody Coal (BTU) missed a debt payment and warned it may have to file for bankruptcy. In a statement, the company noted substantial doubts about its ability to stay in business. Coal demand is plummeting in the face of ultra-cheap natural gas. For the first time ever, more power plants are being fueled by natural gas than by coal. Patriot Coal and Walter Energy have already filed for bankruptcy.

The Federal Reserve declined to raise short-term interest rates at its policy meeting which ended yesterday. In the accompanying statement, Fed officials acknowledged financial market turmoil around the world as one reason why it will continue to be patient with rate hikes. In addition, while there are signs of rising inflation, the Fed prefers to wait and see if that nascent trend persists. Early in 2016 many Fed bank governors were talking about 4 rate hikes this year; now the forecast is for only two. The Fed now forecasts US economic growth (GDP) to rise 2.1% in 2016 after rising 2.4% last year. CNBC reporter Bob Pisani summarized the Fed announcement pretty well: “The Fed has come to the Street’s position essentially.”

The US Index of Leading Indicators (LEI) ticked up .1% in February from prior month levels. Economists were anticipating a .2% gain. LEI is intended to be a predictive indicator of the health of the economy, and while the index has softened over the last year, it’s still healthy enough to suggest a continuation of moderate economic growth. On a year-over-year basis, LEI accelerated to 2.3% y/y growth from 2.1% in the prior month. Separately, Citigroup’s Economic Surprise Index, has risen back to -3 from its recent low of -55 in early February.


March 16, 2016

Stocks opened lower this morning but quickly turned around. The Dow and SPX are current up 8 pts & .1%, respectively. Energy, tech and financials are bouncing back, but the healthcare sector continues to languish. In fact, healthcare is the worst performing sector year-to-date despite the fact that earnings season confirmed solid revenue & earnings growth, which exceeded Wall Street expectations. Much of the recent weakness can be attributed to the presidential campaign. Politicians are eager to deride pharmaceutical and biotech companies and are calling for drug price cuts.

Oil prices are up 4% on the day, allowing stocks to advance. WTI crude oil is trading back up toward $38/barrel. Most other commodities are up as well. Gold, by the way, is up about 15% year-to-date. But that’s small consolation for investors who have suffered a more than 30% decline since gold peaked in 2011. The dollar is stronger today, even though oil is higher. That’s because we’re facing a Federal Reserve policy meeting, and traders are wondering if recent improvement in the economy may lead the Fed to talk about interest rate hikes later this year. That’s also why we’re seeing bond yields rise. The 2-year Treasury yield backed up to 1.0% this morning for the first time since early January; the 5-year is up to 1.53%.

In a CNBC interview yesterday, hedge fund manager Lee Cooperman said he has a “neutral plus stance” on the stock market. I think that can roughly be translated to cautiously optimistic. Most investors, on the other hand, are taking a “very conservative stance” and the market is “discounting a more conservative set of assumptions” in terms of earnings & economic growth. So very few are expecting a “rosy scenario.” Consequently, many stocks now yield more than bonds; there are a “ton of stocks that are very cheap.” He also noted that bull markets usually end with a hostile Federal Reserve, and that just isn’t reality today. So neither the behavior of investors nor the actions of the Fed suggests a market top.

US housing starts—ground-breaking on new construction—rose a better than expected 5.2% m/m in February to an annualized rate of nearly 1.18 million units. That’s pretty close to an 8-year high. That figure is also fairly close to the level of new construction necessary to keep up with natural population growth. It’s nowhere close to the excess we saw in the run-up to the housing crisis.

The Consumer Price Index (CPI) rose 1.0% year-over-year in February, slightly ahead of expectations. Inflation decelerated a bit from January’s 1.4% growth. Excluding food & energy, “core” CPI accelerated to 2.3%, and that’s what traders are focused on this morning. Core CPI hasn’t increased this much since May 2012. Price increases were noted in medical care, rent, hotel rates and education. Remember, the Federal Reserve’s core inflation target is 2.0%. Yes, it’s true that the Fed’s preferred measure of inflation is slightly different (the Core PCE Deflator). But at this point, any sign of accelerating inflation will rile traders and cause volatility.

US industrial production fell about 1% y/y in February. (I won’t even mention the month-over-month numbers because they’re very noisy.) That doesn’t sound inspiring. But Barron’s points out that weakness was driven by mining, and actually February’s figures point to a nascent reacceleration in manufacturing. To be specific, production of business equipment showed strength for the second straight month, and that could be a leading indicator for improving capital spending by companies. Similarly, while overall capacity utilization fell to 76.7% from 77.1% in the prior month, deterioration was driven by utilities producers and mining facilities. Utilization at manufacturing plants held steady at 76.1%.

March 15, 2016

Stocks dropped at the open again today. The Dow is down 26 pts and the SPX is off .5%. The Nasdaq is also down .5%. Energy, materials and healthcare are the worst performing sectors; all are down more than 1%. The Nasdaq Biotech Index is down more than 2.5%! We understand an executive from Express Scripts highlighted the rising cost of pharmaceuticals in a presentation this morning. So he’s just feeding the political firestorm over drug pricing. The VIX Index—a closely watched gauge of investor fear—is back up to 17. The dollar is a bit stronger on the day and commodities are lower. WTI crude oil is trading down to $36.30/barrel. The Bloomberg Commodity Index is down about .6% in early trading. Bonds are mostly unchanged; 5-year Treasury at 1.49% and 10-year Treasury at 1.96%.

Yesterday CNBC reported results from its latest presidential campaign poll of Wall Street economists and analysts. About 40% of respondents say the best outcome for the economy would result if a Republican is elected. Even more, 42%, say they don’t know or it doesn’t matter. In other words, there are no great choices. Interestingly, John Kasich is seen as having the best economic policies (42% of respondents). But a plurality, 56%, say this campaign has negatively impacted the economy.

Retail sales rose 3.1% year-over-year in February, accelerating a bit from January’s 3.0% rate. That’s a 1-year high in terms of growth. You’re not going to hear that from the financial news media this morning, however, as they are focused on the month-over-month numbers and revisions. Here’s Barron’s take: “Consumer spending did not get off to a good start after all in 2016 as big downward revisions to January retail sales badly upstage respectable strength in February.” CNBC said this: “US retail sales fell less than expected in February, but a sharp downward revision to January’s sales could reignite concerns about the economy’s growth prospects.” That’s garbage. Back to the year-over-year numbers: autos sales rose 6.8%, restaurant sales grew 6.4%, sporting goods soared 6.7%, and building materials & garden equipment surged 12.2%. What does that tell us? The US consumer is spending. Oh, and by the way, if you strip out gasoline retail sales is growing at a 4.8% y/y clip.

Wholesale inflation (PPI) fell flat in February from year-ago levels. That’s the first non-negative reading in a year. Excluding food & energy, PPI rose at a 1.2% clip. But while wholesale inflation is up a bit, it’s still not even close to what we’d call normal levels, and certainly not high enough to get the Federal Reserve thinking about rate hikes.

March 14, 2016

The major stock market averages opened modestly lower this morning (Dow -7 pts; SPX -.24%). Energy, healthcare and materials sectors are leading the market lower. Oil prices are down today; WTI -4% to about $37/barrel. Iran confirmed it will not agree—with Saudi Arabia, Russia and others—to freeze oil production at January levels. The country’s goal is to boost production from its current level around 2 million barrels per day to a target of 4 million barrels. Most other commodities are lower (Bloomberg Commodity Index -1% on the day and up slightly this year). Bonds are modestly higher as yields tick lower. The 5- and 10-year Treasury yields are trading at 1.47% and 1.96%, respectively. Speaking of bonds, “junk” or high-yield bonds are recovering from a 1-year rout. The SPDR High Yield Bond ETF (JNK) is actually up 2% for the year. Oil’s convincing move back over $30/barrel is helping to ease credit conditions. In addition, economic data has come in better than expected lately.

Charles Schwab’s chief investment officer says stocks are more likely to move back to all-time highs rather than descend into a cyclical bear market. She acknowledges higher volatility, but says it looks like the risk of recession is decreasing. The “economy is probably OK here.” Of course, we don’t have to get a recession in order to push the stock market down 20%, and that’s a possibility. But at this point, she doesn’t believe that is likely. By the way, a Bloomberg article today asserted, “economic data around the world suggest the global economy is far from the recession environment that wiped almost $9 trillion off the value of equities worldwide this year through mid-February…”

Here is a look at expected economic (GDP) growth for 2016 around the world, sourced from the Economist:

USA 2%; Canada 1.6%; Mexico 2.5%; Brazil -3.2%; Eurozone 1.5%; Russia -1.3%; Japan 0.8%; China 6.4%; Australia 2.5%; India 7.5%; South Korea 2.6%.