December 22, 2015

The major stock market averages opened higher this morning. The Dow and SPX are currently up 68 pts and .36%, respectively. The energy sector is leading, up about 1.5% in early trading. The dollar is a bit weaker on the day and non-metals commodities are mostly higher. WTI crude oil is up well over $36 a barrel, and that’s really what the market is keying on. Bonds are a little lower on the day, with the 5-year and 10-year Treasury yields ticking up to 1.69% and 2.22%, respectively.

Third quarter US GDP was revised slightly lower to 2.0%. This is the final revision from the Commerce Department, and while we are used to GDP figures in the range of 2% to 2.5%, it was quite a deceleration from 3.9% in Q2. Personal consumption, the GDP component that measures consumer spending, rose 3.0% as expected. That’s healthy, and remember it accounts for about 70% of our overall economy. In addition, corporate spending on equipment (“capex”) shot up at a 9.9% annualized rate. That’s not a misprint. Ok, so consumer spending accounted for 2 percentage points of growth, with capex spending adding another .6 percentage point. Unfortunately, weaker net exports and business inventory purchases, as well as lower corporate profits, weighed on growth.

US existing home sales fell 10.5% m/m last month to an annualized rate of 4.76 million units. This is a far cry from October’s 5.32 million annualized units. The National Association of Realtors says the dip was largely due to regulatory changes in paperwork necessary for home purchases. The changes were supposed to simplify the home-buying process, but apparently that wasn’t the effect. Here’s the other problem: the median home price for an existing home in the US is now over $220,000 and that’s up over 6% year-over-year. When you combine higher prices with lower for-sale inventories you get lower transaction volume.

October 27, 2015

Stocks opened lower this morning (Dow -52 pts; SPX -.18%; Nasdaq flat). By the way, year-to-date the SPX is up 1.81%. Healthcare is the only sector in the green at the moment, up 1.6% on the back of strong earnings from Merck (MRK). Energy stocks are down about 1.5% in early trading as oil continues to slide; now down under $43/barrel. On the other hand, copper, gold and iron ore are up a bit. But on a year-to-date basis they’re all in the red. Commodities have been a terrible investment in 2015. Bond prices are up as yields fall. The 5-year and 10-year Treasury yields edged down to 1.35% and 2.02%. The prime culprit has to be a weak durable goods orders report (see below). It’s getting harder and harder to believe the Fed will raise rates soon.

Reynolds (RAI) reported a good quarter, with revenue & earnings equal to Wall Street estimates. Earnings rose 16% y/y. The CEO noted cigarette sales volumes and pricing are stable. In addition, consumers are trading up to premium brands (at least in the US). She’s projecting 13-17% earnings growth for full-year 2015. The stock is down about 3% in early trading, but it’s still up nearly 50% year-to-date.

US durable goods orders fell 1.2% m/m in September following a downwardly revised 3% decline in the prior month. Capital goods orders excluding defense equipment and aircraft—a closely watched proxy for corporate capital spending—fell .3% m/m after a downwardly revised 1.6% decline in the prior month. On a year-over-year basis, capital spending is down 7.3%, due mostly to a stronger US dollar and the decimation of the energy sector. In addition, softer economic growth abroad is hitting exports.

Markit Economics’ private estimate of US services business activity fell to 54.4 this month from 55.1 last month. While still indicating growth in business activity, the index is at a 9-month low. Services businesses account for roughly 80% of our economy and with weakness in manufacturing, investors are watching the services sector very closely. Markit’s index takes a backseat to the ISM Non-Manufacturing Index, which won’t be published until 11/4. ISM’s last reading of 56.9 for September was fairly strong.

We’re about 40% of the way through third quarter earnings season, with 211 of the S&P 500 companies having reported. Aggregate year-over-year revenue and earnings growth are tracking to -2.7% and -2.5%, respectively. As recently as a week ago, Wall Street consensus called for aggregate earnings growth of -5% y/y. So it’s looking a bit better than expected, but there’s still very little growth to be had. Jason Trennert of Strategas Research Partners cautions investors not to expect much from the market until growth returns. “Whatever positive news we’re getting now from the market is largely going to be borrowing from 2016 unless we start to get better earnings and revenues.”

On Thursday we’ll get third quarter gross domestic product (GDP) data. Economists currently expect anemic growth ( 1.4% q/q annualized), well below the final second quarter reading of 3.9%. Bloomberg interviewed RBS’ chief US economist, who said although the headline number won’t “look good on the surface…if you look at consumer spending and housing and business spending, the numbers are going to be closer to 4%.”

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.