October 5, 2015

Stocks surged at the open this morning (Dow +186 pts; SPX +1.2%). All ten major market sectors are in the green, led by telecoms, industrials and energy. On Friday, US stocks posted their biggest reversal in 4 years. The S&P initially gapped down 1.5% after a disappointing jobs report, but steady recovered to end the day up 1.4%. What’s more, the Dow and SPX closed the day at session highs. These should be modestly positive technical signs. Today, European markets are up 2-3% and Asia was positive overnight. Commodities are mostly higher and the dollar is a bit weaker on the day. WTI crude oil is up 2.6% to $46.70/barrel. Bonds are lower as yields move higher. The 5- and 10-year Treasury yields are up to 1.32% and 2.02%, respectively.

Bloomberg ran an article highlighting a recent Federal Reserve report on US corporate earnings. Typically, investors follow quarterly earnings announcements for S&P 500 Index companies in order to gauge profit growth for Corporate America. By that measure, corporate earnings were down 2% y/y in the second quarter, and Wall Street analysts forecast a 5.6% y/y decline in third quarter earnings. But the Fed’s measure—Non-Financial Profits Before Taxes—tells a different story. By that measure, earnings were up 11% y/y in the second quarter. The Fed’s profit gauge obviously excludes taxes and ignores the financial sector. But it apparently also casts a much wider net than the S&P 500, which covers only about 75% of the total market capitalization of US companies. Bloomberg’s implication is that we might be underestimating the earnings power of US companies. By the way, Alcoa (AA) will kick off earnings season on Thursday.

The ISM Non-Manufacturing Index fell to 56.9 in September from 59.0 in the prior month. Economists were anticipating a smaller decline. Over the past two months the pace of growth in services industries pulled back from a 10-year high. But rather than flashing any warning signs, the index is probably just returning to a more sustainable level of growth. As a reminder, any reading above 50.0 indicates businesses are expanding. On the other hand, ISM’s US Manufacturing Index has flat-lined at 50.2 due to the stronger dollar and persistently weak oil prices.

September 28, 2015

Stocks opened lower again this morning (Dow -210 pts; SPX -1.65%). Materials (-2.2%) and healthcare (-2.1%) sectors are leading to the downside. European stock markets are about to close down 1-2%. Commodities are broadly lower and WTI crude oil is trading down under $45/barrel. Bonds are higher, feeding on weakness is equities. The 5-year and 10-year Treasury yields are down to 1.44% and 2.12%, respectively.

The Bloomberg World Mining Index of commodity producers is now at its lowest level in nearly seven years. Slower global economic growth, especially in emerging markets, is to blame. Today, Alcoa (AA) announced it will split into two publicly-traded companies. One will focus on manufacturing, and the other will keep the mining & smelting assets. This is basically an acknowledgement that there is just too much extra mining & smelting capacity in the world. The price of aluminum is down 16% this year. Separately, we note Glencore, a European miner, is down about 25% this morning after a research shop warned there is very little value left for equity holders. They are not alone. Freeport McMoran (FCX) is down 60% year-to-date.

The August Personal Income & Spending report was modestly better than expected. Household spending rose .4% m/m, matching July’s (upwardly revised) gain. Adjusted for inflation, real spending rose .4% vs. economists’ consensus forecast for a .3% gain. Again, the report confirmed inflation remains contained. The Core PCE Price Index is up only 1.3% y/y. Bloomberg quotes RBC Capital Markets’ chief economists as saying consumer spending is on pace to grow 3% in the third quarter. That’s fairly strong. Personal incomes grew .3% m/m in August after climbing a better than expected .5% in July. The biggest component of incomes—wages & salaries—surged .5% and .6% in each of the last two months. And finally, the consumer savings rate edged down to 4.6% in August but is still considered adequate. Barron’s conclusion: “The consumer is making money and spending money at the same time that inflation is very quiet.”
Pending home sales rose 6.7% y/y in August, decelerating a bit from July’s 7.2% growth rate. The Nat’l Assn. of Realtors (NAR) says higher home prices are starting to hit demand, and there just aren’t a lot of properties for sale, either. On the other hand, low mortgage rates and an improving job market have propelled the housing market back to 2007 levels and home-buyer traffic is relatively strong.

July 10, 2015

Stocks opened sharply higher this morning on hopes for resolution of issues in Greece & China. The Dow and SPX are up 233 pts & 1.35%, respectively. All ten major sectors are in the green, with most up more than 1% in early trading. Not surprisingly, the dollar is a bit weaker against the Euro. Commodities, however, continue to slide. Copper is down another .5%. WTI crude oil is down 1% to $52/barrel.  Bonds prices are lower on the day as yields rise. The 5-year Treasury yield is back up to 1.64% and the 10-year is trading up to 2.39%.

Last night, Greece submitted a new proposal for a plan to reform government finances. The Greek parliament will vote on it today and the country’s creditors—European Central Bank (ECB), Int’l Monetary Fund (IMF), and European Commission (EC)—will consider it this weekend. Interestingly, former ECB president Trichet reviewed the proposal and said, “…clearly we have something which is very different from what was the position at the moment of the referendum.” The Greek list of reform proposals was more or less in line with what Europe was looking for. So it makes one wonder, what was the point of the referendum? In the space between the referendum and today, the Greek economy has tanked.

Chinese stocks rebounded strongly this morning, and perversely, our markets blindly followed. CNBC contributor Art Cashin characterized the government’s capital markets strategy as “Rally or be executed.” So it’s all manipulation. Bloomberg reported results from a recent survey of Wall Street economists conducted on July 8-9. Two-thirds of them say China’s recent stock market correction will reduce third quarter growth in that country by between 0.1% and 0.6%. The other third say they don’t expect any effect at all. Economists currently forecast about 6.8% to 6.9% GDP growth in China for the last half of 2015. China reported first quarter growth at 7.0%.

Alcoa (AA) kicked off earnings season night before last. The CEO noted improving demand in all kinds of aluminum end markets, especially in the US. He predicts 8-9% growth in aerospace end demand, and is encouraged by US auto sales rising 4% this year. He mentioned US construction activity is accelerating, and commercial truck and beer can manufacturers are also seeing increased demand.

This morning, CNBC interviewed Charles Plosser, former President of the Federal Reserve Bank of Philly. He said Greece and China don’t really pose a financial contagion risk to either Europe or the US. “Spillover effects to the US are likely to be quite small.” And he believes the Federal Reserve feels “comfort that whatever happens, it can be contained.” As for the economy, he says we are on a “steady state path” of modest growth. He notes the consumer is strong and housing is improving. He believes the Fed should already have begun raising interest rates.

January 13, 2015

Stock markets opened higher on Alcoa’s earnings beat. The Dow and SPX are currently up 213 points and 1%, respectively. All 10 market sectors are up, led by tech, utilities and consumer discretion. Energy and basic materials are up the least in early trading. For the first time since July 2013, US West Texas Intermediate crude oil and Brent (European) crude are at parity (i.e. the same price), around $46/barrel. Natural gas has not fared well lately, dropping from about $3.70/mcf to $2.86 over the last month. Typically natural gas spikes with winter weather, so the trend is an anomaly. Commodities have really been hit over the last year. The Bloomberg Commodity Index is at its lowest level since 2002. Bonds are seeing a modest selloff this morning as yields tick up. The 5-year Treasury is trading at 1.40% and the 10-year is at 1.93%. And by the way, rates are extremely low around the world. The Bank of America Global Broad Market Sovereign Plus Index is at a record low yield (1.2%), with data going back to 1986.

The UAE oil minister said OPEC will stand behind its decision not to cut oil production despite “unstable oil prices.” This means the decline in oil prices might not be through. Non-OPEC producers, like the US and Canada, will be forced to shut down their higher-cost oilfields. Bloomberg reports 39 energy exploration companies have recently cut capital spending guidance by an average of 20% for 2015. On the list are US names such as Conoco Philips, Marathon Oil, Goodrich Petroleum, and Continental Resources. We’re still waiting for the giants—Chevron and Exxon—to update their capex guidance. Goldman Sachs has said it believes US-based oil capex will fall 30% this year.

Alcoa kicked off fourth quarter earnings season yesterday with a blow-out announcement. Revenue surged 14% year-over-year, and the company generated more free cash flow than in any quarter since 2010. The company has been successful in its restructuring efforts, but the real story is strong global demand for aluminum. The CEO forecasts 7% global demand growth in 2015. That’s a big deal when all we hear about is weaker global growth.

The NFIB’s Small Business Optimism Index surged to 100.4 in December, its highest level since October 2006. The index measures sentiment among 350,000 US small business owners. Don’t miss this: the report includes hints of wage growth. Seventeen percent of business owners said they recently increased wages, and another 25% say they plan to do so in coming months. In past cycles, this index has been a leading indicator of wage growth.

July 9, 2014

The stock market opened higher this morning in modest rebound from two consecutive down days. The Dow and SPX are currently up 33 pts & .28%, respectively. All sectors save utilities are in the green, led by consumer discretion. Tech and biotech are bouncing back nicely. Commodities are mixed in early trading; WTI crude has fallen in recent days to $102.60/barrel from its recent multi-year high of nearly $107. Some basic technical analysis of the chart suggests it will fall further. Copper has made a huge come-back from its multi-year low in March, suggesting the Chinese economy is stabilizing. Bonds are lower on the day; the 5-year Treasury yield ticked up to 1.72% and the 10-year is at 2.58%.

Bloomberg ran an article this morning positing that “months of calm in the equity market are coming to an end.” As evidence, the author cites the recent selloff in small-caps and tech stocks. Indeed, strategists at Raymond James and Citigroup say stocks are vulnerable to losses—having made new highs—and much depends on the quality of Q2 earnings announcements. The VIX Index should head higher, they say, reflecting greater uncertainty going forward. Overseas, there are some signs that economic recovery in Europe could be stalling (i.e. UK’s drop in manufacturing activity; Germany’s dip in exports). So there’s the near-term bear case for stocks.

Yesterday afternoon, Alcoa (AA) announced second quarter results, beating Wall Street analysts’ earnings projections by several cents per share. Sales also beat expectations on the back of improving demand (and higher prices) for aluminum. The CEO predicts global demand will rise 7% this year. Alcoa stock is up 3.6% this morning.

American Airlines (AAL) stock is up after the company said Q2 profit margins came in higher than expected. Better margins were driven by higher revenue-per-seat-mile. This is important because it comes on the heels of two profit warnings from European airlines yesterday. The CEO of American said global travel demand remains robust.

The Federal Reserve is scheduled to release the minutes from its June 17-18 meeting today.

July 8, 2014

Stocks dipped again this morning. The Dow S&P 500 are currently down about 125 points and .77%, respectively. The Nasdaq is off 1.5%. CNBC is making a big deal of the fact that this two-day dip is the biggest in nearly one month. Only one sector is in the green at the moment: utilities. The VIX Index (which measures investor fear) is up about 10% to 12.3. Commodities are mostly lower except for gold, which has staged a mini recovery over the past month. WTI crude oil is down for the seventh consecutive day. The bond market is a bit higher on the day; the 5-year and 10-year Treasury yields are down modestly to 1.69% and 2.57%.

Part of today’s decline is likely due to escalating violence in Israel. Following rocket attacks by Hamas in Gaza, Israel’s defense force is retaliating with airstrikes.

The National Federation of Independent Business (NFIB) said its small-business optimism survey declined to 95.0 in June, pulling back from a six-year high of 96.6. Forward expectations took a hit. That is, fewer business owners said they anticipate a better economy and improving sales & earnings trends. Interestingly, the number of employers predicting gains in employment and compensation rose in June. And 26% of employers said they currently have job openings that are hard to fill. This report suggests the labor market is tightening. Separately, I note small-cap stocks have meaningfully underperformed both large-caps and mid-caps this year.

General Mills held a webcast for investors, reaffirming its guidance for fiscal 2015 sales and earnings. Management said operating cashflow should improve in 2015 and the company’s number one goal is accelerating sales growth. The stock is up .5% this morning.

Alcoa will officially kick off second quarter earnings season today after the bell.