March 10, 2016

Stocks opened higher but quickly turned lower. Volatility is still very much with us. The Dow and SPX are currently down 142 pts & .85%, respectively. The only sector holding onto a modest gain is telecom. The worst performing sector is energy (-1.2%). WTI crude oil is down 1.4% to $37.75/barrel and Brent crude is trading at $40/barrel. At this point, the longer oil stays above $30, the more institutional money managers will be convinced that it has bottomed. That’s critical to keeping the stock market in recovery mode. Most commodities are modestly lower today. Bonds are lower as yields continue to rise. The 5- and 10-year Treasury yields are up to 1.45% and 1.95%, respectively. It really looks like the 10-year is making a run at 2.0% in the near term.

Blaming persistently slow global economic growth, European Central Bank (ECB) chief Mario Draghi announced new economic stimulus measures for Europe. The ECB cut short term interest rates again and increased the amount of bonds it buys on a monthly basis (called quantitative easing, or QE). The rate of interest paid on bank deposits at the ECB is now negative, and Mr. Draghi’s expectation is that this will encourage bank lending. In addition, he announced a new program providing cheap loans to banks within the Eurozone. Mr. Draghi has now gone all-in, eager to demonstrate that the ECB is “not short of ammunition” to combat sluggish economic growth and low inflation. He said the moves were necessary because global (not Eurozone, mind you) economic growth is softening and financial conditions are tightening. The ECB’s economists now believe Eurozone economic growth will be 1.4% this year and 1.7% next year. They don’t believe inflation will rise to 2% for the next several years. In the wake of the announcement, the Euro initially weakened but it has recovered. Germany’s 10-year sovereign bond yield (at .31%) is actually higher than it was yesterday. European stock markets fell about 1.5%. US stocks initially rose this morning but quickly gave way. Although equity traders got exactly what they wanted from the ECB, the market’s reaction is not positive.

US filings for initial unemployment insurance (“jobless claims”) unexpectedly fell again last week, to 259,000. That’s the lowest level in 5 months and confirms—again—the health of the labor market. The total number of continuing claims fell to 2.22 million. For about the last year, we’ve been lower on continuing claims than at any other time in at least the last 10 years.

May 20, 2015

Stocks gapped down at the open but quickly recovered. The Dow and SPX are currently up 12 pts & flat, respectively. Telecoms, utilities and healthcare are leading the way. The major averages are hovering right around all-time highs. Yesterday, a number of homebuilder stocks hit 52-week highs on the back of much better than expected housing starts data. The dollar is a bit stronger today, and has been moving up for about the last week. Bonds are modestly higher on the day. The 5-year Treasury yield ticked down to 1.57% this morning after hitting 1.60% yesterday. Remember, a close above 1.60% likely sets up for a run to 1.70%, and that’s the high for the year. The 10-year Treasury yield is trading at 2.26%, just a couple of basis points away from its 2015 high.

WTI oil is up modestly to $58.80/barrel. Over the last couple of trading sessions, it has become reasonably clear that oil hit a near-term peak at $60/barrel. Goldman Sachs commodities analysts acknowledge they got the recent oil rally wrong, but now say oil prices will revisit their recent lows (in the low $40s) because high oil inventories are a reality that can’t be ignored forever. Interestingly, management of Plains All American Pipeline (PAA) says it believes oil will recede to around $50/barrel by the end of the year.

CNBC interviewed Vanguard founder Jack Bogle yesterday, asking him a number of different questions. Much of it was to be expected. He called the stock market a “casino” when you play the “short term speculation game,” and pointed out that investors have a much better chance of success if they invest for the long term. He even uttered the forbidden words “buy-and-hold.” He also suggested that stocks are a much more attractive investment (long term) than bonds or commodities. “I don’t think commodities…like gold…have any long term return prospects at all.”

This afternoon the Federal Reserve’s key policy making committee will release the minutes from its last meeting. Bloomberg ran an article today about how central bankers around the world have “repeatedly overestimated inflation since the middle of 2011.” Global inflation has been in decline for about a decade, and Bloomberg interviewed a former Treasury official who says ultra-low inflation could be more persistent than Fed policy makers think. The article suggests that perhaps central bankers are not in control of interest rates, which are simply reacting to an extended period of low global economic growth. Traders, of course, don’t care about this and only want to know when the Fed plans to begin raising interest rates.

January 14, 2015

Stocks gapped down at the open (Dow -241 pts; SPX -1%). Consumer discretion, financials and materials are leading to the downside in early trading. Only the utilities sector is in the green. The VIX Index is trading up to 22. Yesterday’s session was troubling, as the Dow climbed points early on, only to give it all up by the close. CNBC’s Jim Cramer says the market has a “mood disorder.” Commodities are down again. Copper is down 2.7%. WTI crude oil is hovering around $46/barrel. Bond yields are plunging (5-year Treasury down to 1.28% and 10-year down to 1.81%!).

Europe is in the news, with stock markets down 1-2%. The European Court of Justice (ECJ) ruled last night that bond buying by the European Central Bank (ECB) is legally permissible. This lends some legitimacy to monetary stimulus measures already undertaken by the ECB, and sort of gives a green light for the ECB to go ahead with an expanded quantitative easing program later this month. The court was pretty clear that it doesn’t want to stand in the way of the ECB propping up economic growth. This decision was expected, and now attention will shift to the size of the QE program. Most investors think the ECB will underwhelm when it announces the policy on Jan. 22^nd.

The World Bank cut its 2015 global economic growth forecast to 3% from 3.4%. Estimates for Japan, China and Europe were revised lower. The World Bank noted China is undergoing a “managed slowdown.” At the same time, the US growth forecast is raised to 3.2% from 3.0% previously.

The homebuilders are getting smashed this morning after KB Home’s conference call yesterday. The company noted weakness in profit margins, saying 2015’s gross margin is unlikely to reach the 20% expected. This took everyone by surprise, and investors are trying to figure out whether this is a company-specific or an industry-wide problem.

JP Morgan reported fourth quarter earnings. Legal costs in the quarter were about twice what analysts expected. The CEO angrily complained that US banks are “under assault” by regulators. “We have five or six regulators or people coming after us on every different issue.” And today we’re hearing that JP Morgan and Citigroup just fired some employees related to a currency trading investigation. Wall Street analysts are beginning to see that they can’t just ignore legal & regulatory costs as one-time items. They’re more or less a semi-permanent part of running a banking business these days, and should be factored into the ongoing operating results of the banks. JP Morgan stock is down 4.7% at the moment.

Wells Fargo reported a better quarter, but it certainly wasn’t stellar. Expenses rose 4.7% y/y and kept a lid on earnings growth. The bank’s net interest margin edged down to 3.04% as interest rates throughout the economy fell. The stock is down 1.6% this morning.

Goldman Sachs downgraded a host of chemical companies today, citing a “new oil order” in which lower oil prices and a stronger US Dollar are expected to be the norm for the foreseeable future. The firm says most Wall Street analysts & strategies have yet to adjust their 2015 and 2016 earnings estimates low enough.

US retail sales fell .9% m/m in December, whereas economists were anticipating a .1% dip. In addition, November retail sales growth was revised down to a .4% gain. Of course, we know gasoline sales have plunged in the face of falling oil prices. But core retail sales (excluding autos and gasoline) still fell .3% in the month. So this is rather surprising. On a year-over-year basis, things look better—core retail sales are up 3.2%. And it looks like fourth quarter consumer spending rose 4% over the prior year.