December 17, 2015

Stocks opened lower this morning following a Fed rally yesterday. The Dow and SPX are currently down 89 pts & .6%, respectively. All ten market sectors are lower, led by energy (-1.5%). The dollar didn’t move much yesterday after the Fed announcement, but it is clearly strengthening this morning (+.6% vs. the Euro). Not surprisingly, gold and other commodities are getting hammered. WTI crude oil id down another 1.7% to $34.86/barrel. Bonds prices are up a bit today. The 2-year Treasury yield spiked to 1.0% yesterday (5 ½ year high) but is down to .99% at the moment. The 5-year Treasury is trading at 1.72%.

Yesterday, The Federal Reserve’s Open Market Committee did exactly what was expected of it. For the first time in nearly a decade, the Fed raised its key short term policy interest rate. The Fed-funds rate range is now .25% to .50%. In addition, the accompanying statement was interpreted as “dovish” by Wall Street. The Fed will continue to tighten monetary policy very slowly, at an uneven pace that is data dependent. That means perhaps only four rate hikes next year. This was a sort of Goldilocks move; Janet Yellen said rates were raised because the economy is clearly strong enough to support it, but not strong enough to warrant further tightening in the near term. As Jim Cramer said yesterday, “The Big Bad Event” is over. After the announcement, the prime interest rate, used by banks to set consumer loan rates, moved up .25% to 3.5%. This should modestly boost bank earnings going forward. CNBC contributor Art Cashin noted the Fed also apparently raised the interest rate it pays banks to keep their reserves, to .5%. As we know, the US banking system is now over-capitalized, and he implied this rate hike gives further incentive for banks not to boost lending.

July 24, 2015

Stocks opened lower again this morning (Dow -75 pts; SPX -.40%). Healthcare, energy and materials sectors are all down more than 1% in early trading. The US dollar is a bit stronger against a basket of foreign currencies. Oil is falling again; now at $48/barrel. Piper Jaffray says technicals suggest oil will revisit its recent bottom at about $42/barrel, and then we’ll see if it resolved upward or downward from there.  Bonds are higher on the day as yields fall. The 5-year Treasury is trading at 1.61%. I think there’s a sense on Wall Street that yields climbed too high in the first half of the year (5-year topped out at 1.79%), and that economic growth just isn’t strong enough to warrant all the fear of an imminent Fed rate hike. Yesterdasy on CNBC, Art Cashin of UBS said no one expects the Fed to raise short term interest rates at next week’s meeting. In fact, he thinks a Fed rate hike is unlikely this year. He sees a global slowdown putting the Fed on hold.

Caterpillar (CAT) reported a disappointing quarter and cut its full-year sales forecast. “While economic conditions in the United States are modestly positive, the global economy remains relatively stagnant,” said CEO Doug Oberhelman. “Many of the key industries we serve remain weak, and we haven’t seen sustained signs of improvement.”

Comcast (CMCSA) reported a decent quarter, with revenue growth of 11% (better than expected). According to Bloomberg, “The 20% gain in revenue at NBC Universal set the pace for the quarter and was led by the film studio and the theme parks.” The company has 22.5 million broadband subscribers and 22.5 million video subscribers. The number of new internet customers was down 12% y/y and fell short of Wall Street expectations. The stock was down modestly after the announcement yesterday.

Redfin says homebuyer demand is up 13% y/y, which is clearly good news. However, the same index fell 7% in June from prior month levels and this is causing a bit of panic. In fact, the Redfin CEO is calling for a fall-off in demand through the second half of the year. He says higher home prices have caused buyer fatigue and frustration. Median home prices are at record levels, suggesting we may be at a tipping point in terms of home affordability. This morning, we learned that new homes sales fell 6.8% in June from prior month levels. The volume of new home sales hit a 7-month low.  This comes as a surprise to economists and investors, and is part of the reason the market is selling off.

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.

May 12, 2015

Stocks opened lower again this morning but have turned around. The Dow and SPX are down 27 pts & .26%, respectively. Materials, tech and telecom sectors are lagging. Energy stocks are up modestly. WTI crude oil is trading up just short of $60/barrel this morning. You may remember that WTI bottomed in March at about $43/barrel, so we’ve seen a pretty solid recovery. We note that EOG Resources (EOG) recently said if oil reaches $65 it will re-open some drilling rigs to increase production. We suspect other exploration companies are thinking the same thing, so that suggests a near term top in oil. Other commodities have also rebounded lately, partly due to more monetary stimulus in China. Copper is up nearly 4% year-to-date, and iron ore has been rallying for about a month. Gold, by the way, is now up modestly on the year.

Bond yields continue to rise, and investors are really beginning to take notice. The 5-year Treasury yield is holding at 1.58% and the 10-year trading at 2.26%. CNBC contributor Art Cashin believes in the near term the “mental line in the sand” is about 2.3% on the 10-year. That is, investors will ding stocks if bond yields move too fast to the upside. Mohamed El-Erian, formerly of PIMCO, says rates will not likely continue to soar because global economic growth just isn’t strong enough; and on top of that you’re getting a whole lot of central bank easing in Europe, China and Japan.

Verizon Communications (VZ) announced it will acquire AOL for about $4.4bil. CNBC’s Jim Cramer says this deal is “brilliant” for Verizon because it gives the company a credible mobile video platform. He says AOL has value because it has figured out how to monetize video with advertising. He believes the move will bring Verizon into direct competition with Google (GOOGL). VZ stock is actually down following the announcement.

NFIB’s Small Business Optimism Index climbed back to 96.9 in April vs. economists’ consensus forecast for 96.0. The index fell apart over the winter and this is a welcome sign that business activity is turning around. More small business owners reported either recently raising worker compensation (23% of respondents) or planning to do so in the near future (14%).

January 6, 2015

Major stock indexes opened lower this morning. The Dow and S&P 500 are currently down 91 pts and .48%, respectively. Defensive sectors are outperforming—healthcare, utilities and consumer staples. The VIX Index is hovering around 20, hinting at higher near-term volatility. WTI crude oil continues to fall—now under $49/barrel—and this is causing all sorts of trouble. Bonds yields are falling again today: 5-year at 1.50% and 10-year UNDER 2%! That’s a fresh 1 ½ year low.

Art Cashin, head of floor operations for UBS, said in a CNBC interview this morning, “Santa Claus and his sleigh got high-jacked,” and there has been no followthrough on the late December rally. At the root of this small pullback are two factors: falling oil prices and weak economic growth overseas. Bloomberg reports bond fund manager Bill Gross believes “the good times are over” and asset prices are set to fall this year. He thinks deflationary pressure is going to keep interest rates, and economic growth, low. He thinks the 10-year Treasury yield could dip to 1.5%. Let’s do a couple of things: 1) remember he is a bond fund manager; 2) understand he is ignoring the positive effect of lower oil prices on consumer spending and overall economic activity.

ISM’s non-manufacturing Index fell to 56.2 in December from 59.3 in the prior month. Economists were anticipating a more moderate decline. This is one of the most closely watched gauges of service business activity in the US, and like other business activity indexes, 50.0 is the dividing line between growth and contraction. So while growth has decelerated from ultra-high levels this fall, data still suggests solid ongoing expansion. In the statement accompanying the data release, ISM said as much; they’re “not overly concerned” with December’s dip, and note that retailers had a very strong month.

We got some PMI data out of Europe as well this morning. The EU composite PMI (published by Markit Economics) edged up to 51.4 in December from 51.1 in November. But while a modest improvement in overall business activity, economists were looking for something closer to 51.7. A spokesman for Markit said the data imply Europe’s combined economy grew a scant .1% in the fourth quarter of 2014. CNBC spun the news very negatively, and traders jumped all over it as a fresh sign of weakness in Europe. I disagree, and would characterize their reaction as splitting hairs. We all know European economic growth is weak and this data point adds nothing new to the discussion. The real question—for traders—is whether the European Central Bank is poised to establish a monetary stimulus program akin to our “QE3”. And the real question for longer term investors is whether Europe can avoid another recession.

The Republican Party will assume control of the US Senate today, the result of last November’s election.

December 31, 2014

Stocks opened modestly higher on this last day of the year. The Dow and SPX are currently 35 pts & .12%, respectively. Once again, the Russell 2000 (small caps) is leading, up .5%. Traders will be watching to see if the Dow closes the year above 18,000. Biotechs, retail and airline stocks are leading the charge in early trading; the energy sector is lagging. WTI crude oil is back down under $53/barrel and this is causing traders to fret. Oil and interest rates are really in focus as we enter the new year. Bonds are higher again today as interest rates edge down. The 5- and 10-year Treasury yields are trading at 1.67% and 2.18%, respectively. Of all the surprises we got in 2014, the massive dip in interest rates has to be the most significant. Despite the end of the Federal Reserve’s quantitative easing program and clear improvement in the economy, there just isn’t any inflation to speak of. And it looks like huge foreign demand for Treasuries is keeping yields artificially low. Remember, the 10-year Treasury yield started the year at 3%.

With 2014 pretty much in the books, here’s a final look at performance for the major stock indexes:

SPX +15%

Dow +11.2%

Nasdaq +16.3%

Russell 2000 +6.1%

US pending home sales (i.e. signed contracts) rose 1.7% year-over-year in November following a 2.1% gain in the prior month. Economists, on average, expected sales growth to accelerate to around 3.6%. But while the report was a mild disappointment, we have to remember that pending sales spent most of 2014 in negative territory. The housing market is going through a transition period from high price growth to lower more sustainable appreciation; from investor-dominated buying activity to first-time buyer activity. Economists are thinking that 2015 sets up nicely for the housing market because economic growth and improvement in the job market have been more consistent lately. And it looks like mortgage rates will remain fairly low next year.

The Chicago Purchasing Managers Index dipped to 58.3 this month from 60.8 in the prior month. The index, which measures business activity in the Chicago region, showed production levels and new orders moderated a bit. And this is what we’ve seen from other manufacturing indexes this month. But keep it in perspective; any reading above 50 indicates expanding business activity, and anything close to 60 is very strong. The US manufacturing sector is enjoying a period of solid expansion.

Art Cashin, CNBC contributor and head of floor operations for UBS, celebrated his 50^th anniversary as a member of the New York Stock Exchange yesterday. In an interview he said, “This business is a fascinating business. It’s like waking up every morning with a brand new Rubik’s Cube.”

December 2, 2014

Stocks opened higher this morning (Dow +58 pts; SPX +.4%). Energy is the best performing sector in early trading; the only sector in the red is telecom. The VIX Index is back down to 13.5; VIX December futures are trading at 14.8. So volatility is expected to be low this month. Commodities are mostly lower again. Copper is down more than 16% this year. WTI crude bounced yesterday but is back down to $67.50/barrel. It’s interesting that most oil exploration and drilling stocks are higher on the day. Traders are looking for any sign that the group is oversold and might rebound. Bonds are sharply lower today as yields climb. The 5- and 10-year Treasury yields are up to 1.58% and 2.28%, respectively.

China’s stock markets are up sharply today on the expectation for further monetary stimulus measures. And believe it or not, the Shanghai Index is up 31% this year despite weaker economic growth. It is true that Chinese stock indexes do not correlate very well with the country’s economy.

Citigroup says oil prices have probably bottomed. Their call is based on technicals, comparing this selloff to previous ones. Indeed, the crude oil curve is positively sloped, meaning that traders believe prices will move up over the long term. In the meantime, CNBC reports oil price declines are beginning to have a huge effect around the world. In order to achieve a balanced government budget, Venezuela needs oil at $118/barrel; Russia needs $102/barrel. Persistently low oil prices are going to wreak havoc on these economies. Today, the Russian government acknowledged it is likely headed into recession.

CNBC contributor and NYSE trader Art Cashin says his US market outlook is very positive. We’re “going into an absolutely promising period.” Years ending in 5 typically have an upside bias. And the third year of a president’s second term is usually positive. Of course, we know that market generally does well when we have a Republican-controlled congress and a Democratic president. Finally, Art says investor cash on the sidelines amounts to maybe $11 trillion. So if investors decide to embrace the rally, there could be a real upside bias to stocks into 2015.

We got some good news out of the manufacturing sector this morning. GE, Toyota, Honda and Fiat Chrysler said November auto sales exceeded forecasts. Ford posted a decline in sales, but even that was better than expected. The US auto industry is on pace to sell over 17 million units this year, the most since 2003. Separately, ISM’s New York Purchasing Managers Index rose unexpectedly to 62.4 in November from 54.8 in October. Remember, any reading over 50.0 indicates expansion.

CNBC reports about 1,000 hedge funds will close this year due to persistently weak performance. The record number of closures (1,471) was set back in 2008 during the height of the Great Recession. Hedge funds are having a difficult time outperforming benchmarks, and as a group have posted mid-single digit returns this year. It also doesn’t help that the SEC has stepped up investigations exposing insider trading and fraud.