Fluctuating Between Ugly and Ugly
DOW – 358 = 16,990
SPX – 43 = 2035
NAS – 141 = 4877
10 YR YLD – .05 = 2.08%
OIL + .34 = 41.14
GOLD + 19.00 = 1154.10
SILV + .27 = 15.68
Well, it was just ugly.
Yesterday, the Federal Reserve released the minutes of the July FOMC meeting. Many investors and traders interpreted the policymakers’ discussions as dovish, with the probability of a rate boost next month sliding to 36 percent from about 50 percent earlier in the day. The matter is still open to debate, and the bottom line is that we have to wait about 4 weeks to find out what the Fed will do.
Today, stocks closed near session lows, off about 2%; and it smacks of a rate tantrum, traders expressing their dis-satisfaction to let the Fed know they are opposed to rate hikes. The other reading is that a dovish Fed might mean that the global economy really is weak; the drop in commodities is hurting emerging markets; the strength of the dollar is hurting US exporters; we are now facing currency wars; and global growth (or the lack thereof) will weigh on the US economy. If the Fed doesn’t raise rates, it’s because the market is too fragile.
The S&P 500 fell into negative territory for the year, with consumer discretionary the greatest decliner on the day. Energy is the greatest laggard for the year, down 17 percent. The Dow Industrial Average is now down about 4.5% for the year, and down 7.2% from its peak. After today’s stock market selloff: Russell 2000 off 9.5% from peak; Nasdaq off 6.5%; S&P 500 -4.5%.
Bearish sentiment toward stocks is getting worse, at least according to the options market. Based on the number of puts trading compared with calls on single stocks, pessimism is higher now than any time since 2012. It’s mostly the result of a decrease in bullish calls, whose volume has declined 36 percent since January. Investor skepticism is growing as the Standard & Poor’s 500 Index meanders in its tightest range in nine decades. In August, speculators have neglected calls, which give holders the right to buy shares at a certain price. They’ve instead focused more on puts, which convey the right to sell shares at a specific level.
Of course markets tend to fluctuate; that is the only thing we can say with certainty. Mohammed El-Erian described it as “a classic overshoot that starts in the emerging markets world and it starts spreading. What that causes is heightened risk aversion.” The outflows of funds hits emerging markets the hardest first, with the capacity to send shock waves to other markets “and at the end is the equity market in the U.S.” The fundamentals of the economy are a bit weak, but risk assets have not adjusted to reflect that weakness, and the difference is central banks boosting the financial markets. If the central banks, or specifically the Fed, steps away from supporting the markets, the valuations could come down to fundamentals. Makes sense.
China’s stocks slumped to a two-week low. The Shanghai Composite Index dropped 3.4 percent, the lowest level since Aug. 6. About 17 percent of mainland-listed shares remain halted. The Hang Seng China Enterprises Index sank 2.3 percent to a 10-month low.
We are seeing waves of currency devaluations. Kazakhstan’s currency plunged a record 23% at the start of trading today, following a surprise announcement the government would allow the currency to float freely. Kazakhstan is central Asia’s biggest oil exporter. The move continues a currency war being fought in the emerging markets. Vietnam devalued its currency on Wednesday for the third time this year after a similar move in China, while Russia is allowing the ruble to track the drop in crude, which has tumbled 58% over the past year.
Perfect timing. Greece has made a €3.2 billion-euro payment to the ECB, shortly after receiving the initial disbursement of funds from its new bailout. The first tranche amounts to €13 billion-euro, of which about €12 billion-euro will be used to pay down debt. Meanwhile, Greek PM Alexis Tsipras has called for the European Parliament to join the so-called quartet of creditor institutions overseeing the country’s new rescue. Now, if you look at the numbers you see that the bailout is not so much for the Greek government or even the Greek people; the creditors offer the bailout with one hand and then take the money right back with the other hand. And so this afternoon, Tsipras, faced with a revolt in his party over his acceptance of unpopular bailout measures, said he will resign and call early elections in September. Tsipras said on national television that his ruling mandate has “exhausted its limit and now people must decide anew.”
And just to add a little violence into the mix, North and South Korea exchanged fire today across the demilitarized zone between the two countries. The incident started when North Korea fired a rocket at a South Korean border area, prompting Seoul’s forces to reply with an artillery barrage. So far, no reports of casualties. Tensions have flared in recent weeks across the DMZ that bisects the Korean peninsula.
Two South Korean soldiers were maimed on Aug. 4 by land mines that the Seoul government says were recently laid by North Korea. Relations deteriorated further when South Korea started blaring propaganda at the North through loudspeakers along the DMZ. After today’s exchange, North Korea threatened to “start a military action” unless South Korea stops all propaganda broadcasts and withdraws the loudspeakers within 48 hours.
Purchases of previously owned homes unexpectedly rose in July to the highest level since February 2007. The National Association of Realtors reports contract closings increased 2 percent to a 5.59 million annualized rate from the prior month’s revised 5.48 million pace. The median price of an existing home climbed 5.6 percent from July 2014 to reach $234,000.
The number of Americans filing for unemployment benefits last week remained historically low. Jobless claims increased by 4,000 to 277,000 in the week ended Aug. 15. Applications have been lower than 300,000, a level typically associated with an improving job market, since early March.
The leading economic index fell 0.2% in July after four straight strong gains, largely because of a decline in permits to build new homes. The Conference Board says the LEI is still pointing to moderate economic growth through the remainder of the year.
The Philadelphia Fed’s index of business conditions increased to a reading of 8.3 in August, above the 5.7 reading in July.
Valeant Pharmaceuticals is nearing a deal to pay $1 billion for Sprout Pharmaceuticals, just a day after the company won approval to sell the first drug which boosts libido in women. Under the terms, Valeant would pay all cash, one $500M installment upfront and one next year, for privately-held Sprout and its pink pills that will be sold under the brand name Addyi.
McDonald’s has announced plans to launch all-day breakfast nationwide as soon as October. According to an internal corporate estimate, McDonald’s could see a 2.5% lift in sales at stores that introduce all-day Egg McMuffins. Breakfast is a hot commodity not only at McDonald’s but also at many restaurants nationwide. Breakfast sales rose over 5% to $27.4 billion in 2013 at quick-service and fast casual restaurants.
Yesterday was the 11th anniversary since Google’s initial public offering, and there’s no doubt the company has had a remarkable run (Class A shares +1,277%). Although the online advertising giant has given a massive return to investors, there are still 13 stocks that outperformed Google since 8/19/2004: Alexion Pharmaceuticals; Amazon; Apple; Celgene; Gilead Sciences; Intuitive Surgical; Keurig Green Mountain; Monster Beverage; Netflix; Priceline; Regeneron Pharmaceuticals; salesforce.com; Vertex Pharmaceuticals. Or, if you want to keep it simple, you could limit it to the FANGs: Facebook, Apple, Netflix, and Google – by the way, they were some of the biggest losers today.
A new report from NASA shows California is sinking; specifically the Central Valley. The prolonged drought means domestic wells have run dry and growers are drawing down portions of the valley’s vast aquifer to historic lows. As the aquifers shrink the land drops. Some areas have seen the land sink by 10 to 14 inches since the start of the year. The sinking is so subtle that it is imperceptible on the ground, save for the effect on infrastructure. Aqueducts and irrigation canals buckle. Roads crack, causing millions of dollars in damage.
Another month, another record high for global temperatures. The National Oceanic and Atmospheric Administration reports that July was the hottest month since meteorologists began keeping track way back in 1880. Earth’s average surface temperature for the month of July was 61.86 degrees Fahrenheit (or 16.61 degrees Celsius). July’s average temperature was 1.46 degrees F higher than the average for the 20th century and 0.14 degrees F above the previously hottest month, which occurred in 1998.
The new record was fueled by the oceans. Across the globe, the average sea surface temperature in July was 62.85 degrees F, 0.13 degrees higher than the previous monthly record (set in July 2014) and 1.35 degrees higher than the average for the 20th century. All 10 of the hottest months for sea surface temperatures have occurred since April 2014. Temperatures on land contributed too, coming in 1.73 degrees F above the 20th century average. The report bolstered predictions from NOAA’s Climate Prediction Center that an El Niño is likely later this year.