September 24, 2015

Stocks sank again this morning on fears over soft economic growth around the world. The Dow and SPX are currently off 220 pts & 1.2%, respectively. Not surprisingly, the basic materials sector is the worst performing, down over 2% in early trading. European markets are poised to close down 2+%. WTI crude oil is up a bit to $44.60/barrel but that’s not helping stocks at the moment. The energy sector is trading down 1%. Bonds are higher on the day as yields fall. The 5-year Treasury yield is trading down to 1.42% and the 10-year is down around a 1-month low of 2.08%.

Let’s recap recent market volatility. The S&P 500 fell 12.5% intraday from 5/20 through 8/25. It then spiked up 6.8% through 9/16 and has headed lower since. The index is hovering around 1,911 at the moment, and it very well may fall toward the 8/25 low of 1,867 in order to re-test that level. That would be a normal chart pattern. The VIX Index—which measures investor fear—has been elevated (above 20) since 8/20, with a brief spike to 40 when the market bottomed on 8/25. The VIX is trading at 25 this morning. VIX October futures are trading at 23, suggesting a gradual reduction in market volatility over the next month.

Caterpillar announced more layoffs today and cut its 2015 sales forecast. The company—and the entire mining and energy space—is suffering from plunging commodities prices and lower global demand. CAT will cut as many as 10,000 jobs over the next four years. Sales are seen falling 5% next year. CAT is down 6.5% this morning, and is shaving about 30 points off of the Dow.

Durable goods orders for US factories fell 2% in August from prior month levels. Orders were decent in June & July but are cooling off a bit. Capital goods orders excluding defense equipment and aircraft (a common proxy for corporate capital spending) dipped .2% m/m after rising 2.1% in the July. These aren’t terrible numbers, but again, it’s clear that business spending is somewhat restrained.

New home sales surged 5.7% m/m in August to an annualized rate of 552,000 units. That is the highest rate since the spring of 2008. Remember, July new home sales were also much better than expected. Even though for-sale inventory remains pretty low, mortgage rates are also historically low and the job market has been improving steadily. The median price of a new home is nearly $300,000.

September 17, 2015

This is a special edition of the market update based on today’s Federal Reserve policy meeting. Prior to the Fed announcement, CNBC conducted a survey in which “49 percent of Wall Street believes the Fed will hike, with 43 percent saying the central banks will hold.” So with investors split, high volatility in stocks and bonds was expected. With a dramatic flourish, a CNBC reported proclaimed this to be “the biggest, most consequential decision” affecting America. Sort of silly.

The CEO of Caterpillar said this morning he doesn’t believe the economy is strong enough for higher rates. “All this speculation and drama around for 25 basis points we’re not going to see.” But I think Honeywell’s CEO hit the nail on the head: “If you said it’s a quarter point on the way to 4%, quarter point raises that’s one thing.” In other words, a slow, gradual progression toward higher rates is probably OK for the economy.

The Federal Reserve’s Open Market Committee declined to raise its short term policy interest rate. While the announcement acknowledged housing and labor market improvements, the committee noted concerns over recent global economic & financial developments. The committee said it is monitoring developments abroad, and that’s something we haven’t heard yet. Only one member of the committee (Lacker) favored a quarter-point hike at this meeting. The committee lowered its long run outlook for the fed funds rate, and inflation is not seen hitting the Fed’s 2% target until 2018. The announcement was seen as very dovish.

In the wake of the announcement, the VIX Index dropped 5% to 20. Stocks dipped a bit, then shot back upward. REITs, which were negative early in the session, also surged. The 10-year Treasury yield didn’t really move in the wake of the announcement. But the 5-year Treasury yield dipped a few basis points and the 2-year Treasury yield dropped to .73% from .81%. That certainly makes sense—bond buying activity as interest rate expectations edge lower.

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.

April 23, 2015

Stocks opened slightly lower this morning (Dow -20 pts; SPX flat). Telecoms, utilities and energy are up nicely but most of the rest of the market is a bit lower. WTI crude oil is up 3% to $57.90/barrel—the highest since December. Oil approaching $60/barrel is a big deal. For example, oilfield services giant Schlumberger has seen its stock climb back up to its 200-day moving average. Bonds are modestly higher on lower yields. The 5-year Treasury yield ticked down to 1.38% and the 10-year is trading at 1.97%.

New home sales fell 11% m/m to an annualized rate of 481,000 units (a four-month low). Prior month sales were also downwardly revised. There are a lot of cross-currents in the housing market, with often contradictory data points. Economists are generally predicting a very solid spring sales season and meaningful improvement in housing this year. After all, job growth is better and mortgage rates remain very low. But on the other hand, limited for-sale inventory and relatively tight bank credit could mute gains. We prefer to take a step back and look at year-over-year trends. On that basis, new home sales are 17% higher than year-ago levels.

Caterpillar (CAT) reported a better than expected first quarter and raised full-year earnings guidance. North American demand for machinery—especially in energy and transportation—was strong. And construction-related demand in the US is expected to persist. The CEO talked about a dichotomy where the US is doing fairly well but the rest of the world is slowing. To keep things in perspective, however, note total sales fell 4% y/y in the quarter. And in fact sales have declined y/y in eight of the last ten quarters. The stock is down 17% over the last 12 months. So this is a modestly positive surprise for a company that still faces serious headwinds. The stock is up .7% this morning.

Qualcomm (QCOM) today warned investors its first quarter results were weaker than anticipated. The warning was driven by the company’s semiconductor segment. Apparently, cellphone makers such as Samsung are looking elsewhere for some components. In addition, the Chinese government has really gone after Qualcomm’s royalty business model, and while a recent antitrust investigation resulted in a hopeful settlement, the company still hasn’t been able to fully collect royalties due it. And part of the settlement involves lower royalty rates for all Chinese customers. The stock is down 2.7% today and nearly 17% over the last 12 months.

EBay (EBAY) beat earnings estimates in the first quarter largely due to strength in PayPal. The company is facing tough competition from Amazon.com and is moving to cut costs and improve profitability. EBay recently reduced its workforce by 7%. Management says the planned spinoff of PayPal is on track for the third quarter. The stock is up 4% this morning.

January 27, 2015

Stocks gapped down at the open on some lackluster earnings reports and economic data. The Dow and SPX are down 350 pts & 1.58%, respectively. This is the worst percentage point loss for the Dow since June 2013. Commodities are also lower. WTI crude oil is hovering around $45.50/barrel. Bonds are gaining on the day. The 5-year Treasury yield is down to 1.28% and the 10-year is trading down to 1.76%.

US durable goods orders fell 3.4% m/m in December following a downwardly revised 2.1% drop in November. Capital goods orders excluding defense and transportation dipped .6% in both November and December. All of these figures were worse than expected. Goods orders have fallen in each of the last four months. We’re seeing slower demand from Europe and emerging markets.

The Case-Shiller Home Price Index for the 20 largest US metro areas rose 4.3% y/y in November, in line with expectations. Price growth rates have slowed sharply over the last year and we may finally be back to a more sustainable rate of appreciation. The housing recovery has been very uneven despite lower mortgage rates because of weak wage growth. Also, household formation hasn’t yet returned to normal levels. But slower home price growth is likely to encourage more home-buyer traffic this year.

Caterpillar (CAT) missed Wall Street earnings estimates by a wide margin and the stock is down 8% in early trading. The CEO said this will be a tough year for the company, citing a stronger dollar and the oil selloff. Thus far, fourth quarter earnings season has been disappointing. Roughly 120 of the S&P 500 companies have reported, with 53% beating sales forecasts and 75% beating earnings forecasts. Those numbers aren’t bad, but forward guidance hasn’t been strong. A stronger US Dollar is clearly affecting US multi-nationals.

We’re hearing a growing chorus of CEOs and Wall Street strategists saying the Fed will delay interest rate hikes. The dollar strength has definitely done some of the Fed’s work for it, keeping inflation low. And with commodity prices falling, we’re nowhere near the Fed’s 2% inflation target. So it’s hard to see that the Fed will be forces to hike rates. According to Jeff Gundlach  of Doubleline Capital, the only reason the Fed may want to raise modestly in the last half of the year is that they “don’t like having no tools” with which to conduct monetary policy. That is, once you take rates down to zero, you can’t go any further.

January 27, 2014

Stocks opened higher but quickly turned around. The Dow is currently up 11 pts and the SPX is down .3%. Tech, healthcare and materials are leading the market lower. Asia was down about 2% overnight and Europe is about to close in the red. Bonds are modestly weaker this morning after Friday’s fixed income rally. The 10-year Treasury edged up to 2.73%. The dollar is strengthening.

You probably know that the Dow was down over 300 pts on Friday. The index experienced its widest swing from high to low since last summer, and it blew through the 50-day moving average (a sign of weakness). The last time the Dow touched its 50-day moving average was taper day, December 18^th. Some technical analysts are saying the index needs to dip and touch the 100-day moving average before it can begin to rise again. We’ll see. The SPX is now 3.5% below its all-time high. The VIX Index surged to 18 from 15. Investor sentiment has taken a hit in this mini-correction. The American Assn of Individual Investors (AAII) bullish sentiment gauge dropped to 38 from 55 at the beginning of the month. By the way, 55 was a 2-year high.

So everyone is worried about emerging markets, and specifically China. As a guest on CNBC said, “The epicenter of risk has moved to Asia.” There are a few of reasons for this. First, economic growth is slowing and the long-held view that emerging markets are the go-to for growth is very much in question. Second, as the Fed gradually tightens monetary policy and interest rates rise here at home, we should expect to see global investors pulling money out of emerging markets and reinvesting in the US. That capital flow will hit emerging markets currencies. Finally, the threat of a financial crisis in China is building some steam. The country’s $6 trillion shadow banking sector is built on shaky ground. We understand the China Credit Trust Co. came very close to defaulting on a $500mil high-yield investment product. The “Credit Equals Gold Number 1” fund, distributed by the Industrial & Commercial Bank of China, was doomed by an investment in a failed coal mining company.  Details are murky, but some unidentified party stepped in to bailout investors. Let’s remember, the Chinese government has both the money and the centralized power to “fix” a lot of defaults. So panic is probably not the best course of action for investors.

US new home sales disappointed, falling 7% m/m in December. The annualized pace of new home sales was 414,000 in December following a downwardly revised 445,000 in November. This report is a clear disappointment, but the housing recovery is still intact. Full-year new home sales totaled 428,000, the highest in five years and 16% better than 2012. It could be that terrible weather kept buyers at bay. In the northeast where weather was worst, sales fell 36% from November levels.

Caterpillar reported a solid fourth quarter, handily beating Wall Street earnings forecasts. Construction equipment demand surged, and the company’s ongoing cost cuts and stock buy-backs aren’t hurting either. Management issued strong revenue guidance for 2014 as well, saying it sees signs of better global growth. Construction demand will likely rise 5% this year but mining equipment demand will fall 10%. The severity of the mining industry collapse surprised management. The stock is up about 5.7% this morning.