No Argument for Bulls
DOW – 91 = 17,435
SPX – 7 = 2040
NAS – 26 = 4712
10 Y – .03 = 1.85%
OIL – .03 = 48.16
GOLD – 3.50 = 1255.50
Fed rate-hike probabilities have been pulled forward. The April Federal Open Market Committee minutes were released yesterday, and they suggested that if conditions are right, the Fed may raise rates in June. While this was not particularly new, it sent shivers through the fed fund futures market.
Traders had been pricing in a minimal chance of a June rate hike and a just-over-50% chance the next hike would occur in December. After the minutes’ release, however, markets now see a 60% chance of a rate hike in either June or July. So we had a complete turnaround in conventional wisdom from no hike in June to an almost certain hike in June.
This morning Federal Reserve Vice Chairman Stanley Fischer said we are near full employment and inflation is approaching the Fed’s target of 2%, but he says he wants to see faster potential growth. Fischer did not comment on the likelihood the Fed will raise interest rates again in June. Fischer said more study should be devoted to finding ways to boost the so-called equilibrium real interest rate, which is the level of borrowing costs associated with stable inflation and full employment.
Also this morning William Dudley, President of the New York Fed said it would be appropriate to raise interest rates again at either the June or July meeting as long as the economy rebounds from a weak first quarter as expected.
Also this morning, Richmond Fed President Jeffrey Lacker, who doesn’t have a vote and has been itching for an interest-rate hike, did allow that if markets were rocky enough by June 15 – just over a week before the U.K. gets to vote on leaving the European Union – he could be persuaded not to support a rate increase. But it looks like Fed policymakers feel confident they will have a handle on the Brexit vote by the time they convene the next FOMC meeting.
Now, all the jawboning from Fed officials does not guarantee a rate hike, the economy might wobble, job creation could dry up, GDP growth could wither, the Brits might Brexit; but if they do raise rates, what does it mean for stocks? Well, higher rates increase corporate borrowing costs at a time of lofty stock valuations and declining forward-earnings estimates; it would also curtail stock buybacks. And consider the economic outlook of higher inflation and something near full employment, which would mean wage pressures.
A rate hike would almost certainly result in a stronger dollar which would mean reduced sales for multinational companies when money is repatriated from a country with a weaker currency. Then go to the charts. The S&P 500 index added 270 points off the February lows, but that was not enough to clear resistance around 2100, not enough to hit new highs, and a lower high than last October. Also, the February lows were lower than the August lows, so we have lower lows and lower highs.
It looks like a failed rally and a double top (you could argue it is a triple top). The S&P has now dropped below its 50 day moving average and is dropping below its 100 day moving average. Add in the seasonal tendency to “sell in May” and it is difficult to make a bullish argument. Meanwhile, don’t forget the bond market, which has seen a big sell-off following the Fed minutes.
The number of Americans who applied for unemployment benefits in mid-May fell by 16,000 to 278,000, with most of the drop concentrated in New York. Initial jobless claims had risen three straight weeks to a 14-month high, capped off by sharp 20,000 increase in the first week of May. The recent spike in claims can be traced to an unusual law in New York that allows bus drivers, cafeteria workers and similar school employees to seek benefits for the week of work they miss during spring break for students.
Moody’s Investor Service cut its 2016 growth forecast for the U.S. economy to 2% from 2.3%, citing subdued global demand and weak business investment. Moody’s 2016 growth outlook for advanced markets is 1.7% in 2016, down from 1.9% in 2015. According to the agency’s Global Credit Research report, “The global recovery has weakened further and the outlook across countries remains uneven and largely weaker than in the previous two decades.” Moody’s said a more pronounced slowdown than expected from China’s economy is currently one of the biggest risks to the global economy.
Arizona’s seasonally adjusted unemployment rate increased one-tenth of a percentage point from 5.4% in March to 5.5% in April; still running higher than the national rate of 5%. Arizona gained 7,500 Nonfarm jobs in April, slightly below average. Professional and business services added the most jobs, while mining lost.
German drug and chemicals giant Bayer has made an unsolicited takeover offer for Monsanto. Terms were not disclosed. Monsanto’s market cap is about $42 billion, and the bid is likely to top the $43 billion that ChemChina paid for its rival Syngenta in February. A tie-up would result in the world’s largest seed and crop-chemical company, with $67 billion in annual sales. Monsanto said in a statement its board is reviewing Bayer’s proposal, which will surely come under regulatory scrutiny.
Walmart reported a higher-than-expected quarterly profit as increased drug prices and solid demand for basic apparel items boosted sales, and its shares jumped more than 7 percent. The company’s performance bucked a string of weak results from competitors. Earnings per share of 98 cents beat the analysts’ average estimate of 88 cents. Sales at U.S. stores open at least a year rose 1.0 percent.
Clothing retailer Gap posted earnings that matched estimates while revenue missed. Same store sales dropped 5%. Gap announced it will close 75 Banana Republic and Old Navy stores worldwide, with most of the closures in Japan.
Network equipment maker Cisco Systems reported better-than-expected results and gave an upbeat forecast for the current quarter. The company has been beefing up its wireless security and datacenter businesses. Results in the latest reported quarter were mainly driven by a 17 percent jump in sales in its security business.
The SEC has charged a former chairman of Dean Foods and a professional Las Vegas gambler with engaging in a years-long insider trading scheme, which included a tip that benefited professional golfer Phil Mickelson. William “Billy” Walters, who has built a multi million-dollar fortune as a Las Vegas sports bettor, and Thomas Davis, Dean Food’s former chairman, were criminally charged in a case brought by federal prosecutors in Manhattan. Mickelson was not criminally charged, but was named as a relief defendant in a civil lawsuit by the U.S. Securities and Exchange Commission, which said he also traded in Dean Foods stock. A relief defendant is not accused of wrongdoing but has received ill-gotten gains as a result of others’ illegal acts.
In a statement via his attorney, Mickelson said he had no desire to benefit from any transaction that the SEC viewed as questionable and that he takes “full responsibility” for having become part of the probe. In 2012, Mickelson took positions in Dean Foods totaling about $2.4 million, and he pocketed a profit of more than $900,000 in about a week’s time. Mickelson has agreed to return gains from that trade. But that doesn’t mean the matter is closed. You might be wondering why a successful golfer was involved in an insider trading scheme in the first place. The answer is that “Lefty” the golfer owed “Billy” the gambler gambling debts; which means Mickelson was betting and losing – possibly in violation of PGA rules.
General Motors plans to compensate about 130,000 American owners of SUVs that had inflated fuel economy labels, revealing itself as the latest automaker to misstate gas mileage. GM will disclose a program to reimburse the owners for the difference in miles per gallon in the coming week, and will temporarily halt sales of about 60,000 new 2016 U.S. vehicles.
Tesla will sell $2 billion in stock to help it ramp up production of its new Model 3 electric car over the next two years. Tesla unveiled the Model 3 in March and already has 375,000 pre-orders. Now they have to ramp up their manufacturing capability. Of the stock Tesla plans to offer, about $1.4 billion will be new shares. The remaining amount will be sold by Elon Musk to cover tax expenses stemming from 5.5 million stock options he has exercised.
The bankrupt operating unit of Caesars Entertainment has unveiled a new proposal to emerge from Chapter 11 that includes a $4 billion contribution from its parent corporation. A smaller initial agreement was widely opposed by creditors, who are collectively owed more than $18 billion. They allege that Caesars Entertainment stripped away many of the best hotel casinos and put them out of reach for debt collecting.
Microsoft has unveiled a magic mirror – or a smart mirror that can recognize and greet users, read their emotions and display the weather, time and other information. All the while looking just like a regular mirror. The Magic Mirror has a hidden facial-recognition camera that can detect eight human emotions, including anger, happiness and surprise. Microsoft plans to expand the mirror’s features, allowing it to show app-fed news as well as Facebook and Twitter feeds in a display panel. No word yet on when, if ever, Microsoft will produce the magic mirror. Until then, if you need to see what kind of human emotion is displayed on your face, you’ll just have to look in a regular mirror.