August 4, 2015

Stocks sagged again at the open (Dow -16 pts; SPX flat) and there is no clear direction. Commodities are faring a bit better and the dollar is weaker on the day. WTI crude oil is up 2% to $46/barrel but there is a growing chorus of analysts calling for a near-term re-test of $42. By the way, the national average price of gasoline has backed down to around $2.65/gallon. But the California average is currently $3.72 and the Orange County average is near $4.00. Bonds are slightly lower this morning. The 5- and 10-year Treasury yields are currently trading at 1.53% and 2.17%, respectively. I know I mentioned it yesterday, but it bears repeating: the recent move lower in long term rates suggests the economy isn’t strong enough to produce any real inflation, and that means the Federal Reserve won’t be raising short term rates this year.

This is admittedly a very confusing market. The S&P 500 Index has been traveling in a very narrow range, directionless, since the end of January. But the Dow Jones Transportation Average, which is often seen as a leading indicator for the whole stock market, saw a 13% correction through early July, and is still down nearly 8% for the year. The Nasdaq Composite Index is up about 8% so far in 2015, but it has been driven by a very narrow group of winners that represent a large portion of the index (AAPL, AMZN, FB, GOOGL, GILD). Strong cross-currents (i.e. strengthening US dollar another plunge in oil prices) have caused huge divergence between sectors. The energy sector is down 15% this year whereas the consumer discretionary sector is up 11%. And whereas we’ve weathered the melt-down in Greece, markets are now grappling with an economic slowdown in China. It seems apparent that the commodity super cycle is over now that China is no longer able to drive global growth. And then there’s the Fed, dutifully, gradually preparing investors for higher interest rates. And while we don’t believe they will hike rates this year, the Fed is certainly no longer a tailwind for the stock market. From now on, “don’t fight the Fed” means don’t invest against an upward move in rates. So that has (temporarily) taken the wind out of the sails of dividend stocks. All this is to acknowledge that in a near-term trader’s view, the stock rally is looking fragile.

Now zoom out to a longer investment horizon. Famed investor Laszlo Birinyi says he believes the S&P 500 Index will reach 3,200 by 2017. Of course, the current level is 2,100, so he expects strong gains over the long term. Mr. Birinyi notes that this is the second greatest rally in history, and “there’s no reason why we can’t keep on going.” All of the factors listed above—fear of Fed rate hikes, Greece, China, stronger dollar—are “noise,” and this rally has been hated by investors all the way up. He advises, “Don’t’ get shaken out by all this noise.”

July 21, 2015

Stocks retreated this morning (Dow -200 pts; SPX -.38%; Nasdaq Composite -.26%). The SPX is shying away from yesterday’s re-test of the all-time high set back in May. The key level to push through is 2134. The Nasdaq Composite Index and Nasdaq 100 Index hit a fresh all-time high yesterday, and CNBC notes investors are “paying up” for anything that has growth. And by the way, Amazon, Google, Apple and Facebook represent about 30% of the total market cap of the Nasdaq 100 Index. These are the types of stocks toward which investors are gravitating. The US dollar is a bit weaker on the day, so commodities are higher. WTI crude oil is trading up toward $51/barrel; remember, oil was over $60/barrel just a month ago. The Bloomberg Commodity Index is down 7.5% year-to-date. Bonds are modestly higher as yields edge lower. The 5-year and 10-year Treasury yields are trading at 1.67% and 2.35%, respectively.

In its latest bid to control the daily gyrations of its casino-like stock market, the Chinese government has created a state-run margin trading firm with $483bil in capital. The China Securities Finance Corp. can even borrow from China’s central bank if it should need more funds. According to Bloomberg, it doesn’t just lend money to investors, but it is cleared (and probably commanded) to invest its own funds. In other words, the company has been charged with artificially propping up stock prices. Perversely, global investors seem to be pleased at this development because it is seen as a hedge against downside volatility.

Verizon Communications (VZ) reported second quarter earnings that beat Wall Street estimates even as revenue came in a bit light. The company signed up 1.1 million new monthly subscribers, most of whom are using tablets. Profit margins for the wireless business rose nicely. Unfortunately, management cut its full-year sales forecast to 3% growth from the prior estimate of 4%. Price competition is still plaguing the industry. The stock is down 2.3% at the moment.

United Technologies (UTX) reported a very disappointing quarter. The CEO said, “…the reality that we’re facing” is lower demand in several end markets. Sales are tracking lower than expected in aftermarket aircraft parts and Otis elevators. He is not yet seeing an economic recovery in Europe, and China is “much weaker than expected.” UTX depends on overseas markets, which generate about two-thirds of the company’s total sales. The stock is currently down 7%.

December 26, 2014

Stocks opened higher this morning on very light trade volume. The Dow and SPX are currently up 45 pts & .43%, respectively. By now you are certainly aware that the Santa Claus Rally did show up. The Dow has rallied for seven straight days. The SPX briefly touched an all-time high in early trading and is now up 15% year-to-date. Even the Russell 2000 (small caps) Index is participating today, up .68%. All ten market sectors are up at the moment, led by utilities. In fact, 6 of 10 sectors are currently setting multi-year highs. Commodities are mixed: copper, oil and natural gas are down; gold is up. WTI crude oil is hovering around $55/barrel after having bottomed at $54 back on the 18^th. Since then, the S&P 500 Energy Sector has rallied 3%. Bonds sold off hard over the last several sessions, but yields are roughly unchanged today. The 5- and 10-year Treasury yields are trading at 1.76% and 2.26%, respectively.

Industry research firm ComScore says online holiday shopping could rise 16% y/y in the November/December period. They project total online spending at $61bil, which would be a record. Another research group, ChannelAdvisor, notes Amazon.com’s sales surged 20% from Black Friday through 12/21. IN the US, online makes up about 6.5% of all retail sales. Yet another source, SpendingPulse, estimates total US retail sales grew 5.5% y/y from Black Friday through Christmas Eve. That agrees (roughly) with what Mastercard is saying.

Saudi Arabia keeps insisting it will keep oil production at 30 million barrels per day, and doesn’t mind oil prices at $60/barrel or even lower. But a Bloomberg interview with a former economic adviser to the Saudi government suggests otherwise. John Sfakianakis believes the country’s 2015 budget assumes oil prices hover around $80/barrel. Oil exports are absolutely key for Saudi Arabia’s budget, accounting for nearly 90% of total revenue. Mr. Sfakianakis says this is a sign the Saudis believe an oil rebound is imminent.

Bloomberg reports Russia is on the brink of recession. If oil prices average $60/barrel, the Russian economy could shrink by about 4% next year. Economists, according to a recent survey, believe the recession could last two years. The Russian government is selling down its foreign currency reserves in order to defend the Ruble (to fight rising inflation), but that’s not sustainable over the long term. The government will likely be forced to restructure its budget (i.e. cut spending) to address the issue. For an idea of the scale of the problem, understand that the Ruble has lost nearly 40% of its value against the US dollar this year.

September 16, 2014

Stocks opened lower but quickly recovered. The Dow is currently up 12 pts; SPX +.19%). Energy, telecom and utilities are leading the way. The VIX Index is down a bit to 13.9, and VIX October futures are trading up around 15. I mention it because, although still at fairly tame levels, investor fear is gradually increasing. Commodities are mixed, but WTI crude oil is back up to $93.80 from the recent low of $92. Bloomberg reports OPEC may cut oil production amid falling prices. Bonds are modestly higher after a month-long route. The 5- and 10-year Treasury yields edged down to 1.79% and 2.58%, respectively.

We’re seeing some selling in tech stocks, prompting CNBC and Bloomberg to posit that large institutional money managers are selling in order to make room for Alibaba (BABA) in their portfolios. In the month-to-date period LinkedIn (LNKD), Yelp (YELP), and Amazon (AMZN) are all down 6-8%.

US wholesale inflation (PPI) rose 1.8% y/y in August, in line with expectations. PPI has accelerated this year, having dipped to 1.1% last winter when the economy briefly stalled. Back at the high end of the post-recession range, PPI suggests improvement in the economic recovery but price growth isn’t high enough to make anyone worry.

We’ve had some disappointing economic news out of Europe and China. A key German investor confidence index fell to a 21-month low. And The Scottish independence referendum is causing some volatility in Eurozone markets. Over the weekend, we found out that foreign direct investment in China fell to a four-year low. Industrial output (up 6.9% y/y) fell to its lowest growth rate since 2008. Fixed asset investment and retail sales also disappointed. As time goes on, it seems like a less attractive place for global businesses to invest. As we’ve said repeatedly, the Chinese economy is going through a massive long-term transition from export/manufacturing led growth toward consumer-driven growth. At the same time, Chinese monetary authorities are trying to balance inflation against a hot real estate market. And, of course, it’s painfully clear that state-sponsored organizations are stealing as much intellectual property from foreign businesses as they can. So a lot of cross-currents that don’t paint a rosy picture.

The Federal Reserve’s policy committee (FOMC) begins a two-day meeting today. Tomorrow’s session will likely see some Fed-driven volatility; everyone is anxious to hear the Fed’s evolving view on the timing of interest rate hikes. Jeremy Siegel, famed Wharton professor, says investors are a “little behind the curve” on interest rate expectations. That is, the Fed funds futures market suggests investors expect lower rates than some FOMC members do by the end of 2015. He says this could cause a temporary pullback in stocks as the market adjusts to reality. “There is some room for volatility in the market over the next week when they realize that this period of zero rates is going to end.”

July 25, 2014

Stocks opened sharply lower this morning. The Dow and SPX are currently down 134 pts & .54%, respectively. Consumer discretion and energy (yesterday’s leaders) are lagging today. Commodities are mixed. WTI crude oil is down 1% to $101/barrel. Gold is up modestly. Bonds are mixed on the day; the 5-year Treasury yield is essentially unchanged at 1.69% and the 10-year Treasury yield is down to 2.48%.

Visa (V) reported a strong second quarter yesterday, but guided 2014 revenue lower than expected. The CEO said he’s just not seeing any acceleration in global growth, and called out weakness in China, Ukraine, Russia, Argentina, the Middle East and Venezuela. So that’s basically a laundry list of the most troubled parts of the world. Thus, Visa’s revenue should rise about 9-10% this year vs. management’s prior guidance of 10-11%. The CEO offered this: “These headwinds we do not feel are permanent.” The stock is down 4.7% today, and is responsible for a good portion of the Dow’s decline.

The other big contributor the Dow’s decline is Amazon (AMZN), which missed analysts’ consensus second quarter earnings estimate. AMZN reported a net loss double what was expected, despite 23% revenue growth. Apparently, the company sharply accelerated spending on new warehouses, cloud computing initiatives, and new products like the Fire cellphone. The stock is down 11% at the moment. Understand that this is how AMZN has always operated. It has built a massive business without showing much in the way of profits. For the moment, investors seem to have lost patience.

US durable goods orders rose .7% in June vs. economists’ consensus estimate of .5%. The more interesting subset of data, capital goods orders excluding defense and aircraft, rose 1.4% in the month. This data series is often used as a leading indicator for US corporate capital spending. Anyway, these seem like really strong growth rates until you realize that prior month orders were revised sharply lower. So corporate capex fell 1.2% in May and rebounded 1.4% in June. Not inspiring.

Economic indicators have been all over the place recently. We’ve seen some huge after-the-fact revisions (GDP, new home sales and now durable goods) that leave investors confused and make it difficult to gauge the trajectory of economic growth. Citigroup publishes an economic surprise index that can be of use in situations like this. Currently, the index sits at -24.5, meaning that on balance data is coming in worse than expected. While off of its recent bottom (-50), the index is down substantially this year from its peak of +72. No wonder bond yields have fallen this year.

April 21, 2014

Stocks opened higher, but are giving up ground. The Dow and SPX are currently flat. Bonds are modestly higher; the 5- and 10-year Treasury yields edged down at 1.71%, & 2.70%, respectively. Bill Gross, founder of the world’s largest bond fund, is quoted in Barron’s thus: “We’re at the lowest level [in the bond market] of reward to risk that we’ve ever seen.” In other words, although yields have been falling this year, don’t expect it to last.   

The Index of Leading Indicators shot up .8% in March following an unrevised .5% gain in the prior month. This is better than Wall Street was expecting, and builds on a nice gain we’ve seen since the end of 2013. The index is intended to gauge the economic outlook over the next three to six months, so it’s different from most economic data, which is backward-looking.

An article in the WSJ over the weekend detailed Q1 results for the PwC Manufacturing Barometer, a survey of 61 executives who run large multi-national manufacturing companies. About 71% said they are optimistic about the US economy’s prospects over the next 12 months. That’s three percentage points higher than the Q4 reading. And 82% say they expect positive revenue growth. Despite this, only 39% say they are planning major new projects and only 56% say they plan to hire. Those rates have declined since Q4. Finally, most respondents expect the US to post better growth than overseas markets.

Hedge funds apparently had a tough Q1. According to the WSJ, the herd mentality caused many of them to invest in the same group of high-fliers that have suffered the most this year. The WSJ cites an industry research firm executive as saying, “Everything is so saturated. As soon as anyone gets an idea, everyone else jumps on board.” As a group, hedge funds returned about 1.1% in Q1, the lowest since 2009. Despite the misnomer “hedge,” these funds often take significantly more risk than the average equity mutual fund. 

Speaking of volatile high-fliers, here’s a sampling of stocks that have tanked in 2014:

3D Systems, down 48%

Potbelly, down 29%

Twitter, down 29%

Netsuite, down 20%

Linked In, down 19%

Amazon, down 18%

Celgene, down 16%

The IMF cut its emerging markets economic growth forecast to 4.9% for 2014 (from 5.1%). Interestingly, the organization blamed the revision on uncertainty in Ukraine rather than deceleration in China. Overall global growth is expected to rise from 3% last year to 3.65% this year (2.8% in the US; 1.2% in the Eurozone; 1.4% in Japan; 7.5% in China; 5.4% in India).

I’ll leave you with this: in a Barron’s interview, the co-CIO of ClearBridge Investments said, “If I had worried about every decline in every stock I owned, I wouldn’t have anything.”

March 28, 2014

Stocks surged at the open after two down days. The Dow an SPX are currently up 123 pts & .8%, respectively. The major averages are close to unchanged year-to-date, so the quarter could go either way (up or down) based on what happens in the next few trading sessions. This morning, several sectors are up more than 1%: discretion, healthcare, tech and materials. Commodities are broadly higher after China’s Premier Li Keqiang posted a statement on the government website that seemed (obliquely) to support monetary stimulus in case economic growth slows further.  So copper is up about 1.6% on the day; WTI crude is up about $1 to $101/barrel. Rates aren’t moving around very much; the 5- and 10-year Treasury yields are up modestly to 1.72% and 2.70%, respectively.  

According to Bloomberg, “the air is coming out of the balloon” of some high-flying tech stocks. Over the last year, names such as Facebook, TripAdvisor, Netflix, Tesla, and Amazon screamed higher regardless of fundamentals like sales & earnings growth, cashflow, etc. Consequently, the P/E ratios on these stocks don’t make sense. Tesla is trading at 135 times expected 2014 earnings, and Amazon is trading at 175 times. Even with the recent pullback, Twitter is trading at over 2000 times expected earnings. Valuation levels are “approaching the Internet bubble,” and it looks like traders are beginning to sell. Over the last month, the Global X Social Media ETF is down nearly 12%, Tesla is off 12%, and Netflix is off 18%. Over the last week, I’ve highlighted the fact that short term interest rates are beginning to move up. If that trend continues, it will certainly put a dent in demand for these trading stocks, which are often purchased on margin.   

Personal Incomes rose .3% in February, as expected, matching the prior month gain. Personal Spending also rose .3% in the month after a downwardly revised .2% gain in January. This is a pretty healthy report, leading me to believe the consumer is recovering from some winter weakness. About 70% of the US economy is driven by consumer spending. The PCE Deflator, a gauge of inflation on consumer goods, rose .9% y/y in February, and that’s considered very low. The Fed will start paying more attention once inflation accelerates to around 2%/yr.

University of Michigan Consumer Confidence edged down to 80.0 vs. 81.6 in the prior month. Economists anticipated a reading of 80.5, but nobody’s really disappointed. The bottom didn’t drop out over the winter months, and we’re roughly even with year-ago levels.   By the way, 80 is considered a “moderate level” by Barron’s.  

October 19, 2013

Stocks opened lower but quickly recovered. The Dow and SPX are currently up 8 pts & flat, respectively. Financials and energy (and housing related stocks) are leading the way. Asia was mostly lower overnight and Europe is also down. Commodities are broadly lower (WTI crude is now under $93/barrel; copper is off .4%). Bonds are modestly lower as rates creep higher. The 10-year Treasury yield edged up to 2.69%.

So the SPX now trades at a forward P/E ratio of 17. That’s 17 times expected earnings over the next four quarters. Remember, the index started the year trading around 14 times. So this year’s rally has been more about P/E expansion than it has been about earnings growth. In that sense, we’ve entered a new phase of the stock recovery. Some say it’s all to do with the Fed’s quantitative easing, which is keeping interest rates very low and encouraging investors to buy stocks. If that’s true, modest tapering of QE isn’t likely to end the rally. Investors will continue to ride the momentum. Of course, somewhere off in the future there will be a price to pay for QE. Bloomberg quotes the CEO of Marketfield Asset Management: “higher inflation, higher interest rates, much more difficult business conditions.” But he says that’s a long way off. “I would be very surprised if this bull market ended sooner than 18 months, and maybe it’s 36 months.”

The Organization for Economic Cooperation and Development (OECD) cut its global economic forecast. Global GDP is now expected to grow 2.7% this year and 3.6% next year. The prior forecast was 3.1% and 4%, respectively. The primary reason for the move was to account for some slowing in key emerging markets like India and Brazil. OECD says the US will grow about 1.7% this year and 2.9% next year. Stocks immediately shrugged off this report.

Bloomberg ran an article highlighting the fallout from a multi-year credit binge in China. The government (mostly through state-owned banks) encouraged a $6.6 trillion lending spree as stimulus to counter the effects of the global economic crisis. A lot of that went to building out infrastructure and helping state-sponsored enterprises stay afloat. But now it looks like a good portion of those loans may not be repaid. Bloomberg calls this “over-investment gone bust.” Big Chinese banks have been busy writing off loans, and Wall Street suspects they are preparing for another wave of write-offs. The country’s leaders seem to understand overcapacity throughout the industrial sector is a problem and this is why we got yesterday’s speech by Xi Jinping promising less government intervention in the financial system.    

Best Buy issued a profit warning for the fourth quarter, saying it needs to compete on price to keep up with competitors during the holiday shopping season. The electronics retailer is losing market share to Amazon and Wal-Mart, and has responded by shedding employees and cutting costs. The stock is down about 6% in early trading. Of course, Wall Street analysts are trying to figure out whether the holiday shopping season will be strong enough to extend the stock rally. And it’s looking like a key theme will be aggressive promotional activity.

October 25, 2013

Stocks opened to the upside this morning. The Dow and SPX are currently up 26 pts & .26%, respectively. Tech and consumer discretion are the best performing sectors in early trading. Commodities are mixed—WTI crude is back up to $97/barrel and copper is lower on the day (and down 12% over the last year, suggesting a soft Chinese economy). Bonds are broadly unchanged with the 10-year Treasury yield at 2.50%. We’ve seen a significant short term rally in bonds due to the government shutdown mess as well as pushed out expectations for Fed tightening. My feeling now is that the 10-year will trade in a range of 2.47% to 2.60% until 1) we get better jobs data, and 2) we get some kind of confirmation that Debt Ceiling Fight III (coming up early next year) won’t be another bitter, high-stakes game of chicken.  

US durable goods orders surged 3.7% m/m in September (before the shutdown) following an upwardly revised .2% gain August. Economists were anticipating something closer to 2.3% orders growth. Now, capital goods orders excluding aircraft and defense equipment (a better proxy for corporate capex spending) actually fell 1.1% in the month, and prior month orders were revised down to .4% from the initially reported 1.5%. Both of those figures are well below expectations. This index attempts to measure the health of the manufacturing sector, which accounts for about 12% of the US economy. The takeaway is that businesses pulled back on spending ahead of the government shutdown and Debt Ceiling Fight II. The only bright spot was commercial aircraft.

US consumer confidence fell to a 10-month low in October. The index posted a 73.2 reading this month vs. economists’ consensus forecast of 75.0. Just to give some perspective, the post-recession high and low for the index are 85 and 56, respectively. So the level of consumer confidence is not nearly as low as it was during Debt Ceiling Fight I back in 2011, but the most recent wrangling in Washington has clearly impacted the economic outlook. It seems painfully clear that political uncertainty is going to—at least temporarily—hold back the momentum of the economic recovery.  

Thankfully, the market is focusing on earnings season, which is turning out pretty well. Amazon and Microsoft just reported very solid quarterly results, and that’s what is driving the tech sector this morning.  About half of the companies in the S&P 500 Index have reported, and 76% of those have beaten Wall Street analysts’ earnings forecasts. Companies within basic material, tech, consumer discretion and healthcare sectors are faring especially well vs. expectations. It looks like overall corporate earnings growth for the third quarter will be close to 7% vs. the roughly 5% analysts were expecting. And now you see why stocks continue to advance.