Novewmber 26, 2014

Stocks opened mixed this morning. The SPX and Dow are currently down 8 pts & up .1%, respectively. Last Friday ended the best 5-week rally for stocks since 2009 (SPX up over 9%). The Nasdaq is only about 5% away from its all-time high. Commodities are tanking this morning. Copper is down another .5% to a fresh 8-month low. WTI crude oil is down under $74/barrel in front of the OPEC meeting. So traders are betting OPEC keeps production unchanged. In fact, Bloomberg reports Saudi Arabia, Venezuela, Mexico and Russia apparently met early and failed to agree to production cuts. Bonds are up big in early trading. The 5-year Treasury yield dipped to 1.55% from 1.60%. The 10-year yield ticked down a couple of basis points to 2.24%.

Yesterday on CNBC, Dan Greenhouse argued that most people don’t give this rally enough respect because they’re seeing an economy that isn’t yet completely healed. “What matters for stocks is not good or bad, but better or worse.” Things are improving, and that is driving stocks.

US durable goods orders rose .4% m/m in October following an upwardly revised decline of .9% in the prior month. All of the October gain can be attributed to transportation, without which orders were down .9%. The most common gauge of US corporate capital spending (cap goods orders excluding defense and commercial aircraft) fell 1.3% in both September and October. Taking a step back to survey the broader trend, durable goods orders excluding transportation were up 6.4% year-over-year following an upwardly revised 7.8% in the prior month. These figures are fairly healthy.

Personal incomes rose .2% m/m in October vs. economists’ consensus forecast for a .4% gain. Personal spending also rose .2%, matching income growth and coming in slightly shy of estimates. Consumers are living within their means. The inflation gauge on personal spending (PCE deflator) ticked up .1% in the month, and is rising at a very modest 1.4% year-over-year rate. By the way, this is the inflation gauge most favored by the Federal Reserve, whose target for the PCE deflator is 2%. This is not a terribly bullish report.

The Chicago Purchasing Managers Index (PMI) fell to 60.8 in November from 66.2 in the prior month. Economists on average anticipated a smaller monthly decline. The regional business survey is a bit softer this month, but is still at very elevated levels. As Barron’s says, “Chicago purchasers continue to report outsized rates of monthly growth.”

The University of Michigan US Consumer Sentiment Index rose to 88.8 this month from 86.9 in October. The survey is now at a fresh 7-year high. And we’re back to average pre-recession levels.

Pending home sales rose 2.2% year-over-year in October. This represents a deceleration from September’s 3.4% growth rate. But keep in mind that home sales went negative a year ago and have been rebounding nicely over the last 6 months. New home sales have also been very choppy over the last year, moving in a range of 400,000 to 450,000 annual units. We’re now back to the high end of that range in the last couple of months. So the housing recovery is showing some signs of new life.

November 25, 2014

Stocks opened mixed, searching for direction. The Dow and SPX are currently about flat. Energy stocks are really lagging, as are utilities. As we move into the last month of the year, it looks like the energy sector will be the worst performing (down 3% at the moment); healthcare will be the best performing (up 23%). Commodities are broadly lower this morning (WTI crude at $74.40). Copper just hit an eight-month low, despite the fact that China just announced more monetary stimulus. Bonds are modestly higher on the day, with the 5-year Treasury yield down to 1.60% and the 10-year at 2.29%. With yields down, it’s interesting that utilities are down .5% today—that only makes sense if you believe the sector is overvalued and investors are beginning to take profits.

US inflation-adjusted economic growth (GDP) was revised sharply higher for the third quarter, to 3.9% from the initial estimate of 3.5%. The personal consumption (i.e. consumer spending) component of GDP came in at 2.2% growth, a bit higher than expected. Inflation ticked up just a bit to 1.4% from the initial estimate of 1.3%, and that is a dagger in the heart of those on Wall Street who are calling for deflation. None of the domestic inflation gauges we watch are decelerating.

The S&P/Case-Shiller Home Price Index for the 20 largest US metro areas rose 4.9% y/y in September following 5.6% growth in the prior month. Home price growth is clearly moderating after having peaked at about 14% back in 2013. I see this as good news, because we’re moving toward levels that are more sustainable; levels that will help stimulate demand.

US Consumer Confidence dipped to 88.7 this month from 94.1 last month. So the index fell to a 5-month low despite the fact that gasoline prices are dropping quickly, home prices are still rising, the unemployment rate is falling, and stocks are hovering around all-time highs. There are a lot of moving pieces here. Within the index, consumer attitudes about the current month as well as the 6-month outlook got worse. But at the same time, more survey respondents indicated they plan to spend more on new appliances, televisions, and cars. I’m guessing we’re splitting hairs here. If you step back and look at the longer term chart, the index is hovering around a seven-year high. This report doesn’t give me any reason to doubt our outlook for strong consumer spending during the holidays.

Senator Chuck Schumer, instrumental in forcing ObamaCare through congress in 2010, now says Democrats made a mistake by “put[ting] all our focus on the wrong problem—healthcare reform.” He went further, saying the party misused the mandate given by voters in the 2008 election. Healthcare reform “wasn’t the change we were hired to make.” He now believes the American people wanted Democrats to focus on helping the middle class. Finally, he urged voters to trust big government anyway. I believe this speech is important because it probably represents the party’s emerging narrative for the 2016 election.

November 21, 2014

The Dow and SPX gapped up at the open to fresh record highs due to what I’m calling “Global Monetary Stimulus Day.” We’ve given back a little of that; at the moment the Dow is up 122 pts and the SPX is up .65%. Commodities are moving to the upside after China’s central bank cut interest rates for the first time since July 2012. The one-year lending rate was cut to 5.6% from 6%. This comes as a surprise; investors are encouraged that Chinese leaders are willing to take bold monetary policy action to address slowing economic growth. Copper, oil and gold are up more than 1% at the moment. WTI crude is currently at $76.50/barrel and Brent crude is trading at $80. Also boosting energy prices are rumors that Russia and OPEC are considering production cuts. It does look like Russia (and Venezuela) are getting desperate with oil down 30% from the summer highs. Their national budgets depend on the commodity. Bonds are modestly higher on the day. The 5- and 10-year Treasury yields ticked down to 1.62% and 2.32%, respectively.

The European Central Bank (ECB) has begun a two-year asset purchase program, which is similar to our Federal Reserve’s quantitative easing program. ECB chief Mario Draghi gave a speech in which he said they must act now to drive inflation up to normal levels, and may increase the asset purchase program if necessary. Art Cashin, frequent CNBC contributor, noted Draghi has “finally turned from the Prince of Promises” to real action. European stock markets are all up 1-3% this morning on the news.

Bloomberg reports the University of California regents have approved a 28% increase in university tuition rates, or about 5% per year for the next five years. California Governor Jerry Brown opposed the increase but doesn’t have a vote. He says the UC budget has risen 27% since he took office in 2011. Politicians, of course, are notoriously bad a math, but just consider the fact that consumer price inflation (CPI) in our country is less than 2%, but the inflation rate on education is more than twice that.  Over the last 10 years, tuition and fees at public 4-year universities have increased an average of 3.5% per year beyond increases in CPI.

Intel (INTC) hosted its annual investor meeting yesterday. Management raised sales guidance, saying full year 2015 sales should grow in the mid-single digits. Wall Street analysts currently forecast only 3% sales growth next year, so this is clearly a positive for the stock. I don’t think many analysts saw this coming.

November 20, 2014

Stocks gapped down at the open but quickly recovered. The Dow and SPX are currently up pts & %, respectively. The energy sector is finally up, and other cyclical sectors are following suit. WTI crude oil is up over $75/barrel, and it’s clearly trying to put in a bottom over the last week. Bonds are little changed on the day. The 5-year and 10-year Treasury yields are sitting at 1.64% and 2.34%, respectively.

The Consumer Price Index (CPI) rose 1.7% y/y in October, even with the prior month. This was slightly higher than the 1.6% expected, but here’s the takeaway: retail inflation is still very tame. Part of the reason for that is that energy (gasoline) prices are falling rapidly. But even if you exclude the typically volatile food and energy categories, CPI is rising at a 1.8% clip. I view this number as Goldilocks-ish; not too hot and not too cold. In other words, inflation isn’t high enough to force Fed interest rate hikes, and not low enough to make investors worry about disinflation. Steve Liesman, economics reporter for CNBC, said this proves the US is not importing weakness from overseas markets.

Existing home sales rose 1.5% m/m to an annualized rate of 5.26 million. This was slightly ahead of economists’ consensus forecast and represents a one-year high in sales. Existing home sales have now exceeded 5 million (annualized rate) in each of the last five months. The standard explanation is that mortgage rates have been falling and the job market is steadily improving. Whatever the reason, it looks like the housing uptrend may have resumed.

More importantly, the US Index of Leading Indicators shot up .9% in October, far outpacing forecasts. This is probably the most closely watched gauge of the US economic outlook over the next 3-6 months. Results speak to rising factory orders, job market improvement, falling gasoline prices and other conditions that suggest the economy will continue improving into 2015. This is a big deal, and probably the reason why stocks turned positive after a weak open.

Things overseas are not looking so good. Markit Economics’ Flash China Manufacturing PMI—a broad measure of manufacturing business activity—fell to 50.0 in November. So the index is sitting right on the line that divides expansion and contraction. China has clearly been slowing. This same index was at 50.8 a year ago. Separately, Markit’s Eurozone Flash PMI, which covers both manufacturing and service businesses, fell to 51.4 in November from 52.1 in the prior month. That’s the lowest reading in 16 months. Compare these readings with Markit’s US Manufacturing PMI at 54.7 and you can see we’re in much better shape than most other large economies around the world.

CNBC spent some time this morning considering whether the economy is looking more sustainably stronger than many think. Wall Street consensus GDP growth for the fourth quarter is currently forecast at 2.7%. But we could be looking at something north of 3% based on improving consumer spending. We just got positive results from a host of retailers (Best Buy, Costco, Dollar Tree, Williams Sonoma, Wal-Mart, Kate Spade…).

November 18, 2014

Stocks surged higher at the open. The Dow and SPX are currently up 43 pts & .4%, respectively. The Nasdaq is up about .5% to a fresh 14-year high. Hard commodities are mostly lower, with iron ore off 3%, copper down 1.3% and WTI crude down modestly to $75/barrel. Bonds are flat to modestly higher on the day. The 5-year Treasury yield is down 1 basis point to 1.62% and the 10-year is trading at 2.33%.

Over the last couple of weeks, stock have fallen flat, as if exhausted from the torrid run during the last half of October. Of course, we’ve talking about the fact that markets need to churn around for a while in order to digest those gains. And it’s possible we could see a mini selloff before the Santa Claus rally shows up. Certainly the American Ass’n of Individual Investors (AAII) Bullish Sentiment Index suggests that. The index recently surged to a nearly 4-year high, suggesting retail investors have a very positive outlook for stocks. Institutional money managers, on the other hand, often cite this index as a contrarian indicator.

The Producer Price Index (PPI), which measures wholesale inflation, rose unexpectedly in October. The year-over-year inflation rate came in at 1.5% vs. economists’ consensus forecast for 1.3%. PPI excluding volatile food & energy categories accelerated to 1.8% y/y from 1.6% in the prior month. The rise in wholesale prices is not alarming and it’s not broadbased, either. Price hikes were pretty much confined to food (meat) and services. Falling energy prices are definitely keeping a lid on PPI. Gasoline prices, according to AAA, are back to 2010 levels.

The Nat’l Ass’n of Homebuilders’ Housing Market Index unexpectedly rose to 58 this month from 54 in October. So this is a reversal of the recent trend and puts the index very close to its highest level in the post-recession period. It also suggests homebuilders are feeling better about their prospects in 2015.

An index of German investor confidence also rose unexpectedly, posting the first monthly increase in the last 11 months. The index, published by ZEW in Mannheim, suggested investor/analyst expectations over the next six months are improving. This is a big deal because Germany is the leading country in Europe, and everyone is trying to figure out whether the Eurozone will fall into recession.

Third quarter earnings season is nearly complete; 95% of S&P 500 companies have reported. About 59% of them beat Wall Street sales forecasts, and roughly 79% beat earnings forecasts. Looking back to the second quarter, those figures were about 65% and 75%, respectively. Now, as for year-over-year growth of corporate earnings, the second quarter posted 9.5% and the third quarter came in at 9%. That’s pretty solid.

November 14, 2014

Stocks are mixed in early trading (Dow -14 pts; SPX flat). Many of the cyclical sectors (industrials, tech, discretion) are higher. Healthcare and consumer staples stocks are falling into the weekend. WTI crude oil bounced a bit (now at $75.20) this morning after hitting a fresh four-year low of $74.20/barrel yesterday.

Speaking of oil, the Int’l Energy Agency (IEA) says falling prices show no sign of turning around. Weak demand, lots of supply and a stronger dollar are to blame. By the way, CNBC reporters were lamenting the fact that they are having a difficult time finding any interviewees from Wall Street firms who’ve actually “been right” about oil. Almost no one predicted the sharp drop in oil prices.

US consumer sentiment rose to 89.4 this month vs. 87.5 expected. That’s a 7+ year high for the index, which has been boosted by an improving job market, and falling gasoline prices. But while overall expectations rose, it’s interesting that “most households still expect a declining standard of living.”

Retail sales were up .3% m/m in October, slightly better than expected. Excluding gasoline, sales rose a very strong .6% in the month. On a year-over-year basis, retail sales (which account for 1/3 of total consumer spending) are up 3.3%. One of the floor traders from Wunderlich Securities told a CNBC reporter that “The real trade will be when everybody wakes up and realizes lower oil prices are a tailwind for the consumer.” He believes that fact is not yet priced into the stock market. We did get better than expected third quarter earnings from Wal-Mart yesterday, and that’s quite a departure from the norm over the last several years.

The Import Price Index reminded us this morning that inflation just isn’t a factor in this economy. Prices for imported goods fell 1.3% month-over-month and 1.8% year-over-year. That the largest decline in two years. The simple fact is that over the last half-year the US Dollar has appreciated roughly 10%, and this is making imported goods cheaper.

Third quarter mortgage delinquencies dipped to 5.85% of all outstanding loans, from 6.04% in the prior quarter. Delinquencies haven’t been this low since the end of 2007.

We got some economic data from Europe this morning. Eurozone economic growth (GDP) rose .2% following .1% in the prior quarter. Germany and France posted GDP growth of .1% and .3%, respectively. So for all intents and purposes, Europe has flat-lined. “We see a picture confirming an outlook of weak growth but with limited risks of a relapse into recession,” says the chief Euro economist at UniCredit Global Research.

The head of O’Leary Financial Group addressed Alibaba (BABA) on CNBC this morning. He’s not touching the stock until the company 1) announces a plan to begin returning cash to shareholders (i.e. dividend), and 2) proves it can grow free cashflow. “All the rest is crap…”

November 13, 2014

Stocks opened higher this morning (Dow +54 pts; SPX +.1%). Every sector except energy and utilities is in the green. The VIX Index is down under 13. Commodities are broadly lower (oil, copper, iron ore). In fact, WTI crude oil fell to a fresh four-year low of $75.50/barrel. Brent (European) crude oil is also trading under $80. The dollar is a bit weaker this morning, but has appreciated roughly 10% against a basket of foreign currencies over the past several months. That’s a big move, indicating our economy is stronger than many others around the world. Bonds are slightly higher in early trading. The 5-year Treasury yield ticked down to 1.63% and the 10-year edged down to 2.36%.

CNBC’s Bob Pisani said something interesting yesterday afternoon as the market closed flat. “The more the market moves sideways, the less overbought the market is.” In the near term, stocks will likely need to churn around and digest recent gains.

Bloomberg ran an article yesterday positing that copper prices are signaling the global economy isn’t as wrecked as oil prices suggest it is. Brent crude oil is down about 30% from its recent peak, at a four-year low. But copper fell [only] about 10% from its July peak and has already begun to recover. Historically, economists and traders pay a lot of attention to copper because it is perhaps the most industrial of metals. Bloomberg quotes a Barclays money manager thus: “Global growth should recover as the ratio of copper to Brent oil has risen notably, which historically has been correlated with a pickup in growth.”

We got some disappointing economic data out of China. Factory production disappointed with 7.7% y/y growth—at the low end of its 5-year range. Fixed investment (i.e. infrastructure spending) grew at the slowest rate since 2001. I actually heard a CNBC reporter mention the possibility of a “hard landing” for the Chinese economy. I’ve been hearing that term for the last 10 years and it hasn’t happened yet. Don’t bet on it. Investors are sorely disappointed that the Chinese central bank hasn’t yet responded in a big way to recent economic weakness. They want monetary stimulus—nationwide interest rate cuts—from the government.

The US military yesterday confirmed Russian troops have crossed into Ukraine, presumably to help Russian-backed Ukrainian rebels overthrow the government. The Russian government, of course, denies direct involvement in the civil war. This comes on the heels of another report that the Russian parliament has learned 12 Russian soldiers were recently killed on secret missions away from their home base.

November 12, 2014

Stocks sank at the open. The Dow and SPX are currently down 67 pts & .36%, respectively. Telecom, consumer discretion and materials sectors are leading the way. Utilities are getting smacked around in early trading. Commodities are mostly lower today, and you may know that the Bloomberg Commodity Index is down nearly 15% from its peak in May. WTI crude oil is down modestly again today, around $77.50/barrel; we should be thankful it isn’t in freefall anymore. Bonds are modestly higher on the day; the 5-year Treasury yield ticked down to 1.61% and the 10-year Treasury yield is down ever so slightly to 2.32%. So it’s a bit of a surprise that utilities stocks are performing so poorly. It could be that institutional money managers are beginning to lock in gains. Up until very recently, the utilities sector had outperformed all other sectors this year.

Chinese stocks are up 1% this morning; the Shanghai Composite is sitting at a 3-year high. China is opening up its stock market to Hong Kong investors, who for the first time will be allowed to purchase “A” shares of China-listed companies. China’s economy is clearly slowing, but remember, stocks and the economy don’t correlate very well in China.

Macy’s reported third quarter earnings this morning, beating Wall Street earnings estimates by a wide margin. Unfortunately, the retailer missed on revenue as same-store-sales declined 1.4% (vs. estimated +1.9%). Management also cut its earnings outlook for fiscal 2014 (ending in January). Despite the bad news, the stock is actually up 3% this morning. An analyst at Stiefel Nicolaus says the company is “appropriately cautious” on the holiday shopping season. My sense is that Wall Street’s bar is set pretty low right now for retailers going into the holidays. The chain announced it will open two hours earlier on Thanksgiving Day to boost Black Friday sales.

BB&T announced it will acquire Susquehanna Bancshares for $2.5bil in stock and cash (mostly stock). The deal is all about building scale. BBT’s CEO said, “Potential sellers have decided it’s a good time to sell because they’re realizing the substantial costs that go into being regulatory compliant.” In other words, the cost of running a bank in the post-financial crisis world is rising. BB&T stock is down 1.8% this morning as investors weigh whether they are overpaying. The deal was done at a 39% premium to yesterday’s closing price.

AT&T announced it will pause all investments into fiber (that is, laying fiber optic cable) until the FCC clarifies new rules on net neutrality. The CEO said, “We can’t go out and invest that kind of money deploying fiber to 100 cities not knowing under what rules those investments will be governed.” Remember, President Obama has asked the FCC to regulate high speed internet service as a public utility. In that case, AT&T would not be able to charge internet content providers (i.e. Netflix, YouTube) a fee to prioritize their internet traffic.

November 11, 2014

Stocks opened lower but quickly turned around.  The Dow and SPX are currently flat on the session. By the way, the SPX achieved a new all-time high of 2040 yesterday. The VIX Index is down to 12.7; volatility has really calmed down. The best performing sectors today are materials and healthcare; the energy sector is lagging. Commodities are lower (oil, copper, iron ore). Citigroup just cut its demand forecast for iron ore. Bonds are a bit lower in early trading (5-year Treasury yield up to 1.64%; 10-year at 2.36%).

WTI crude oil is hovering around $77/barrel this morning. ISI Evercore, a well-respected economics research shop, says oil is close to a bottom, which technically could be around $75-$76/barrel. The firm believes upside outweighs downside risk and we could see oil move toward $90 in the near term. Goldman Sachs & Soc Gen, however, say OPEC will decide whether oil continues to fall or finds a bottom in the near term. If OPEC decides to cut production prices will move higher. If they decide to continue defending market share with price cuts, we’re in for a “new oil order” which could keep prices down for a while. In that case, oil prices will eventually be set by US drillers based on their production level decisions. So OPEC may have significant influence for a while, but ultimately it will fade.

Federal Reserve Bank of Philadelphia President Charles Plosser says he sees signs that interest rates are “too low”. Even despite falling oil prices and lackluster wage growth, he thinks higher rates would be healthy for the economy. “There is no precedented history to have rates at zero. I think we are really behaving in a way which is outside of historical norms and that should make us nervous.” So this is a fairly hawkish view, suggesting he would like to see rate hikes sooner rather than later. Fed funds futures contracts, traded on the Chicago Mercantile Exchange, suggest 56% of traders believe the Fed will begin to raise short term interest rates in September 2015. About 36% believe that first rate hike will happen in July 2015.

The NFIB’s Small Business Optimism Index rose to 96.1 in October vs. 95.3 in the prior month. Results were slightly better than expected. For about the last six months, the index has been hovering around levels not seen since 2007. The index is moving in the right direction, albeit very slowly. Global economic weakness is still weighing on results. And only 13% of small businesses surveyed said they plan to increase wages in the near future.

November 10, 2014

Stocks opened higher this morning (Dow 18 pts; SPX .21%). The Nasdaq is up .35% in early trading. Consumer discretion and energy sectors are in the red, sticking out like a sore thumb. Most everything else is modestly higher. By the way, both the Dow Transportation Index and the S&P 500 Industrials Index just hit all-time highs after rising 13-16% is less than 30 days. Commodities are broadly higher (oil, copper, iron ore). WTI crude oil is up close to $79/barrel after having fallen to $77 last week. Bonds are a bit lower in early trading (5-year Treasury at 1.61%; 10-year at 2.32%).

The other day I mentioned Bob Doll, Nuveen’s chief equity strategist. CNBC interviewed him again this morning. Mr. Doll cited good earnings progress, and economic improvement. Looking forward to 2015, he predicted a “pick-up in cyclical sectors,” and said some overseas economies will begin to “respond to policy” (that is, improve). He sees interest rates moving “irregularly higher” into 2015.

High speed internet providers like AT&T, Comcast and Time Warner are down this morning following comments by President Obama on net neutrality. The president urged the FCC to create the “strongest possible rules” to protect net neutrality. The president wants consumer broadband service classified as a public utility so that providers can’t intentionally prioritize higher paying traffic. Internet providers, on the other hand, are pushing for a regulatory regime that would allow them to charge more to content providers who want their internet traffic prioritized.

Barron’s cover story this weekend, titled “Cat Fight,” addresses the growing price war between AT&T, Verizon, Sprint and T-Mobile. The industry needs to consolidate, and until regulators allow Sprint and T-Mobile to merge, they won’t be able to compete against the big players in the long run. The article runs through the numbers; for example, AT&T and Verizon control 75% of high-margin post-paid wireless subscribers in the US. The smaller players are dropping prices to compete and this is cutting into industry-wide profit margins. But the bottom line is that more M&A is basically inevitable in the industry. Long term, Barron’s thinks AT&T and Verizon are the best bets for investors.

Third quarter earnings reporting season is nearly over. About 450 of the S&P 500 Index companies have already reported, with 60% beating Wall Street sales forecasts and 80% exceeding earnings forecasts. Those figures are improved from the second quarter.