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Tuesday, August 23, 2016

Very, Very Quiet

Financial Review

Very, Very Quiet

DOW + 17 = 18,547
SPX + 4 = 2186
NAS + 15 = 5260
10 Y + .0 = 1.55%
OIL + .69 = 48.10
GOLD – 1.70 = 1337.90

The S&P 500 index hit an intra-day record high of 2193. The Nasdaq Composite hit an intra-day record high of 5275; those indices could not hold on for record closes. Approximately 96% of the companies in the S&P 500 have already reported second quarter results, approximately 79% of them beat earnings expectations and 56% exceeded revenue estimates. Still, earnings declined about 3.7% for the second quarter; that marks the fifth consecutive quarter of declining earnings.

Analysts are now anticipating third quarter earnings will decline .9%. If you believe the profit forecasts of U.S. companies, stocks are massively overpriced. The S&P 500 is currently trading at roughly 18 times next year’s projected earnings. That’s the highest markup since 2002. Still, the indices are hovering near record highs. You can’t call it irrational exuberance; irrational maybe but there is no sign of exuberance.

The markets have been quiet, very, very quiet. The past 30 days have been the least volatile of any 30-day period in more than two decades. Only five days during the most recent stretch saw the S&P 500 move by more than 0.5% in either direction, the lowest since the fall of 1995. The market has now been serene for so long, you actually have cause to worry about the calm. Periods of extreme calm in the market have often signaled a coming storm.

Among the points in recent history when the market approached its current level of stability was January 2007, months before the collapse of Bear Stearns. For now, investors seem complacent, at least as measure by the VIX, the volatility index; that could change when Fed Chair Janet Yellen speaks this week at the Jackson Hole economic symposium.

Oil prices started lower
 but finished higher as the market digests reports indicating that Iraq is preparing to ramp up its export levels. Goldman Sachs published research showing Libya, Iraq and Nigeria — which all have suffered from severe supply disruptions — last week started to show the first signs of ramping up production.

Morgan Stanley analysts published a report warning that an output agreement between members of the Organization of the Petroleum Exporting Countries remains “highly unlikely” as the cartel members battle for market share. Yet as far as crude stocks go, in the United States anyway, there are signs that inventories will continue to tighten. Genscape, the widely watched market intelligence firm, reported that Cushing, Oklahoma crude stocks fell by 187,000 barrels.

IHS Markit’s composite Purchasing Managers’ Index dropped in Germany to a 54.4 reading from 55.3 in July. The gauge for the services sector fell to 53.3. Markit said the report signaled a weaker pace of expansion for the nation. France flash August composite PMI rose to a 10-month high of 51.6. Overall Eurozone flash composite PMI came in at 53.3 for August to top the consensus estimate of 53.1.

British manufacturing firms experienced a marked boost to their export orders in the aftermath of the June vote on European Union membership. Following the Brexit vote, the pound dropped and that helped support overseas demand.

Global retail e-commerce sales are forecast by eMarketer to increase 24% year-over-year to almost $2 trillion this year to account for 8.7% of all of retail spending. Retail e-commerce sales in North America are seen rising 15.6% to $423 billion. eMarketer expects retail e-commerce sales to balloon to more than $4 billion in 2020, to represent just short of 15% of all retail spending.

Best Buy shares jumped about 16% this morning, after the consumer electronics retailer reported fiscal second-quarter results that beat expectations, including a surprise rise in same-store sales. For the quarter ended July 30, earnings rose to $198 million, or 61 cents a share, from $164 million, or 46 cents a share, in the same period a year ago.

New-home sales jumped 12.4 percent last month to a seasonally adjusted rate of 654,000 annual units, the strongest level since October 2007. Demand is outpacing construction; just 4.3 months’ supply of new homes is available on the market, down from 5.2 months a year ago. New-home sales have climbed 12.4 percent so far this year and are up 31% compared to one year ago. Builders have started work on new housing units at a pace of more than 1 million homes a year every month since April 2015, more than doubling from a low of 478,000 in the spring of 2009.

Residential investment has made a positive contribution to overall gross domestic product for eight of the last nine quarters. In short, the housing market is healthy, even strong. In the new Census Bureau report, the median sale price for new homes actually fell, to $294,600 from $310,500 in June. That is a strong hint that there is more supply being built at the lower end of the housing market. In other words, exactly the kind of smaller houses that young adults can afford.

The housing market crash was nearly 10 years ago and much of the excess inventory from that downturn has now been consumed. Yet relatively few new houses to fulfill eventual demand were built. Mortgage rates have stayed near record lows, and job creation has been relatively strong. All that has been missing is homes in the right places and at the right prices for those young people to buy. At the same time, retiring boomers might be looking to downsize a little into a new home that doesn’t require as much maintenance. The message to home builders – if you build the right sized home at the right price, the buyers will come.

Uber is now the most used taxi app in 108 countries. That’s according to analytics provider SimilarWeb, which tracked the reach and usage of ride-hailing apps in 171 countries on Android devices. Uber has a particularly big lead in the U.S., where the app is installed on 21 percent of all Android devices, compared with just under 3 percent for its main domestic competitor Lyft. The one region where Uber has struggled is Asia, where local operators have held ground.

Volkswagen is preparing to resume full production at its factories after resolving a serious dispute with suppliers. A shortage of parts had caused major disruption at six of the automaker’s factories in Germany and forced Volkswagen to reduce hours for about 27,700 workers.

Two major auto suppliers are joining forces to develop an advanced self-driving system by 2019, which would likely place them about a year ahead of the target time being set by some automakers. Mobileye, an Israel-based maker of sensors, and Delphi Automotive, a longtime supplier to the auto industry, say they expect to co-develop a system that would be capable of at least Level 4 automated driving on a scale of five, meaning the car would be able to drive itself in almost all circumstances.

Meanwhile, the results are in… the fastest production car made in the world is….electric. Tesla released a new, 100-kilowatt-hour battery pack for the dual-motor versions of the Model S and Model X on Tuesday. The upgrade makes the Model S the first all-electric sedan with a range of more than 300 miles, and it cuts the zero-to-60 time to just 2.5 seconds.

Don’t blame the weather. Airlines are the biggest cause of flight delays in the US.  Late arrivals triggered by mechanical breakdowns, a lack of flight crews, computer glitches, and other factors attributed to the airlines were the largest category of delay last year for just the second time, and by the widest margin, since the government began collecting such data in 2003.

Almost six out of 100 flights were held up by factors attributed to the airlines. That doesn’t include the ripple of delays that a late flight inflicts on subsequent ones. And the difference is even more substantial when measured by the aggregate amount of time flights are tardy. Airline-caused delays totaled 20.2 million minutes last year — 2.7 million more than all other categories combined. is working on a music subscription service that would cost about $5 a month and would only work on its Echo hardware. Tech news website Recode reports Amazon would like to launch the services in September, but has not finalized deals with major music labels and publishers.

Wells Fargo will pay $4 million after the government found it charged illegal late fees to some of its student loan borrowers. The bank agreed to pay a penalty of $3.6 million to the Consumer Financial Protection Agency. It also must set aside $410,000 to refund customers who were hit with illegal fees, which occurred between 2010 and 2013.

General Electric’s seven-year, $1.6 billion dredging campaign to remove industrial pollutants from the Hudson River was called inadequate by the New York Department of Environmental Conservation. A letter sent by the agency urged the EPA to closely scrutinize the effectiveness of GE’s dredging in its project review due to be released by April 2017. The state agency says at least 136 acres of river bottom and 35% of the PCBs discharged from a pair of GE factories along the Hudson near Albany have not been removed.

Markets Lose Steam to Post Modest Gains

Charles Schwab: On the Market
Posted: 8/23/2016 4:15 PM ET

Markets Lose Steam to Post Modest Gains

Although off the highs of the day, U.S. equities finished positive, aided by a near nine-year high in new home sales, a favorable read on eurozone business activity, as well as upbeat quarterly results from Best Buy. However, the gains were likely kept in check on some softer-than-expected domestic manufacturing data and as Fed Chairwoman Janet Yellen's key Friday speech looms on the horizon. Treasuries and the U.S. dollar were little changed, crude oil prices rebounded somewhat, while gold ticked lower.

The Dow Jones Industrial Average (DJIA) increased 18 points (0.1%) to 18,547, the S&P 500 Index rose 4 points (0.2%) to 2,187, and the Nasdaq Composite gained 15 points (0.3%) to 5,260. In moderate volume, 722 million shares were traded on the NYSE and 1.5 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.69 to $48.10 per barrel, wholesale gasoline added $0.02 to $1.50 per gallon and the Bloomberg gold spot price declined $1.02 to $1,338.07 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 94.55.

Best Buy Co. Inc. (BBY $39) reported 2Q earnings-per-share (EPS) ex-items of $0.57, well above the $0.43 FactSet estimate, as revenues were roughly flat year-over-year (y/y) to $8.5 billion, versus the projected $8.4 billion. Domestic 2Q same-store sales increased 0.8% y/y, compared to the expected 0.4% decline. Sales of appliances and consumer electronics rose solidly. BBY issued stronger-than-expected 3Q revenue guidance, while reaffirming its full-year sales outlook and raising its earnings forecast. Shares jumped over 18%.

J.M. Smucker Co. (SJM $144) posted fiscal 1Q EPS ex-items of $1.86, compared to the estimated $1.74, as revenues declined 7.0% y/y to $1.8 billion, versus the projected $1.9 billion. SJM reaffirmed its full-year profit outlook, while lowering its sales forecast. Shares were solidly lower.

Toll Brothers Inc. (TOL $32) announced fiscal 3Q earnings of $0.61 per share, in line with expectations, as revenues rose 23.5% y/y to $1.3 billion, roughly in line with expectations. The luxury homebuilder said the solid economy and employment picture are benefitting its target customers, while combined with continuing low interest rates, a favorable supply-demand equation and limited competition in the luxury market, "position us for continued growth." TOL narrowed its outlooks for full-year revenues and deliveries, while lowering its gross margin guidance. Shares finished higher.

New home sales surge, while manufacturing data disappoints

New home sales (chart) jumped 12.4% month-over-month (m/m) in July to an annual rate of 654,000, and well above the Bloomberg forecast of 580,000 units. The median home price dipped 0.5% y/y to $296,000. The supply of new home inventory dropped to 4.3 months at the current sales pace as sales surged in the Northeast m/m, gained solidly in the South and ticked higher in the Midwest, while sales in the West were flat. Compared to last year, sales in all regions were up solidly. New home sales are based on contract signings instead of closings.

This was the fastest pace in new home sales since October 2007 and the report comes ahead of tomorrow's broader measure of the housing sales market in the form of existing home sales, projected to dip 1.2% from more than a nine-year high to an annual rate of 5.51 million units in July (economic calendar). Existing home sales are based on contract closings. Additionally, MBA Mortgage Applications will also be released.

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his latest Schwab Sector Views: There's a New Sector Coming, at the beginning of September, real estate will become a brand-new 11th sector, made up of mostly real estate investment trusts (REITs). Brad notes that when we update our ratings after September 1, we anticipate that our first rating of the real estate sector will be marketperform, while financials will remain at outperform, on the heels of the equity REIT group's nice run in 2016. We think it's getting a little late in the game to aggressively jump into this group as U.S. interest rates seem more likely to rise than to fall over the next couple of years and the laws of supply and demand are taking hold. Read our entire sector views at and follow Schwab on Twitter: @schwabresearch.

The preliminary Markit U.S. Manufacturing PMI Index for August decelerated more than expected, declining to 52.1 from July's 52.9 level, and versus the forecasted dip to 52.6, with a reading above 50 denoting expansion in activity.

The Richmond Fed Manufacturing Activity Index surprisingly fell into contraction territory (a reading below zero), dropping to -11 in August from the 10 posted in July, while economists had anticipated a decline to 6.

Treasuries were nearly unchanged, as the yield on the 2-year note ticked 1 basis point (bp) higher to 0.75%, while the yields on the 10-year note and the 30-year bond were flat at 1.55% and 2.23%, respectively. For analysis on the fixed income markets see the video from Schwab's Managing Director of Trading and Derivatives, Randy Frederick and Fixed Income Director Collin Martin, CFA, titled Tempered Expectations for Bond Returns: Why Hold Bonds? Also, for commentary on the record high stock market, see the video from Schwab's Chief Investment Strategist, Liz Ann Sonders and Randy Frederick, titled Long-Running Bull Finally Attracting Believers? See both videos at and follow Liz Ann and Randy on Twitter: @lizannsonders and @randyafrederick.

Europe higher following upbeat eurozone and U.S data, Asia mixed 

European stocks finished higher, despite global caution ahead of this week's annual Fed monetary policy gathering in Jackson Hole, Wyoming, which will be highlighted by Chairwoman Janet Yellen's speech on Friday. Basic materials stocks rebounded, along with oil & gas issues, as crude oil prices reversed to the upside, aided by a favorable U.S. home sales report and an upbeat read on eurozone business activity in August. The preliminary Markit Eurozone Composite PMI Index—a gauge of output from both the services and manufacturing sectors—unexpectedly improved to 53.3 from July's 53.2 level and compared to the forecasted dip to 53.1. A reading above 50 denotes expansion and the index hit the highest level in seven months, suggesting the fallout from the U.K.'s late-June vote to leave the European Union, known as a Brexit, so far is having a limited impact.

Amid the choppiness and potential increase in volatility due to a plethora of factors facing the global markets, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers Three Reasons Why Now is Not the Time to Retreat from Global Diversification, complemented by his latest article, Your portfolio may be less diversified than you think. Read both articles at and be sure to follow Jeff on Twitter: @jeffreykleintop. Also, for commentary on the potential impact of the Brexit vote, see the Schwab Center for Financial Research's article, Brexit: What Investors Should Know, at The euro was flat and the British pound finished higher versus the U.S. dollar, while bond yields in the region dipped.

Stocks in Asia finished mixed in cautious trading as the global markets await this week's annual Fed gathering in the U.S. as policy uncertainty remains elevated, culminating with Yellen's speech on Friday. The continued pullback in crude oil prices from last week's rally weighed on the energy sector. Japanese equities dropped, with the yen gaining solid ground on the U.S. dollar to weigh on export-related issues. Mainland Chinese securities increased slightly, while those listed in Hong Kong finished flat. Elsewhere, Australia’s markets saw a nice gain, with some weakness in oil & gas issues being more than offset by strength in financials and healthcare issues, while South Korean equities moved modestly higher, and stocks in India were little changed.

Tomorrow’s international economic calendar will hold Japan’s Leading Index, consumer confidence from the Eurozone, and GDP from Germany.