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.

September 28, 2015

Stocks opened lower again this morning (Dow -210 pts; SPX -1.65%). Materials (-2.2%) and healthcare (-2.1%) sectors are leading to the downside. European stock markets are about to close down 1-2%. Commodities are broadly lower and WTI crude oil is trading down under $45/barrel. Bonds are higher, feeding on weakness is equities. The 5-year and 10-year Treasury yields are down to 1.44% and 2.12%, respectively.

The Bloomberg World Mining Index of commodity producers is now at its lowest level in nearly seven years. Slower global economic growth, especially in emerging markets, is to blame. Today, Alcoa (AA) announced it will split into two publicly-traded companies. One will focus on manufacturing, and the other will keep the mining & smelting assets. This is basically an acknowledgement that there is just too much extra mining & smelting capacity in the world. The price of aluminum is down 16% this year. Separately, we note Glencore, a European miner, is down about 25% this morning after a research shop warned there is very little value left for equity holders. They are not alone. Freeport McMoran (FCX) is down 60% year-to-date.

The August Personal Income & Spending report was modestly better than expected. Household spending rose .4% m/m, matching July’s (upwardly revised) gain. Adjusted for inflation, real spending rose .4% vs. economists’ consensus forecast for a .3% gain. Again, the report confirmed inflation remains contained. The Core PCE Price Index is up only 1.3% y/y. Bloomberg quotes RBC Capital Markets’ chief economists as saying consumer spending is on pace to grow 3% in the third quarter. That’s fairly strong. Personal incomes grew .3% m/m in August after climbing a better than expected .5% in July. The biggest component of incomes—wages & salaries—surged .5% and .6% in each of the last two months. And finally, the consumer savings rate edged down to 4.6% in August but is still considered adequate. Barron’s conclusion: “The consumer is making money and spending money at the same time that inflation is very quiet.”
Pending home sales rose 6.7% y/y in August, decelerating a bit from July’s 7.2% growth rate. The Nat’l Assn. of Realtors (NAR) says higher home prices are starting to hit demand, and there just aren’t a lot of properties for sale, either. On the other hand, low mortgage rates and an improving job market have propelled the housing market back to 2007 levels and home-buyer traffic is relatively strong.

November 3, 2014

Stocks opened lower this morning (Dow -44 pts; SPX -.12%). Tech, utilities and financials are higher while energy and materials sectors continue to lag. The VIX Index is trading at 15.5. Commodities are mostly lower in early trading. WTI crude oil edged down to just below $80/barrel. Gold is also lower as the dollar strengthens. The Powershares US Dollar Index Bullish Fund (UUP) is up 9% since the middle of the year. Bonds are modestly lower as rates tick higher. The 5-year Treasury yield has shot up to 1.65% from 1.34% in the middle of October. The 10-year is up to 2.36%.

ISM’s Manufacturing Index shot up to 59.0 in October from 56.6 in the prior month. Results were far stronger than anticipated and represent a 3+ year high. We saw improvement in all the major sub-components of the index: employment, production, new orders, backlogs. This is probably the most closely watched survey of manufacturing business activity in the US. Results seem to suggest US factories are responding to improving domestic demand and overcoming slower economic growth overseas. We just learned that the Eurozone’s manufacturing PMI ticked up to 50.6 in October and China’s (official) PMI fell a bit to 50.8 last month. Note that all three indexes use 50.0 as the dividing line between business expansion and contraction.

CNBC reports that for all home sales in the US this year, the share of first time home buyers share has dropped to 33% (vs. 38% last year). The long term average is about 40%. It looks like the rapid rise in home prices we’ve seen over the last couple of years has hurt affordability. Home prices have been trending up by roughly 8-12% whereas wage growth has been stagnant at 2-3%.

Bloomberg reports the Republican Party is poised to achieve gains in the mid-term elections tomorrow. It is possible that Republicans could pick up an additional 6 seats in the US Senate and achieve control there, but some races are too close to call. It does look like several Senate seats will flip Republican: South Dakota, Montana and West Virginia. President Obama has been sidelined by very low approval ratings (41%), and has done very little campaigning for fellow Democrats. Republicans, however, are trying to turn the election into a referendum on the president.

January 24, 2014

Stocks gapped down at the open. The Dow and SPX are currently off 123 pts & .9%, respectively. Industrials, financials, materials, consumer discretion and energy sectors are all down more than 1%. Commodities are mixed, but I’ll point out that copper is off 3.5% since the beginning of the year. Copper prices are seen as a proxy for economic growth in China. Europe is set to close down about 1%. Asia was down more than that overnight. Bond yields are down again today, benefiting fixed income investors. The 10-year Treasury yield is down to 2.73%. I see some technical support at 2.71%. With the rise in yields temporarily reversed since the beginning of 2013, REITs, utilities and preferred stocks have been allowed to run. We’ll see how long it lasts.

Jim Cramer called yesterday’s slide the “first crisis” of the year and urged his viewers not to panic. Most of the angst among traders was due to China (see my update comments yesterday). But I think any time the market has run so much, just about any bad news can be used as an excuse for selling. My guess is this mini-correction will persist another several percent. By the way, the Dow is now off about 3% so far this year. The Nasdaq and Russell 2000, however, are flat. So we’re seeing a divergence among stocks –tech and smaller caps are faring better at the moment.  

Full year 2013 housing data is in. Median homes prices roses 11.5%. Existing homes sales reached 5.1 million units (compared to 6.5 million in 2006 before the financial crisis). But the market is still dominated by all-cash buyers (i.e. investors). First time buyers are accounting for only about 30% of units sold.

Medical supplies maker Covidien reported a better than expected quarter and the stock s up nearly 4% this morning. The company beat both revenue and earnings expectations and told investors it’s on the prowl for small and mid-size acquisition targets. Microsoft surprised everyone with a significantly better than expected quarter. Xbox & Surface tablet sales were very strong, and even commercial software sales were up 10%. It’s been years since Microsoft posted a quarter this good. Finally, Union Pacific [railroad] reported 7% revenue growth and 13% earnings growth, which outpaced analysts’ forecasts. Shipping volumes were very strong – agricultural up 13%, autos up 10% and industrial goods up 9%. UNP’s results are often seen as an indicator of general economic strength.

Yesterday in a CNBC interview, Scott Minerd, CIO of Guggenheim, said of China: “It‘s really difficult to get the information you need to make an investment decision there.”

December 31, 2013

This is the last trading day of the year. Stocks gapped up at the open; the Dow and SPX are currently +53 pts & +.34%, respectively. So the Dow has set another all-time high (16,563) for the second consecutive day. Cyclicals are leading the way this morning—energy, tech, industrials, financials. Gold, copper and oil are lower. In fact, gold is at its lowest level since June and is down about 30% this year. Bonds prices are falling (along with REITs, preferred stocks) as rates are on the rise again. The 10-year Treasury yield edged up to 2.99%.

The S&P/Case Shiller Home Price Index (20 largest cities) rose 13.6% y/y in October following a 13.25% y/y gain in the prior month. Economists were anticipating a smaller gain. So this is the highest y/y growth rate in prices since early 2006. The data is admittedly stale, but the long term trend in home prices is unmistakable. That massive overhang of foreclosures and short-sales has melted away, and the resulting dearth of inventory is propping up prices even as mortgage rates head higher. Economists expect price growth to moderate next year.

The Chicago Purchasing Managers Index (PMI) fell to 59.1 in December vs. economists’ forecast of 60.8. PMI measures business activity across the nation, and any reading above 50.0 indicates expansion. So this is really a very strong report. Business activity over the last three months has been the strongest in over two years.  

US consumer confidence rose to 78.1 in December vs. economists’ consensus forecast 76.0. Confidence rose sharply in the month. The November figure was also revised higher. The index has trended mostly higher in 2013 on the back of higher stock market & home prices. The forward-looking gauge of consumer expectations for the next six months jumped to a 3-month high. We’ll see if rising confidence translates into better retail sales numbers. Remember, about 70% of our economy is driven by consumer spending.