Morning in Arizona

Morning in Arizona

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Friday, June 09, 2017

Not Known for Patience

Financial Review

Not Known for Patience


DOW + 89 = 21,271
SPX – 2 = 2431
NAS – 113 = 6207
RUT + 6 = 1421
10 Y + .01 = 2.20%
OIL + .26 = 45.90
GOLD – 11.20 = 1267.40
BITCOIN + 0.39% = 2837.72
ETHEREUM + 0.65% = 278.78

The Dow Industrials, S&P 500 and the Nasdaq Composite all hit intraday record highs – only the Dow managed to hang on for a record high close.

Tech stocks have been on a roll recently. Not today. Some of the biggest names tumbled. Alphabet dropped about 3.5%. Apple down almost 4% – its biggest one day loss in more than a year. Microsoft lost 2.2%. Facebook down 3.3%.

The strangest trade was Amazon. Over a period of about 5 seconds, the stock price went from $960 to $930. Back up to $953, down to $927, then traded just over $959. Looks like a fat-finger, flash crash. Amazon finished the day down 3.1%.

Goldman issued a report saying the big 5 mega-tech stocks have added $600 billion in market cap since the start of the year. In Goldman’s view, the sector has gotten ridiculously crowded. Bank of America issued a report saying the tech sector is the “most overweight it has ever been.”

We all know that trees don’t grow to the stars and stocks don’t trade in a straight line. It is a rotation today and it is out of tech into some of the other sectors. We’ll look for confirmation on Monday. The VIX, the volatility index, started the session in single digit territory, finished just above 10 – still very, very complacent.

Next week brings another Federal Reserve FOMC policy meeting. They are expected to raise rates another 25 basis points. Today, a group of economists published a letter urging the Fed to consider a monumental change in policy: raising its target for inflation above the current 2 percent. The Bank of England, the Bank of Japan and the Swiss National Bank also meet next week.

The Federal Reserve has been communicating that it will raise interest rates, and so that is what they will almost certainly do; anything less would shock the markets, and this Fed does not like surprises. Absent a shocker, we’ll watch the Fed for signs of a softer, or more dovish stance on future rate hikes and lower projections for inflation and economic growth.

In the follow-up to Super Thursday, President Trump denied accusations by former FBI director James Comey that he tried to block an investigation into a former national security adviser, adding that he was willing to give his version of events under oath. Asked by a reporter if he had told Comey to drop a FBI probe into former top aide Michael Flynn, Trump said, “I didn’t say that.”

Last month Trump tweeted that there might be tapes of the conversations. Time will tell. Meanwhile, oxygen continues to leak out of Washington DC at a rapid rate. And this means problems for the legislative agenda. It’s still unclear whether Republicans will ever be able to pass a replacement for Obamacare.

But whatever happens on the legislative front, there are big problems developing in the insurance markets as we speak: companies pulling out, leaving some parts of the country undeserved, or asking for large increases in premiums. The problem is the uncertainty, especially the failure to make clear whether crucial subsidies will be maintained.

In North Carolina, for example, Blue Cross Blue Shield has filed for a 23 percent rise in premiums, but declared that it would have asked for only 9 percent if it were sure that cost-sharing subsidies would continue.

On the international front, Trump blasted Qatar of being a “funder of terror at a very high level” and demanding that it cut off that money flow to rejoin the circle of responsible nations. Meanwhile, Secretary of State Rex Tillerson called for calm in the standoff urging an end to a blockade.

Qatar is in talks with Iran and Turkey to secure food and water supplies amid concerns of possible shortages two days after its biggest suppliers, the United Arab Emirates and Saudi Arabia, cut trade and diplomatic ties with the import-dependent country.

And remember, there is a US air base in Qatar, one of the biggest in the region with over 8,000 US military.

But, you say, stocks are up, so how bad can it be? And it’s true that while Wall Street has lost some of its initial enthusiasm for Trumponomics — the dollar is back down to pre-election levels — investors and businesses don’t seem to be pricing in the turmoil.

The good news is that the global economy keeps expanding as corporate profits rise and the recovery continues. Even as the Federal Reserve normalizes rates, the economy has the potential to grow for several more years before its next cyclical stumble. How this all plays out, I do not know. You do not know. The pundits do not know. But time is running out for the bold legislative moves Trump promised: healthcare reform, tax reform, infrastructure investment, and deregulation.

The economic agenda might still move forward but right now it isn’t. And one thing I think I know is that Wall Street is not known for its patience. Wall Street has been rolling along on a buy the dip mentality, but what happens when we get a day where liquidity doesn’t fill the void, and we don’t buy the dip?

The other big Super Thursday news was the election in the UK. Theresa May’s Conservative party did not win a majority. Between now and Tuesday, someone will have to create a coalition; either May and the Tories, or Jeremy Corbin and the Labor party. Likely, May will prevail, in a very weakened state.

Even if she holds power, the battles are just beginning. Foes include Tory dissidents who want her out now, a born-again Labor opposition that will confront her at every turn, anti-European hardliners who will demand she hew to the toughest possible line and the 27 European Union leaders who will seek to make Brexit as painful as possible.

This is largely a British problem, not a global problem. The pound dropped today – the biggest drop in 8 months, beyond that, market reaction was muted. The British economy has been sluggish, the worst performer among the G7. This election setback won’t help. And again, markets are not known for patience.

As an aside, note that Labor did worse in the seat results than predicted, but better in popular vote, getting 40.1% versus the Tory 42.3%. But in general, the pollsters have as much egg on their faces as the Tories do.

Brazilian President Michel Temer, who pushed back strongly against attempts to bring him down over corruption allegations, appeared set to win a victory in a court with the power to strip him of his office. The Supreme Electoral Tribunal (TSE), considering charges that Temer’s election in 2014 should be annulled because of the role of corruption money, was deeply split.

After deliberating since Tuesday, the lead judge on the case, voted to sack the scandal-plagued president. He laid out a damning portrait of systemic undeclared donations and bribes from big Brazilian corporations that he said had fatally undermined the election result in Latin America’s biggest country.

But when the other six judges on the panel began voting in turn, it became clear that the outcome may go the other way. The next three to vote after Benjamin decided in favor of Temer and the session was expected to continue late. Brazilian analysts were unanimous in predicting at least a narrow acquittal

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