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Thursday, July 14, 2016

Hat Trick

Financial Review

Hat Trick

DOW + 134 = 18,506
SPX + 11 = 2163
NAS + 28 = 5034
10 Y + .07 = 1.54%
OIL + .75 = 45.50
GOLD – 7.70 = 1335.60

The S&P and Dow closed at record highs. The S&P hit 2,168.99, its fourth straight intraday record peak, while the Dow hit 18,537.57 to mark its third straight intraday record high.

The Bank of England took markets by surprise, making no change to interest rates. The call to leave rates unchanged at 0.5% was largely unexpected by investors, as traders had priced in a more than 80% chance of a rate cut to a record low of 0.25%. The BOE said in a statement that most of the policymakers expect to loosen monetary policy by August; apparently they just need a little more time to put together a package of measures to stimulate growth. Maybe they are just trying to keep their powder dry.

U.S. producer prices jumped 0.5% in June — the biggest increase in more than a year — largely owing to higher oil prices and margins for financial services. Yet inflation overall remains muted. In the past 12 months, the producer price index has advanced 0.3%, the first year-over-year increase since the end of 2014. Core prices – stripping out food, energy, and trade margin categories – core prices rose a smaller 0.3% in June.

The number of applications for U.S. unemployment benefits last week held at the lowest level since mid-April. Jobless claims were unchanged at 254,000 in the week ended July 9. Companies having trouble finding qualified and skilled workers are hesitant to dismiss employees. Weekly claims have been below 300,000 for 71 straight weeks, the longest period since 1973 and consistent with robust employment conditions.

Sales of new single-family homes likely grew at a seasonally adjusted annualized rate of 530,000 units in June, up 8.6 percent from a 488,000 annualized pace in May. The Mortgage Bankers Association said June’s estimated pace of sales was up 7 percent from a year earlier. Without adjusting for seasonal factors, there were likely 47,000 new homes sold last month, unchanged from May.

JPMorgan Chase reports second quarter profit slipped 1% versus the same period a year earlier, but that beat estimates. JPMorgan’s second-quarter net income slipped to $6.2 billion in the second quarter ended June 30 from $6.3 billion a year earlier. Net revenue rose 3 percent to $25.2 billion from $24.5 billion. Six major banks report earnings on Friday.

BlackRock, the world’s largest money manager, said second-quarter profit fell 3.7 percent as performance fees declined and clients shifted money from stocks to lower-fee fixed income and cash investments. Net income in the three months through June declined to $789 million, or $4.73 a share, from $819 million, or $4.84 a share, a year earlier.

BlackRock is the first big U.S. money manager to report second-quarter earnings, giving a glimpse of how firms navigated financial markets that were rattled by Britain’s vote to leave the European Union.  Larry Fink, chairman and CEO of BlackRock, weighed in on the recent stock market rally, saying the data on fund flows don’t support the moves. He said the recent rally has been supported by institutional investors covering shorts.

That is probably an oversimplification of what we are seeing. Institutions bet big before the Brexit vote that the markets would skyrocket and that the UK would not leave the EU and unfortunately the exact opposite result happened, forcing these same institutional players to then scramble and go short the market. Well everyone went short at the same time and thus whenever markets move in a herd mentality, one way or the other, it creates opportunities for others to take advantage of the situation.

Certainly short covering is part of the story, but I think we are also seeing a long term bull that went through 13 months of sideways action, or consolidation, and now is breaking out on a bit of decent news. Consider that Brexit did not result in a Lehman moment; central bankers around the globe are pumping money into the system; the Federal Reserve is not hiking rates; the June jobs report showed a strong rebound; earnings season will beat expectations even if it is slightly negative for a fifth consecutive quarter.

The market has been running, a full-fledged sprint to record highs. And even though overbought indicators are flashing a warning sign, remember that the market climbs a Wall of Worry. In situations like this, the market can surprise and just keep running.  Eventually and inevitably, there will be a pause, maybe even a pullback, but I don’t know when; maybe tomorrow, maybe two weeks, maybe longer. Sure, there is plenty that could go wrong but they aren’t going wrong right now.

KFC owner Yum Brands rose 3 percent to $88.27 a day after its key China business showed signs of strength.

Delta’s higher-than-expected quarterly profit sent its shares 3.6 percent higher. An airline industry index has risen almost 12 percent over the past six sessions.

Line Corp. rose in its U.S. trading debut after the Japanese messaging company raised more than $1 billion in the biggest technology initial public offering of the year. Shares opened at $42, after pricing at $32.84 apiece. The company, which is listing shares in Japan and the U.S., will start trading in Tokyo on Friday. Shares closed up 26.6 percent at $41.58.

Monsanto is considering a deal with BASF. The seed giant is considering the acquisition of BASF’s agriculture-solutions unit. While the price tag of the potential deal is unknown, Monsanto would probably pay in newly issued shares. The talks come after Monsanto rejected a $62 billion takeover bid by Bayer in May, and today Bayer sweetened the offer to $64 billion. Global agrochemicals companies are racing to consolidate, partly in response to a drop in commodity prices that has hit farm incomes.

The Federal Communications Commission voted unanimously today to open nearly 11 gigahertz of high-frequency spectrum for mobile, flexible and fixed-use wireless broadband; that made the United States the first country to set aside an ample amount of airwaves for so-called 5G wireless applications and networks. New 5G networks are expected to provide speeds at least 10 times and maybe 100 times faster than today’s 4G networks.

5G technology could have a broad impact beyond things like speeding up movie downloads. It could also improve road traffic by monitoring sensors in streetlights, roadside architecture and cars. It could even help detect air pollution using sensors in trees. In other words, this is the platform for the Internet of Things. Verizon and AT&T have said they will begin deploying 5G trials in 2017, and the first commercial deployments at scale are expected in 2020.

California regulators have again rejected Volkswagen’s plan to fix diesel vehicles that were programmed to cheat on air pollution tests, saying the idea was “incomplete” and “substantially deficient.” The proposal would have covered about 16,000 3.0-liter diesel cars for model years 2009 to 2016. About 85,000 VW 3-liter diesel vehicles that cheat on emissions are on roadways nationwide.

Google faces a new antitrust attack from European Union regulators who allege the search engine skews results in its own favor and unfairly restricts rival online advertising platforms. The European Commission announced a new round of charges against Google, claiming that some of the company’s advertising products restricted consumer choice. The new charges relate to some of Google’s online advertising tools — the main engine for $75 billion in annual revenues — and parts of the company’s search business linked to online shopping.

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