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Thursday, February 16, 2017

When Others Are Greedy

Financial Review

When Others Are Greedy

DOW + 7 = 20,619
SPX – 2 = 2347
NAS – 4 = 5814
RUT – 5 = 1399
10 Y – .05 = 2.45%
OIL + .19 = 53.79
GOLD + 5.40 = 1239.60

Asian markets moved higher this morning but European exchanges were slightly lower. World stocks hit an all-time high this morning, as the MSCI’s All Country World index, which spans 46 countries, notched a record. The Dow Jones industrial average, S&P 500 and Nasdaq have all closed at record highs for five consecutive days, something investors haven’t seen since 1992. And today the Dow, pulled out another record high close but couldn’t drag the other indices higher.

Yesterday, Fed Chair Janet Yellen was delivering her Humphrey-Hawkins testimony before the House Finance Committee and she answered a question about the market’s melt-up. She said: “I think market participants likely are anticipating shifts in fiscal policy that will stimulate growth and perhaps raise earnings.”

Federal Reserve Vice Chairman Stanley Fischer confirmed Fed chief Janet Yellen’s message to the markets this week that the central bank sees signs of strengthening in the economy and “is a little more confident about where we’re going and how soon we’ll get to full employment with stable prices.”

Yellen delivered 2 days of testimony before Congress this week and made the case for continued interest rate hikes this year. Stronger than expected inflation data combined with comments from Fed Chair Janet Yellen to Congress helped push the Fed funds futures market-implied chance of a rate hike in March to 44%, up from 34% the day before.

The odds, per overnight index swaps pricing, have jumped to 52% for March. The dollar hasn’t had a very good week despite the prospect of tighter US policy.

Promises of massive and phenomenal tax reforms have certainly been a driving force in the recent rally; the reality is that we don’t yet know the details, and so the cart seems a bit ahead of the horse. According to a new Bank of America Merrill Lynch Global Fund Manager Survey just 23 percent of respondents, for instance, expect tax cuts to happen before Congress takes its August recess, and 30 percent believe they won’t get enacted until 2018.

Another gauge of emotion, the Investors Intelligence Advisors Sentiment survey, shows bullishness on the stock market at 62.7 percent, the highest reading in more than 12 years. Bearish sentiment, or a belief that the market is heading lower, dropped to 16.2 percent, the lowest since August 2015. Of course, this is a contrarian indicator. You don’t want to buy when everyone is bullish. Or as Warren Buffett famously said, “be greedy when others are fearful and be fearful when others are greedy.”

Normally, the Fed taking a hawkish stance would wipe out giddy optimism but it hasn’t slowed this market hopped up on Trumponomics. What is especially peculiar, is that Trump is calling the economy a disaster.

At a press conference today, to announce his new nominee for Labor Secretary (Alexander Acosta, a former Justice Department official and current dean of Florida International University) Trump claimed: “It’s a mess. At home and abroad. A mess. Jobs are pouring out of the country. You see what’s going on with all the companies leaving our country. Going to Mexico and other places. Low pay, low wages… I inherited a mess.”

When it comes to the U.S economy, though, that “mess” isn’t borne out by most measures. The stock market is at all-time highs. Though growth in the gross domestic product is slow by historical standards, the economy is in the tenth year of one of the longest sustained expansions in history.

And the U.S. job market, which is creating jobs faster than employers can fill them, appears to be stronger than it’s been in nearly a decade; 227,000 new jobs last month and the unemployment rate at 4.8%, which is close to full employment.

The Philadelphia Fed said its manufacturing index soared in February to a reading of 43.3 from 23.6 in January. That’s the highest level since early 1984. Manufacturing activity in the Philadelphia region has been improving since the middle of last year. The new orders index rose 12 points to 39, and the shipments index rose 8.1 points to 28.6.

Initial claims for state unemployment benefits rose 5,000 to a seasonally adjusted 239,000 for the week ended Feb. 11. Claims have been below 300,000, a threshold associated with a strong labor market, for 102 consecutive weeks.

Construction on new houses fell 2.6% in January, but another increase in permits points to builders breaking ground on more units in the months ahead. Housing starts took place at an annual rate of 1.25 million last month. The decline in new construction last month was centered entirely on the category of multi-dwelling units that are usually rented.

Construction on apartment, condos and buildings with five or more units shrank nearly 8%. Yet work on new single-family homes rose almost 2%. Permits to build new homes, climbed 4.6% in January to a 1.29 million pace, and are up 8.2% in the past year.

On Monday, February 20, all US banks and financial markets will be closed in observance of the Presidents Day, perhaps giving investors a chance to catch their collective breath and contemplate the madness of the markets this year.

Cisco sees softness in its core businessThe company beat on the top and bottom lines but said revenue from its key “NGN Routing, Switching and Data Center product revenue decreased by 10%, 5% and 4%, respectively.” Shares fell by more than 1% in after-hours trade.

Waste Management said revenue for the latest quarter climbed, driven by increased volumes and yield in the company’s collection and disposal business, though earnings on a per-share basis missed Wall Street expectations. Waste Management confirmed guidance for the current fiscal year.

Snapchat has reportedly set the value of its IPOThe company has set a valuation of $16.2 billion to $18.5 billion for its initial public offering, below the lower end of its range.

America’s largest banks are to propose a complete overhaul of how financial institutions investigate and report potential criminal activity, arguing that rules imposed in the years after the Sept. 11, 2001 attacks are onerous and ineffective. To keep drug traffickers and terrorists from laundering money through the US financial system, federal law mandates that bank employees file a Suspicious Activity Report (SAR) with authorities if they suspect transactions could be part of a crime.

Oil prices are moving higher after OPEC sources said the group could extend its oil supply-reduction pact with non-members and might even apply deeper cuts if global crude inventories failed to drop to a targeted level. OPEC and other exporters agreed last year to cut output by 1.8 million barrels per day to reduce a price-sapping glut. The deal took effect on Jan. 1 and lasts six months. Most producers appear to be sticking to the deal so far but it is unclear how much impact the supply reductions are having on world oil inventories that are close to record highs.

US oil producers sent a record 7 million barrels of crude out into the world market last week. The 1 million barrels a day is nearly double the week-earlier level. The Energy Information Administration’s weekly inventory data also showed that US oil stockpiles swelled to a record 518.2 million barrels last week, and gasoline inventories also hit a record 259.1 million barrels, gaining 2.8 million barrels.

At 2.25 gigawatts, Arizona’s Navajo Generating Station is the biggest coal-burning power plant in the Western US. The plant, and the nearby Kayenta coal mine that feeds it, are located on the Navajo Indian Reservation, and the Navajo and Hopi peoples have had a conflicted relationship with coal since the plant opened in the 1970s. Almost all the 900-plus jobs at the mine and plant are held by Native Americans, and the tribes receive royalties to account for large portions of their budget.

Negotiations were underway to improve the tribes’ lease terms, which expire in 2019. But on Monday, the four utilities that own most of the plant voted to close it at the end of 2019. They decided that the plant’s coal-powered electricity just can’t compete with plants burning natural gas.

Lease negotiations included consideration of a plan to close one of the plant’s three turbines and replace the generation with renewable energy. But the economically vulnerable tribes will be hard-pressed to immediately replace the critical jobs and revenue associated with coal should the plant close three years from now. The flip-side, of course, is that closing the plant (as well as the mine) would eliminate a significant amount of pollution and water use.

Staff at the Environmental Protection Agency have been told that President Trump is preparing a handful of executive orders to reshape the agency, to be signed once a new administrator is confirmed.

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