December 12, 2016

Stocks opened higher this morning, but quickly gave it all back. Consumer-related stocks are higher, along with healthcare and tech. European markets are poised to close in the green by about 1% although Asia was very mixed overnight. WTI crude oil is down 2.7% to $30/barrel, which is a 12-year low. So I wouldn’t expect today’s rally to last unless that turns around. Speaking of oil, Harold Hamm, CEO of Continental Resources, says the Saudi’s aim is to “drown us,” but it isn’t working. He says it’s been a “monumental mistake” on their part as it is contributing to political instability in the Middle East, and draining Saudi government coffers. US energy companies are adjusting to lower oil prices and he doesn’t think we’ll see a large wave of bankruptcies, primarily because oil prices should begin rising again this year. By contrast, a well-known oil analyst at Oppenheimer (Fadel Gheit) says half of all US shale drillers could go bankrupt if oil prices stay low for another 1-2 years.

One of the reasons our stock market rose this morning is a stable Chinese currency (at least for today). Remember, one of investors’ key concerns focuses on continued devaluing of the Yuan. The Chinese government has done that, in part, to keep its exporters competitive in global trade. But it’s also a simple acknowledgment of slower economic growth. Anyway, CNBC interviewed an economist in China who said it’s “ridiculous” to expect much more Yuan devaluation. Han Jun, deputy director of the office of the Chinese Communist Party’s Leading Group on Financial and Economic Affairs, also touched on growth. He said, “We have to go through a pause in the economy.” Even if China’s GDP falls below 6.5%, it’s “not a disaster.” Thus, he implied some quarters in the near future would fall below the government’s official growth target. So my sense is that global investors don’t believe his party line on the Yuan.

Here’s a quick look at some of the damage done by the recent pullback in US stocks:

Nasdaq Biotech Index -26% since peaking in July

Russell 2000 Index, -19.5% since peaking in June

Dow Jones Transportation Average, -21.8% over the last 12 months

Nasdaq 100 Index, -8% since 12/29/15

June 23, 2015

Stocks opened mixed today (Dow +20 pts; SPX flat). Telecoms, financials and healthcare stocks are leading the way. By the way, the Nasdaq and Russell 2000 Index both closed at all-time highs yesterday. European stocks are poised to close up 1% on anticipation that a Greek debt deal will be reached. The dollar is a bit stronger against the Euro this morning; commodities are slightly lower. WTI crude oil is trading just below $60/barrel. Bond yields are headed higher; the 5-year Treasury is trading at 1.69% and the 10-year yield is back up to 2.40%. It does look like the 10-year will test the 2015 high of 2.49% soon. A member of the Federal Reserve’s Board of Governors said he believes chances are 50-50 that the economy will improve enough to allow the Fed to begin raising interest rates in September.

WTI crude oil is trading in its narrowest range in a year-and-a-half ($57 – $61/barrel), and traders are looking for signs of a break-out either way. US oil production is still rising even though rig counts are way down and OPEC production is at its highest since October 2012. In fact, last week Saudi Arabia’s oil minister said his country stands ready to increase production if global oil demand rises. So it’s hard to see oil rising in the back half of this year.

Despite spin on Bloomberg and CNBC, May’s Durable Goods Orders report was disappointing. Order sank 1.8% m/m in May primarily due to a collapse in aircraft orders. In addition, April orders were revised much lower. Orders excluding transportation-related goods actually rose .5% in the month, but that just reverses April’s .3% decline. The stronger dollar is still holding back exports.

New home sales improved more than expected in May, rising to an annualized rate of 546,000 units.  That’s the highest level since February 2008. In addition, April sales were revised up to an annualized rate of 534,000 units. So we’re seeing clear improvement in housing again. Of course, new home sales only account for about 9% of the total market, but we recently learned that existing home sales accelerated to a 5 ½ year high.

We got some encouraging economic news overseas. Markit Economics’ private gauge of business activity in China unexpectedly improved to 49.6 in June from 49.2 in the prior month. Remember, 50.0 is the dividing line between expansion and contraction. So while business activity is still slowing, there are signs of stabilization. Looser monetary policy may be working. Separately, Markit’s Eurozone Composite PMI rose to its highest level in more than four years this month. The index reached 54.1 vs. 53.6 last month. It is clear that Europe’s economy is recovering.

April 1, 2015

Stocks opened lower again this morning; the Dow and SPX are currently off 74 pts & .37%, respectively. Healthcare (biotech) is the worst performing group in early trading, down about 1.5%.  Energy stocks are up nicely. Despite US oil inventories reaching a record 471 million barrels, WTI crude oil actually rose 2% to $48.60/barrel in early trading. The dollar is unchanged. Bonds are modestly higher, with the 5-year Treasury yield at 1.32% and the 10-year at 1.87%. Remember, the 10-year was trading above 2% a month ago.

So Q1 is in the books, and it looks like The Dow had its first negative quarter in the last two years. The SPX price return for the quarter was about +.6%. Compare that with long term bonds; the iShares 20+ Yr Treasury Bond ETF (TLT) was up 3.7% without the income. The Nasdaq was up 3.5%, and the Russell 2000 outperformed (finally), with a 4% return.

Payroll processor ADP estimates the US economy generated 189,000 new private sector jobs in the month of March. That’s a bit shy of the 225,000 estimated , and lower than the recent trend in job growth. In fact, it’s the first sub 200,000 figure since January 2014. ADP says hiring in the manufacturing sector has all but stopped due to falling energy prices and a stronger dollar. Nearly all of the new jobs are attributable to the service sector.

And sure enough, ISM’s Manufacturing Index disappointed in March, falling to 51.5 from 52.9 in February. This indicates the slowest pace of business activity growth in nearly two years. The effect of the stronger dollar is clear. Export orders contracted for the third consecutive month; the employment component of the index fell flat—to 50.0—and is now at its lowest level since May 2013. Note this report can’t be blamed on bad weather back east, and weak new orders suggest the index won’t improve next month.

In a CNBC interview this morning, investor Sam Zell said a correction in stocks is likely. He noted the stronger dollar is hurting profit margins for US-based multi-national companies. At the same time, growth isn’t strong. “I’m looking for demand, and I’m seeing very little of it.” He believes the stock market still hasn’t appropriately reacted to this reality. “There’s a significant and growing disparity between the stock market and the economy.”

December 31, 2014

Stocks opened modestly higher on this last day of the year. The Dow and SPX are currently 35 pts & .12%, respectively. Once again, the Russell 2000 (small caps) is leading, up .5%. Traders will be watching to see if the Dow closes the year above 18,000. Biotechs, retail and airline stocks are leading the charge in early trading; the energy sector is lagging. WTI crude oil is back down under $53/barrel and this is causing traders to fret. Oil and interest rates are really in focus as we enter the new year. Bonds are higher again today as interest rates edge down. The 5- and 10-year Treasury yields are trading at 1.67% and 2.18%, respectively. Of all the surprises we got in 2014, the massive dip in interest rates has to be the most significant. Despite the end of the Federal Reserve’s quantitative easing program and clear improvement in the economy, there just isn’t any inflation to speak of. And it looks like huge foreign demand for Treasuries is keeping yields artificially low. Remember, the 10-year Treasury yield started the year at 3%.

With 2014 pretty much in the books, here’s a final look at performance for the major stock indexes:

SPX +15%

Dow +11.2%

Nasdaq +16.3%

Russell 2000 +6.1%

US pending home sales (i.e. signed contracts) rose 1.7% year-over-year in November following a 2.1% gain in the prior month. Economists, on average, expected sales growth to accelerate to around 3.6%. But while the report was a mild disappointment, we have to remember that pending sales spent most of 2014 in negative territory. The housing market is going through a transition period from high price growth to lower more sustainable appreciation; from investor-dominated buying activity to first-time buyer activity. Economists are thinking that 2015 sets up nicely for the housing market because economic growth and improvement in the job market have been more consistent lately. And it looks like mortgage rates will remain fairly low next year.

The Chicago Purchasing Managers Index dipped to 58.3 this month from 60.8 in the prior month. The index, which measures business activity in the Chicago region, showed production levels and new orders moderated a bit. And this is what we’ve seen from other manufacturing indexes this month. But keep it in perspective; any reading above 50 indicates expanding business activity, and anything close to 60 is very strong. The US manufacturing sector is enjoying a period of solid expansion.

Art Cashin, CNBC contributor and head of floor operations for UBS, celebrated his 50^th anniversary as a member of the New York Stock Exchange yesterday. In an interview he said, “This business is a fascinating business. It’s like waking up every morning with a brand new Rubik’s Cube.”

December 29, 2014

Stocks opened lower but quickly turned around. The Dow and SPX are currently up 10 pts & .2%, respectively. The SPX briefly touched another all-time high. The Dow is higher for the eighth straight trading session. The Russell 2000 (small caps) Index is again outperforming the major averages, up .3%. The best performing sectors in early trading are consumer discretion, financials and utilities. Consumer discretion, a sub-index of the SPX, just touched a fresh all-time high. Commodities are mostly higher, with the exception of gold. WTI crude oil continues to hover around $55.50/barrel and that’s great news for those predicting a bottoming process is underway. Bonds are surging higher this morning on some political turmoil in Greece. The 5- and 10-year Treasury yields are trading at 1.71% and 2.20%, respectively.

We’re closing in on the last few trading sessions of 2014, so here’s a look at how indexes & asset classes performed this year:

Nasdaq +16.5%

SPX +15.5%

Dow +11.5%

Russell 2000 +6%

TLT (long term US Treasury bonds) +26.7%

JNK (US junk bonds) +1.4%

Gold -2%

Copper -18%

Oil -44%

A snap election was called after Greek politicians failed to elect a president. The prime minister, Antonis Samaras, said he will call for the dissolution of parliament and the new election will be held January 25^th.  The worry here is that Greek voters may take the opportunity to vote in the Syriza opposition party, which generally opposes the European Union’s (EU) bailout plan for Greece. Syriza is also called the anti-austerity party, and has promised to roll back some of the government spending cuts that the EU required for the bailout. You may remember Greece is completely dependent at this point on bailout funds. Greek government debt is 175% of the country’s GDP, and the unemployment rate is about 26%.

The Chinese government has blocked Google’s Gmail service. You may know that the popular web search site was blocked in China after Google refused to yield to government surveillance and censoring. Well, now Chinese citizens are unable to access Gmail even through third-party devices such as Apple’s iPhone or iPad.

Russia’s economy shrank .5% in November from year-ago levels as recession begins to take hold. The Ruble continues to devalue, having lost 40% of its value against the dollar. Finance Minister Anton Siluanov has forecasted 2015 GDP at -4%. Russia’s PMI, which measures business activity, is now well below the 50.0 dividing line between expansion and contraction. Consumer spending is expected to fall more than 6% next year. At this point, it is probably safe to say Mr. Putin’s foray into Ukraine probably wasn’t worth it.

Bill Gross, former head of PIMCO, says his wish for 2015 is that “Republicans and Democrats come together and initiate an investment program” focused on infrastructure to drive economic growth. Good luck with that.

December 26, 2014

Stocks opened higher this morning on very light trade volume. The Dow and SPX are currently up 45 pts & .43%, respectively. By now you are certainly aware that the Santa Claus Rally did show up. The Dow has rallied for seven straight days. The SPX briefly touched an all-time high in early trading and is now up 15% year-to-date. Even the Russell 2000 (small caps) Index is participating today, up .68%. All ten market sectors are up at the moment, led by utilities. In fact, 6 of 10 sectors are currently setting multi-year highs. Commodities are mixed: copper, oil and natural gas are down; gold is up. WTI crude oil is hovering around $55/barrel after having bottomed at $54 back on the 18^th. Since then, the S&P 500 Energy Sector has rallied 3%. Bonds sold off hard over the last several sessions, but yields are roughly unchanged today. The 5- and 10-year Treasury yields are trading at 1.76% and 2.26%, respectively.

Industry research firm ComScore says online holiday shopping could rise 16% y/y in the November/December period. They project total online spending at $61bil, which would be a record. Another research group, ChannelAdvisor, notes Amazon.com’s sales surged 20% from Black Friday through 12/21. IN the US, online makes up about 6.5% of all retail sales. Yet another source, SpendingPulse, estimates total US retail sales grew 5.5% y/y from Black Friday through Christmas Eve. That agrees (roughly) with what Mastercard is saying.

Saudi Arabia keeps insisting it will keep oil production at 30 million barrels per day, and doesn’t mind oil prices at $60/barrel or even lower. But a Bloomberg interview with a former economic adviser to the Saudi government suggests otherwise. John Sfakianakis believes the country’s 2015 budget assumes oil prices hover around $80/barrel. Oil exports are absolutely key for Saudi Arabia’s budget, accounting for nearly 90% of total revenue. Mr. Sfakianakis says this is a sign the Saudis believe an oil rebound is imminent.

Bloomberg reports Russia is on the brink of recession. If oil prices average $60/barrel, the Russian economy could shrink by about 4% next year. Economists, according to a recent survey, believe the recession could last two years. The Russian government is selling down its foreign currency reserves in order to defend the Ruble (to fight rising inflation), but that’s not sustainable over the long term. The government will likely be forced to restructure its budget (i.e. cut spending) to address the issue. For an idea of the scale of the problem, understand that the Ruble has lost nearly 40% of its value against the US dollar this year.

May 15, 2014

Stocks slid at the open for the second day in a row. The Dow and SPX are off 173 pts & 1.2%, respectively. The Russell 2000 Index is now in correction territory (down 10%+). Several sectors are down more than 1% today: discretion, energy, financials, healthcare, industrials and basic materials. Trade volume has been relatively light and I note the VIX Index really isn’t spiking like you would expect. VIX June futures are trading at about 15. Bonds are higher on the day. In fact, the 10-year Treasury yield fell through 2.50% this morning. So we’re back to July 2013 levels and again; that’s not a good sign.  

It’s pretty clear that falling interest rates caused yesterday’s selloff. We’re seeing some crazy things that defy logic. PPI (wholesale inflation) accelerated meaningfully, and yet interest rates fell. CNBC spent a lot of time debating why interest rates are falling if the economy seems okay. Jack Bouroudjian said the bond market is absolutely wrong. “The signals sent by the bond market are indicative of a recession.” Instead, what we have is a low interest rate environment with healthy corporate balance sheets and a stock market at all-time highs. Another money manager pointed to the possibility that the current supply of Treasuries is not meeting demand. The US Gov’t isn’t issuing as much debt as it has been because the budget deficit is shrinking. Jim Cramer said he thinks there is a massive bond bubble in Europe, and this is pushing more and more fixed income investors around the world into Treasuries. One thing everybody seems to agree upon is that falling rates have nothing to do with unrest in Ukraine. The bottom line is this question: are interest rates corresponding to the fundamental economy, or are these other factors primarily responsible for rate movements? Because if, as Larry Kudlow says, rates are falling because “the bond market is not optimistic about the prospects for economic growth,” you can see why cyclical stocks are selling off and defensive stocks are catching a bid. And Larry’s prediction that “Janet Yellen will not raise short term interest rates in my lifetime” starts to seem plausible. Larry is old.

I come down on the side of Jim Cramer on this one: buy good quality stocks that go down because people are confused at the moment.

The Consumer Price Index (CPI) accelerated (as expected) to 2.0% year-over-year growth in April. This is the probably the most popular gauge of retail inflation, and it’s back up to the high end of the range we’ve seen over the past two years. That’s actually sort of a good sign. We had been a bit nervous over the winter as CPI dipped to just 1%. Usually falling inflation corresponds with a weakening economy.

US Industrial Production fell .6% in April vs. economists’ consensus forecast of unchanged. Prior month production was revised a bit higher to +.9%. This doesn’t jive at all with the Empire State (New York) Manufacturing Index, which surged to a nearly 4-year high in April. More noise.   

May 9, 2014

Stocks are opened lower this morning (Dow -38 pts; SPX -.4%). Consumer staples and telecom are the only sectors in the green at the moment. Commodities are mostly higher. WTI crude oil is holding just above $100/barrel. Gold is now up about 7% year-to-date. Copper is a little higher; probably follow through from yesterday’s positive economic data out of China. Bonds are slightly lower—the 5-year and 10-year Treasury yields ticked up to 1.63% and 2.61%, respectively.

Low interest rates are starting to drag—rather than act as a stimulus—on the stock market. Stock investors seem overly obsessed with every minor movement in the 10-year Treasury yield. It really doesn’t make much sense if you’re a long term investor, but maybe with [a pretty good] earnings season in the rearview mirror there’s nothing else to obsess about.

Bloomberg points out that the Russell 2000 Index is nearing correction territory. The index, heavily weighted toward small-cap stocks, is down 9% since early March. We know that small-cap tech and biotech has been hit hard of late. But part of the slide has to be attributable to financials, which account for 25% of the index. By the way, the only two S&P 500 sectors in the red for 2014 are consumer discretion and financials. At this point in the cycle, we’re going to need to see rising interest rates to get banks’ net interest margins moving in the right direction. Here’s one persistently good thing about lower interest rates: the massive and growing government debt load isn’t likely to precipitate any crisis.

Apple announced a deal to acquire Beats Electronics for $3.2bil. Beats, co-founded by rapper Dr. Dre, makes music headsets and owns a subscription music service. A tech expert interviewed on CNBC called the deal “de minimis” to Apple’s balance sheet.  

March 4, 2014

Stocks are rebounding from yesterday’s route. The Dow and SPX are currently up 192 pts & 1.27%, respectively. The SPX is now sitting at a fresh all-time high. Gains are broad-based across market sectors; healthcare and industrials are up over 1.4% in early trading. The Russell 2000 (small-caps) is up about 1.85%. CNBC is calling this a “classic short squeeze.” Commodities are mostly lower, also reversing yesterday’s trend. WTI crude oil retreated back to $103/barrel and gold is down modestly. The 10-year Treasury ticked up to 2.66%. I’m guessing yields will resume their longer term trend higher.

Investors seem to have concluded that the geopolitical crisis in Ukraine/Crimea will be short-lived with minimal impact on us. Overnight, the US pledged $1bil in loans to stabilize the country’s finances, and the Russian defense minister ordered troops involved in combat drills to return to their bases. Vladimir Putin seems to have convinced everyone (for the moment) that troops deployed to Crimea were only intended to protect Russian military installations.

ISM’s New York regional business index fell to 57.0 in February from 64.4 in the prior month. Any reading above 50.0 indicates improving business activity. The index sat at about the same level a year ago. About 55% of respondents noted bad weather as the biggest impediment to their businesses. I noted that the employment component of the index rose to 65.7, and the forward-looking business conditions outlook shot up to 76.3. These are very strong results.   

Tobacco stocks are all up over 2% today. Reynolds American, one of the largest tobacco companies in the US, is preparing a bid to buy Lorillard. While cigarette sales volumes are falling by about 3% per year, Lorillard’s Newport brand has somehow fared better. Even more important, Lorillard is a first mover in the e-cigarette market, having acquired the Blu brand back in 2012. A combination of both companies would control about 37% of the US cigarette market. The WSJ reports Lorillard is probably worth more than $20bil, its current market-cap.

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.”