February 26, 2016

Stocks opened higher this morning but fell flat. The Dow and SPX are currently down 18 pts & flat, respectively. The most beaten-down sectors are leading—materials, financials, energy. Transports and biotechs are doing a little better than the overall market. By the way, the Dow Jones Transportation Average (TRAN) has far outpaced the SPX over the last month (9% vs. 3%), and so we may be looking at a real trend reversal. There’s a lot of catch-up to be had. WTI crude oil is trading up around $32.40/barrel. The dollar is up on the day and the Bloomberg Commodities Index is flat. Bonds are selling off a bit today. The 5- and 10-year Treasury yields are trading up to 1.25% and 1.77%, respectively. Looks like yields wants to move higher.

Oil prices have now fallen more than 70% from the 2014 peak, and investors fear bond defaults and bankruptcies among energy companies. Energy XXI and SandRidge Energy apparently defaulted on some bond interest payments last week. The two companies are saddled with a lot of debt, but few prospects for growing revenue. Bloomberg reports they have until the middle of next month to “either pay the interest, work out a deal with their creditors or face a default that could tip them into bankruptcy.” The two companies are high-yield issuers, meaning they issue junk bonds. Junk bond funds have had a tough time, down roughly 12% (total return) over the past year.

Economist Joe LaVorgna of Deutsche Bank has gone bearish. He sees “serious odds of recession” in the US (35-40% chance). Although recession is not his “base case” outlook, he is increasingly concerned about what he sees as deteriorating economic data. The problem, he says, is that the economy isn’t growing very quickly, and the manufacturing sector is clear in recession. At the same time, the services sector looks to be losing some momentum. In addition, He’s also concerned about a potentially “nasty election.” All this makes the US economy less able to absorb a shock (like falling economic growth in China).

The CEO of TD Bank (TD) was interviewed yesterday on CNBC after the company reported fourth quarter earnings results. He sees falling oil prices as a big problem for the stock market, but not for his bank. Loans to energy companies represent only 1% of TD Bank’s total loans. Further, he doesn’t see a need to increase loan loss reserves at this time. Keep in mind, now, TD is a Canadian bank and Canada’s economy is fairly dependent on oil production. So it seems he’s either overly optimistic or investors are wrong about the perceived contagion effect of oil on the banking system.

Aries Capital (ARCC), a middle-market lender, had some interesting things to say on their earnings conference call. The CEO said, “I think that the problems that the oil and gas markets…are going to present…for the high yield markets is misunderstood…maybe not being currently…considered in the right way by many folks that aren’t invested in high yield and in some of the larger cap credit markets the way that we are. We expect defaults will go up this year, they’re already going up.” So he does expect oil prices to remain lower for longer, and does expect some bankruptcies for small, lower-quality energy companies. “So, I think with more distress in portfolios and less capital in the market, we just see a real lasting change here rather than a blip where you kind of buy on the declines and wait for a rally, we’re really not expecting that.”

This morning, we got the first revision for US gross domestic product (GDP) for the fourth quarter of 2015. Economic growth was revised up to 1.0% (quarter-over-quarter, annualized) vs. the initial estimate of 0.7%. Economists on average expected a downward revision to just 0.4% growth. So that’s a big swing-and-a-miss for them. The revision was driven by a bigger than expected business inventory build. Unfortunately, consumer spending growth was revised down to 2.0% y/y growth vs. the initial estimate of 2.2%. The other major components were mostly unchanged. Exports fell 2.7%, non-residential business investment was down 1.9%, and residential investment soared 8%. The report’s inflation gauge (1.3%) is still nowhere near the Federal Reserve’s target (2.0%) to begin normalizing interest rates. Barron’s says US economic growth “fumbled” into year-end, but the “early outlook for the first quarter calls for a turn higher to trend growth, perhaps as much as 3%.”

A separate report from the Dept. of Commerce showed US personal incomes rose a better-than-expected .5% m/m in January. Personal spending also accelerated at a .5% rate for the month. That’s the highest rate in 8 months. On a year-over-year basis, personal incomes are rising at a 4.3% clip and consumer spending is up 2.9%. The consumer savings rate remained at a very healthy 5.2%. This report is clearly very positive and points to some improvement in the economy. Finally, I’d point out that the report’s inflation gauge jumped from 1.4% y/y to 1.7% y/y—edging closer to the Federal Reserve’s target.

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.

April 2, 2015

Stocks gapped up at the open but quickly pared gains. The Dow and SPX are currently flat. Gainers are led by telecom and consumer discretion. Small caps are outperforming, but biotechs are down yet again. The VIX Index, which spiked last week, is settling down to 14.5. Commodities are lower even though the dollar is down a bit. WTI crude surged to $50/barrel yesterday but gave up those gains this morning (now at $48.90). Bonds are modestly lower on the day as well. The 5-year Treasury yield ticked up to 1.35% and the 10-year is trading at 1.90%. Yields have fallen over the last month as economic data got worse.

Jim Cramer, CNBC contributor, said today US economic numbers “just don’t make sense” and are “so inconsistent they must be driving the Fed crazy.”  He also said our stock market seems like it’s at the mercy of whatever is happening in Europe. The recent trend is a “zero sum” game where higher European markets mean lower US markets. Relative currency fluctuations (i.e. stronger dollar, weaker Euro) are to blame because US multi-national companies are becoming less competitive relative to their European peers.

On his show Mad Money last night, Mr. Cramer discussed another problem with our stock market: the supply & demand balance of shares. Supply is driven by mergers, buybacks, secondaries and IPOs. He says supply is out-stepping demand right now, just at the time when dollar strength and lower oil are poised to strike first quarter earnings announcements. This is a temporary phenomenon, and he believes it was the primary driver of yesterday’s selloff. Interesting theory.

Initial filings for unemployment insurance continue to fall. Last week, initial jobless claims fell to 268,000 which matches the lowest levels in at least a decade. The total number of continuing unemployment insurance claims has fallen to 2.32 million, the lowest level of the post-recession recovery. The job market is clearly improving and it’s probably a matter of time before we start seeing wage growth.

The US trade deficit fell to -$35.4bil in February, and typically a shrinking trade deficit adds to GDP. This report, however, is probably distorted by the west coast port strike, which limited imports in the month. So while exports fell 1.6%, imports declined by 4.4%. Exports are clearly being affected by the stronger dollar, which isn’t likely to turn around in the near future. This is one of the key reasons why economists are reducing 2015 GDP forecasts.

February 27, 2015

Stocks are mixed in early trading. The Dow and SPX are currently down 27 pts & flat, respectively. WTI crude oil is up on the day and is now trading around $49/barrel. Brent crude oil is around $61. So the spread between the two oil prices is rising, and that means gasoline prices are rising. Bond yields are a bit lower, and bond prices are higher on the day. The 5-year and 10-year Treasury yields are down to 1.50% and 2.0%, respectively.

EOG Resources says US oil production will fall faster than world governments expect this year. The company is guiding its own oil production to zero growth in 2014 and says US producers have been so quick to react that this downturn in oil prices will be a “short cycle.” EOG is set to cut capital spending by 40% and drilling activity by 50% this year. So this is a very bold prediction by EOG. We’ll see if their drastic reaction to lower oil prices is matched by other producers.

As you probably know, the Federal Reserve’s Janet Yellen gave fairly dovish testimony to congress this week, suggesting that interest rate hikes are not imminent over the next few months because the economy isn’t strong enough. So again, the financial news media trotted out the usual economists & strategists decrying this liquidity-driven rally all over the world. Jim Grant, famed publisher of the Interest Rate Observer, noted 83% of world market capitalization ‘Is under the shadow” of central bank easing. This means stocks can rally even though economic growth is weak. But the trend isn’t sustainable over the long term. Other investors, such as Mad Money’s Jim Cramer, shouldn’t ignore the clear up-trend. “This [rally] knows how to go higher” better than any other he’s seen in his career.

Pending home sales rose 8.4% y/y in January. This represents the fifth straight month of positive year-over-year gains, and the highest level in 18 years. The National Assn. of Realtors has a fairly constructive view of the housing market this year, citing improved job growth, a positive trend in consumer credit conditions, and more modest home price growth. Of course, the other side of the coin is that for-sale inventory is very low and mortgage lending standards are fairly tight. Mortgage applications have been weak so far this year.

US fourth quarter GDP was revised down to 2.2% growth from the initial estimate of 2.6%. Consumer spending (consumption) came in at 4.2%, still very strong. Remember, consumer spending accounts for about 70% of economic activity in the country. Business investment rose 4.8%, revised up from 1.9%; also very strong. The primary reason for the downward revision to GDP was that business inventories were revised down, and that’s actually good news. Higher inventory builds tend to borrow growth from subsequent quarters. In addition, the stronger dollar kept exports on the low side and added to the trade deficit. Also of note, federal government spending fell at a 7.5% rate. So net-net you end up with a GDP figure on trend with what we’ve seen over the past year-and-a-half.

The Chicago PMI sank to 45.8 this month from 59.4 in the prior month. Economists were expecting a much more modest decline. This is a shocker—the lowest level since July 2009. Weak results were blamed on the west coast port shutdown, as well as bad weather on the east coast. All the major sub-components of the index were sharply lower (employment, production, new orders). The index is closely watched because its scope is nationwide, covering both manufacturing and service sectors. Barron’s says the results “don’t match up with other anecdotal indications for February that on net are pointing to moderate growth for the month.”

April 30, 2014

Stocks opened mixed this morning, searching for direction. The Dow and SPX are currently flat. Traders await release of the FOMC policy statement later on this morning. At the moment, industrials, materials and utilities are stronger. Energy and telecom sectors are lagging. Commodities are actually a bit lower on the day (WTI crude, copper, iron ore, gold). In fact, both copper and iron ore are down more than 10% year-to-date on economic weakness in China. That was corroborated by a disappointing earnings announcement from Vale SA today. Bonds are a bit higher on the day as yields tick down (5-year Treasury yield at 1.71%; 10-year at 2.68%).

First quarter US GDP growth disappointed by a huge margin despite better than expected consumer spending. GDP came in at +.1% vs. economists’ consensus forecast of 1.2% and following 2.6% in the fourth quarter. We’re guessing this is a temporary slowdown driven by severe winter weather. Exports, business investment and government spending declined. Consumer spending advanced 3% (vs. 2% expected), boosted by spending on utilities and healthcare. In fact, healthcare spending contributed 1.1 percentage points to GDP. I should point out that increased spending on health insurance is NOT going to drive the economy forward. This is not good news, and it comes on the same day that the Fed will decide on continued tapering of quantitative easing.

Payroll processor ADP estimates the US economy generated 220,000 net new jobs in April. That’s slightly ahead of expectations, and the highest tally in five months. Prior month payrolls were revised up a bit to 209,000. This is good news, implying some progress in the labor market. Probably the most positive detail in the report was a healthy jump in payrolls at small and medium size companies. Of course, this data series is seen as a leading indicator of the Bureau of Labor Statistics’ Employment Situation Report, which is due out Friday. Economists currently expect a payrolls figure of about 215,000.  

The Chicago PMI, a regional business activity gauge, surpassed expectations in April and posted its best results in six months. The index rose to 63.0 from 55.9 in March. Remember, anything above 50.0 indicates expanding business activity.  

January 30, 2014

Stocks opened higher this morning; we’ll see if it lasts. The Dow and SPX are currently up 86 pts & .8%, respectively. Healthcare, tech consumer discretionary and utilities sectors are all up over 1%. By the way, the SPX is now down 3.2% year-to-date. If you’ve paid attention to the financial media, you might be tempted to believe a new bear market has set in. Commodities are mixed. Copper is down again on China/emerging markets concerns. The industrial metal is down 16.5% in the last 1 year. Gold is down today but has risen about WTI crude is back up over $98/barrel, and again I haven’t heard anyone give a convincing explanation as to why crude has fluctuated so much over the last couple of years (between $81 and $103). Bonds are mostly unchanged; the 10-year Treasury yield is currently at 2.71%.

Fourth quarter GDP came in at 3.2% growth. This is very good number, capping the best second half of a year since 2003. Exports surged 11% and consumer spending was up 3.3%; business spending rose 3.8%. And inflation slowed as well. This really does confirm that the Fed’s QE3 tapering is the right policy.

Pending homes sales fell a much worse than expected 6.1% y/y in December. This follows a downwardly revised 4.4% decline in November. This number is really an outlier and I’ve got to think some of it is due to the “Polar Vortex” back east. Bloomberg also blames rising mortgage rates, but those have moderated since the end of the year. I think this is a throw-away report.

Here’s an update on fourth quarter earnings season. So far, we’ve seen 220 of the S&P 500 companies report. About 64% of those beat Wall Street sales expectations and nearly 80% have beaten earnings expectations. The sectors with the most upside surprises include telecom, financials and healthcare. Now, in terms of sales growth rates (over the year-ago quarter), the leading sectors are consumer discretion, utilities and tech. The leaders in earnings growth are materials, telecom, financials and industrials. The main takeaway is that there are very few sector-wide lessons to learn here. We’re at a point in the cycle where you can’t just pick sectors anymore—you have to look to industries and individual stocks.

Visa reported a solid fourth quarter this morning, beating both sales and earnings estimates. Sales rose 11% y/y and the number of processed transactions on the Visa network rose 13%. The stock is up 2%. Facebook also reported a better than expected quarter on the top and bottom lines. Management noted mobile now represents 53% of advertising revenue. That stock is up something like 14% this morning. Finally, Ford Motor says bad weather has materially affected its supply chain and vehicle sales. This is probably why the stock is down 9% since mid-month.