December 5, 2016

Stocks opened mixed after the worst start to a month since 2008. The Dow is flat and the SPX is up .2%, respectively. Energy and utilities are the worst-performing sectors in early trading, while healthcare is rebounding strongly. Commodities are mixed; gold and copper are up while oil falls again. The dollar is stronger and WTI crude oil is down to $36/barrel. Bond prices are higher again, with the 5-year Treasury yield down to 1.73% and the 10-year hovering around 2.25%.

Market watchers and equity strategists are jumping all over yesterday’s route to find some meaning in it; some suggestion of a new trend; some fresh ammunition to talk their book. Fund manager Peter Boockvar says he believes a bear market in stocks is upon us. (He’s been saying that for a while.) He points out that yesterday the few stocks that propped up the markets in 2015 finally showed some cracks (i.e. Amazon, Netflix). Mr. Boockvar interprets recent economic data as relatively weak (in the US and overseas) so it’s time to play defensive.

JP Morgan strategist Mislav Matejka says yesterday somehow confirms the “buy-the-dip” strategy is dead. While investors have been right to buy stocks during every correction over the past 6 years, that strategy won’t pay off going forward. He expects the stock market to be lower over the next 1-2 years than it is today. He gives three reasons: profit margins are at record highs and won’t go higher; the Fed is no longer stimulating the economy; the era of nearly free money (ultra-low interest rates) is over, so US corporations won’t be buying back as much stock, meaning corporate profits won’t grow as quickly. The conclusion: investors should sit on cash and earn nothing.

Economist Dave Rosenburg’s take is that nothing is really new in the New Year. We still haven’t resolved the issue of a relatively high P/E multiple in the stock market. China remains a “show-me situation, we don’t’ have visibility yet on oil prices…and on top of that [we have a] US election this year,” producing domestic uncertainty. And finally, he points out Fed officials are talking “hawkishly” despite two consecutive contractionary readings for the ISM Manufacturing Index.

Mohamed El-Erian, former CEO of PIMCO, was more circumspect and had a more plausible take on yesterday’s market action. Get used to volatility because it will be a central theme in 2016. This is a continuation of last year in terms of concerns about growth and geopolitical issues. He agrees that a Federal Reserve tightening cycle will act as a headwind for markets. The economy continues to improve, but the real problem is that some key distressed sectors (commodities) will continue to weigh. We are especially susceptible to any weakening fundamentals or headlines because we no longer have central bank support for asset prices.

Citigroup downgraded US stocks yesterday, saying it now favors equities in Japan, Europe and the UK. This is primarily because central banks in those regions are supportive of asset prices, whereas our Federal Reserve is now in a tightening cycle. Citi also points to falling corporate earnings momentum even though the firm projects US corporate earnings growth of 7.1% this year. And Citi’s S&P 500 price target for year-end 2016 implies a 9.5% gain from current levels. Go figure.

Automakers are reporting December sales today. US auto sales for 2015 tracked to about 17.5 million units, which is an all-time high. In December, Toyota sales were up 10.8% (a bit less than expected). GM sales rose 5.7% vs. 4.6% expected.

December 10, 2015

Stocks surged at the open (Dow +96 pts; SPX +.4%). Eight of ten major market sectors are in the green, led by energy (+1.5%) even as oil continues to slide. WTI crude oil is down about .5% trading under $37/barrel. This is a fresh 7-year low. Again, there is no indication that OPEC will let up on oil production. Bonds are basically unchanged. The 5-year and 10-year Treasury yields are trading at 1.66% and 2.23%, respectively.

OPEC says global oil demand will rise modestly next year, and its non-OPEC competitors (i.e. US oil companies) will see significantly lower production. In other words, OPEC will simply produce more oil to mop up the additional demand. At the moment, global oil production is outpacing demand by about 500,000 to 1 million barrels per day. That oversupply is absolutely engineered by Saudi Arabia to defend its global market share.

ConocoPhillips (COP) announced yet another reduction in capital spending. Capex will fall 25% next year (down 55% from 2014 levels). And yet, the company will actually produce more oil; production growth is expected to be about 1-3% higher next year. By the way, Chevron (CVX) also announced a 24% reduction in its 2016 capital spending budget. These cuts (along with assurances that dividends will not be cut) are the reason why US oil stocks are rising this morning.

Steven Weiting of Citi Private Bank said the “R” word on CNBC yesterday. Recession is coming…eventually. His firm believes the business cycle is maturing and investors should begin to upgrade portfolio “quality” and pay attention to credit ratings and debt levels. While he’s not pessimistic about the immediate outlook and recession isn’t a concern for 2016, he expects a “recession-recovery cycle” with the next “several years.” When pressed, he said there is a 50% chance of US economic recession in 2017.

Jim Paulsen of Wells Fargo Asset Management discussed recent market volatility on CNBC yesterday. Some of this down-draft is simply due to investors selling in front of the Fed rate hike. So it’s “trader-related” rather than a reflection of the fundamentals (i.e. economic growth, corporate earnings, etc). In addition, traders are viewing lower oil prices as a sign that recession risk is increasing. The other side of that coin is that lower oil prices usually boost US consumer spending and benefit our economy, but he says traders are choosing to ignore that at the moment.

Mohamed El-Erian, former Co-CEO of PIMCO, says the key theme for 2016 is central bank divergence. That is, our Federal Reserve will be tightening monetary policy at the same time other central banks (Japan, China, Europe) are aggressively loosening. How do markets react to this divergence? With volatility. Also, he sees “real uncertainty” about economics, geopolitics and security playing a role in markets next year. Here again, more volatility. He concludes, we’ll likely see “more tactical opportunities for investors.”

November 2, 2015

Stocks opened higher this morning (Dow +92 pts; SPX +.69%). The healthcare sector is screaming ahead by nearly 2% and the Nasdaq Biotech Index (NBI) is up 3%+ in early trading. By the way, October was the best month for US stocks in four years (SPX + 8.4%; Nasdaq +9.4%). The SPX is now back above its 50-day, 100-day and 200-day moving averages. The dollar is a bit weaker this morning, but commodities are trading lower. WTI crude oil is down 1% to $46/barrel. Bonds are lower as yields head higher. The 5-year and 10-year Treasury bonds are trading at 1.55% and 2.17%, respectively. Remember, interest rates will jump around as investors try to feel out whether the Federal Reserve is serious about raising rates at its December meeting.

Mohamed El-Erian, famed economist with Allianz, sees a 25-30% risk of a US recession by 2017. He points out that capital markets are relying on central banks around the world to stimulate asset prices, and that’s not sustainable over the long term. At the same time, the Federal Reserve is poised to tighten monetary policy here at home and that could cause financial instability overseas. He reminds us that the US is “still pretty interconnected” with the rest of the world. So either a) the global economy improves so that interest rates can normalize, or b) growth stagnates in a world where central banks are ineffective and we’re at the mercy of financial instability. He assigns scenario (b) a 25-30% probability.

Visa (V) reported third quarter revenue that topped estimates even as earnings were slightly lower than expected. Revenue rose 11% y/y and earnings were up 14%. Let’s compare that with aggregate expected earnings growth for S&P 500 companies at about -3.7%. Growth is precisely the reason why Visa has consistently outperformed the index over the last five years. Visa also announced the acquisition of its European subsidiary for about $18-23 billion. It plans to issue bonds to pay for the deal. The stock is down 3% today.

Clorox (CLX) reported better than expected third quarter results and the stock is up about 3.8%. Revenue rose 3% y/y and earnings shot up 20%. Unfavorable currency fluctuations (i.e. stronger dollar) hit the international division, where sales fell 8% y/y. But prices increases and market share gains in the US made up for that.

The ISM Manufacturing Index edged down to 50.1 in October, confirming the sector has stagnated. That’s the lowest level of the year, and in fact the lowest level since May 2013. The employment component of the index fell to 47.6, indicating contracting payrolls. Weak global demand for US exports is a big culprit. The report suggests metals, petroleum and plastics companies in particular are shrinking. But things are as bad as they seem. The key new orders component of the index rose to 52.9 from 50.1, suggesting business activity will stabilize from here.

May 12, 2015

Stocks opened lower again this morning but have turned around. The Dow and SPX are down 27 pts & .26%, respectively. Materials, tech and telecom sectors are lagging. Energy stocks are up modestly. WTI crude oil is trading up just short of $60/barrel this morning. You may remember that WTI bottomed in March at about $43/barrel, so we’ve seen a pretty solid recovery. We note that EOG Resources (EOG) recently said if oil reaches $65 it will re-open some drilling rigs to increase production. We suspect other exploration companies are thinking the same thing, so that suggests a near term top in oil. Other commodities have also rebounded lately, partly due to more monetary stimulus in China. Copper is up nearly 4% year-to-date, and iron ore has been rallying for about a month. Gold, by the way, is now up modestly on the year.

Bond yields continue to rise, and investors are really beginning to take notice. The 5-year Treasury yield is holding at 1.58% and the 10-year trading at 2.26%. CNBC contributor Art Cashin believes in the near term the “mental line in the sand” is about 2.3% on the 10-year. That is, investors will ding stocks if bond yields move too fast to the upside. Mohamed El-Erian, formerly of PIMCO, says rates will not likely continue to soar because global economic growth just isn’t strong enough; and on top of that you’re getting a whole lot of central bank easing in Europe, China and Japan.

Verizon Communications (VZ) announced it will acquire AOL for about $4.4bil. CNBC’s Jim Cramer says this deal is “brilliant” for Verizon because it gives the company a credible mobile video platform. He says AOL has value because it has figured out how to monetize video with advertising. He believes the move will bring Verizon into direct competition with Google (GOOGL). VZ stock is actually down following the announcement.

NFIB’s Small Business Optimism Index climbed back to 96.9 in April vs. economists’ consensus forecast for 96.0. The index fell apart over the winter and this is a welcome sign that business activity is turning around. More small business owners reported either recently raising worker compensation (23% of respondents) or planning to do so in the near future (14%).