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 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.