December 1, 2014

Stocks sagged at the open this morning (Dow -38 pts; SX -.66%). Retailers, industrials and tech are leading the way lower. Utilities and healthcare are hanging onto modest gains. Momentum names like TSLA, TWTR, BABA and FB are getting hit hard. Commodities are mostly lower. WTI crude oil bounced a bit this morning after taking a beating Friday. WTI is currently trading at $67/barrel and Brent crude is at $71. You probably know that OPEC decided not to cut oil production last week. And Bloomberg points out that we haven’t heard any US companies talking about significant production cuts. Bonds are mostly unchanged on the day after rising sharply last week. The 5- and 10-year Treasury yields are sitting at 1.49% and 2.18%, respectively.

Berkshire Hathaway agreed to buy a couple of business units from Weatherford Int’l, a large oilfield services company. The deal is valued at about $750mil and focuses on chemicals used in oil and natural gas drilling. The recent drop in oil prices probably enticed Berkshire, which has a $60bil pile of cash looking for investments. My guess is that the longer oil prices stay down, the more M&A we’ll see in the space. Oil drillers and service providers are going to be forced to cut operating costs.

The Nat’l Retail Federation said retail sales over the Thanksgiving weekend fell 11% y/y, the second consecutive annual decline in sales. This, however, may not mean anything. Many retailers didn’t wait for Black Friday to begin offering huge discounts, so business was pulled forward this year. More important will be retail sales over the entire November/December timeframe. Generally, about 40% of retailers’ business is done in the last couple of months of the year.

ISM’s Manufacturing Index eased to 58.7 in November from 59.0 in the prior month. Economists, however, were forecasting a larger drop to 58.0. Bloomberg reports this is the second-highest reading since April 2011. The forward-looking new orders component of the index accelerated during the month, and has been very strong of late, despite global economic weakness. Even exports improved quite a bit. ISM’s inflation gauge, meanwhile, declined significantly on falling commodity costs. Overall, Bloomberg reports US factories are struggling to keep up with demand.

By the way, we got PMI data from Europe today. France, Germany and Italy all reported declining business activity. European stocks are poised to close lower as a result. China’s official manufacturing PMI fell to 50.3 this month, shy of expectations. Remember, with most PMI data, 50.0 is the dividing line between expansion and contraction. While manufacturing is only a small part of our economy, it accounts for about 45% of China’s GDP.

April 11, 2014

Stocks opened lower again this morning. The Dow and SPX are currently off 76 pts & .3%, respectively. Energy and utilities are the only sectors in the green at the moment. The Nasdaq and Russell 2000 are now down about 7%% from their March highs. Commodities are mostly higher on the day—gold is up and the dollar is at a five-month low. Copper is also higher despite growing concern about the Chinese economy. Bonds are higher again today; the 10-year Treasury yield edged down to 2.62%. This is close the bottom of its recent trading range (1.60 – 1.80%).

Yesterday, the SPX fell 2.1% and the Nasdaq plunged 3.1%. For the Nasdaq, this was the worst intra-day loss since Nov 2011. Big money sold stocks and bought bonds yesterday. The initial reason given on CNBC was slower economic growth, although we got no significant news yesterday on the economy except for initial jobless claims, which were very positive. Then they tried to throw out the recent jobs report, saying it wasn’t strong enough. I’m calling shenanigans on all of that.

The selloff seems to have begun with large scale liquidations by hedge funds that were heavily invested in momentum stocks like NFLX, TSLA, FB, ALXN, CELG, GILD, etc. Losses were most severe in the tech and biotech sectors. In fact, about 65% of the Nasdaq 100 is now in correction territory (down over 10%). We all know that hedge funds tend to move in a herd. Unfortunately, however, because a large portion of exchange volume is driven by hedge funds and high-frequency trading firms, volatility was amplified and the damage quickly spread to other sectors. My question is this: are hedge funds and high frequency traders taking money off the table because they’re afraid of a weak earnings season? Or are they selling because their go-to stocks had become overpriced? Bloomberg pointed out yesterday afternoon that the SPX is trading at about 15.5x earnings vs. about 20x for the Nasdaq. So we could definitely see more rotation out of the higher growth, higher multiple, higher beta names. 

Jim Cramer said, “This is one of the most mystifying days in ages.” He blamed the market action on China’s weak economic data (see yesterday’s update). He also said overseas investors are being driven to the US bond market as they look for safety at a reasonable yield. He urged investors to get into stocks with good dividend yields. The point is, he says rising demand for bonds is NOT a result of a softening US economy.   

Carter Worth, chief market technician at Oppenheimer, said of the market action, “Despite all the fireworks, very little has happened.” He was putting everything into perspective. The SPX is only down about 1% on the year. Unfortunately, however, he sees the index falling about 12% in the near term to complete a normal correction.     

WFC and JPM reported first quarter earnings this morning. JPM missed analysts’ consensus earnings estimates (EPS $1.28/share vs. $1.46). Mortgage revenue fell 42%, and fixed income securities trading revenue fell 21% y/y. Total revenue was down 7.7% y/y. CEO Jamie Dimon said on the call he has “growing confidence” in the economy. WFC, on the other hand, reported Q1 EPS of $1.05/share vs. analysts’ consensus estimate $.96/share. More of a traditional bank, Wells doesn’t have the investment banking and securities trading operations common at money center banks like JPM. Revenue fell 3% y/y, but there were fewer days in the quarter compared with Q113. Wealth management and brokerage services revenue was up 41%; community banking rose 31%; mortgage originations were down 28%. Both banks are still cutting jobs—JPM will shed 5,000 by the end of the year.

March 28, 2014

Stocks surged at the open after two down days. The Dow an SPX are currently up 123 pts & .8%, respectively. The major averages are close to unchanged year-to-date, so the quarter could go either way (up or down) based on what happens in the next few trading sessions. This morning, several sectors are up more than 1%: discretion, healthcare, tech and materials. Commodities are broadly higher after China’s Premier Li Keqiang posted a statement on the government website that seemed (obliquely) to support monetary stimulus in case economic growth slows further.  So copper is up about 1.6% on the day; WTI crude is up about $1 to $101/barrel. Rates aren’t moving around very much; the 5- and 10-year Treasury yields are up modestly to 1.72% and 2.70%, respectively.  

According to Bloomberg, “the air is coming out of the balloon” of some high-flying tech stocks. Over the last year, names such as Facebook, TripAdvisor, Netflix, Tesla, and Amazon screamed higher regardless of fundamentals like sales & earnings growth, cashflow, etc. Consequently, the P/E ratios on these stocks don’t make sense. Tesla is trading at 135 times expected 2014 earnings, and Amazon is trading at 175 times. Even with the recent pullback, Twitter is trading at over 2000 times expected earnings. Valuation levels are “approaching the Internet bubble,” and it looks like traders are beginning to sell. Over the last month, the Global X Social Media ETF is down nearly 12%, Tesla is off 12%, and Netflix is off 18%. Over the last week, I’ve highlighted the fact that short term interest rates are beginning to move up. If that trend continues, it will certainly put a dent in demand for these trading stocks, which are often purchased on margin.   

Personal Incomes rose .3% in February, as expected, matching the prior month gain. Personal Spending also rose .3% in the month after a downwardly revised .2% gain in January. This is a pretty healthy report, leading me to believe the consumer is recovering from some winter weakness. About 70% of the US economy is driven by consumer spending. The PCE Deflator, a gauge of inflation on consumer goods, rose .9% y/y in February, and that’s considered very low. The Fed will start paying more attention once inflation accelerates to around 2%/yr.

University of Michigan Consumer Confidence edged down to 80.0 vs. 81.6 in the prior month. Economists anticipated a reading of 80.5, but nobody’s really disappointed. The bottom didn’t drop out over the winter months, and we’re roughly even with year-ago levels.   By the way, 80 is considered a “moderate level” by Barron’s.