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Monday, April 17, 2017

Hippity Hoppity

Financial Review

Hippity Hoppity

DOW + 183 = 20,636
SPX + 20 = 2349
NAS + 51 = 5856
RUT + 15 = 1361
10 Y + .02 = 2.25%
OIL – .43 = 52.75
GOLD – 3.80 = 1285.00

The S&P 500 is coming off a three-day losing streak, having fallen more than 1% over that period. It has also dropped for two straight weeks, closing at its lowest level since February on Thursday. The Dow and the Nasdaq have also dropped over those periods.

Also, geopolitical hotspots did not boil over during the holiday weekend, even though South Korean news agencies are reporting that 2 more US aircraft carriers are headed for the Korean peninsula. The US and South Korea are discussing joint drills, which will include the three aircraft carriers and other ships. So, we were probably due for a bounce.

And today, the market turned its attention to earnings reporting season, just getting underway with an optimistic outlook. Profits of S&P 500 companies are estimated to have risen 10.4 percent in the latest quarter, the first double-digit percentage growth since the third quarter of 2014, according to Thomson Reuters.

The Atlanta Federal Reserve bank downgraded their outlook for U.S. economic growth for the first quarter. The Atlanta Fed said first-quarter gross domestic product was on track to grow 0.5 percent, which was lower than the 0.6 percent growth rate calculated on April 7. Meanwhile, a survey from CNBC and Moody’s analytics puts the consensus forecast at 0.9%.

Now, keep in mind this is first quarter GDP, and we are already in the second quarter, and we are likely to see a familiar pattern emerge, where a weak first quarter is followed by a second quarter revival, and an even stronger third quarter. What’s expected to underpin second-quarter growth is higher household spending.

Consumers cut back early in the year, partly to recover from holiday spending but also because tax refunds were sent out unusually late. Millions of Americans will have more money to spend this month and next. Also, the US economy is simply on much more solid ground than any time since the Great Recession ended in the middle of 2009.

Home-builders are not feeling the animal spirits. The National Association of Home Builders/Wells Fargo housing market index fell 3 points to 68, on a scale where any reading over 50 is considered good. The March reading was an 11-year high. The measure of current sales conditions also fell 3 points, to 74, though it’s been over 70 for five consecutive months.

Tomorrow, the government will release the latest housing starts data, which should show a modest decline in March. Single-family housing starts have more than doubled from the 2009 lows but are well below non-recessionary levels.

Also, this morning, the Empire State manufacturing survey fell to a reading of 5.2 in April from a two-year high of 16.4 in March. The survey still shows improving conditions, since the index was above zero. But several key components to the survey, including new orders and shipments, also declined.

On Friday, the Commerce Department said retail sales fell 0.2 percent in March following a 0.3 percent decrease in February, which was the first and biggest decline in nearly a year.

Meanwhile, the Labor Department said its Consumer Price Index declined 0.3 percent last month. This was the first decline in 13 months and biggest decrease since January 2015 amid falling prices for gasoline and mobile phone services, which offset rising rents and food costs.

So, with the economy continuing its sluggish growth in the first quarter, where is earnings growth coming from? The answer might surprise you – Europe. The Euro area has made an important contribution to global growth with GDP projected to expand 2.25% in the first quarter and 2.5% this quarter.

First quarter earnings per share growth in the Eurozone is forecast to grow at almost double the rate of earnings growth in the US. Higher nominal GDP outside the U.S. is benefiting European firms and US export-oriented names.

For S&P 500 companies that generate more than 50% of sales inside the US, the earnings growth rate is 6.0%. For companies that generate less than 50% of sales inside the US, the earnings growth rate is 15.7%.

So, we are starting to see a bounce back in Europe. Also, emerging-market stocks and bonds have attracted large inflows from investors. Since the beginning of the year, the main exchange-traded fund for emerging markets, iShares MSCI Emerging Markets, is up 11 percent, with funds that track markets like Mexico, Turkey, India and Argentina rising even more.

And China said its economy, buoyed by heavy investment spending, had grown 6.9 percent, a better figure than economists had projected. Other economies considered to be emerging markets — Mexico, South Korea and Brazil — are also overcoming deterrents, like volatile currencies, political upheaval and worries of a trade crackdown.

According to an index of hard and soft economic data points compiled by the Institute of International Finance, growth in emerging economies was up 6.8 percent through the first quarter this year — the model’s highest reading since 2011.

Non-US equities are multi-decade cheap versus the S&P 500. It’s likely, then, that the next long-term trend will favor non-US markets. Stock and bond market gains in emerging markets can be fleeting, vulnerable to political turmoil and investors with short-term investment horizons. But for now, the mood is bullish.

This afternoon, Treasury Secretary Steven Mnuchin said the administration’s timetable for tax reform is set to slip. The Financial Times reports, Mnuchin said the target to get tax reforms through Congress and on President Donald Trump’s desk before August was “highly aggressive to not realistic at this point”.

Ahead of meetings with finance ministers and central bankers in Washington this week, Mnuchin also rejected fears that the Trump administration may be embarking on a new round of currency wars over the strength of the dollar following the president’s public fretting last week.

He stressed that the US did not intervene in currency markets. He agreed with the president’s repeated comments in recent months that the dollar’s strength in the short term was hurting US exports and the economy.

Budget Director Mick Mulvaney told the administration plans to cut taxes without regard to the budget deficit. Mulvaney also noted House Republicans want to phase out Medicare in favor of vouchers, a position Mulvaney voted for six times when he was in the House —- though he said Trump may or may not go along.

Whatever is happening or is going to happen on the fiscal front, look for opposition from both sides of the aisle. President Trump has promised a raft of presumably Wall Street-friendly initiatives, including tax cuts, an increase in infrastructure spending and deregulation. Those pledges have lifted markets to records, but since March 1, when equity benchmarks last touched a fresh round of all-time highs, momentum has faded.

Meanwhile, the Federal Reserve is lurking in the background. There’s a 47% chance the Fed raises its key interest rate in June, according to World Interest Rate Probability data provided by Bloomberg. That’s down from a 66.5% probability one week ago. The decline in CPI inflation may slow the Fed’s assault on higher rates, but we’ll need to see more data before we can confirm rate hikes are off the table.

Congress remains on vacation as another week begins in Washington, and when lawmakers return they’ll have only days to head off a government shutdown. Senators are due to return Monday, April 24, with House members scheduled to come back a day later. Federal government operations are funded through April 28, and without a new spending bill, a partial shutdown kicks in for the first time since 2013. The key here is “partial.”

United Continental this morning reported first-quarter earnings that topped forecasts. The company earned $0.41 in adjusted earnings per share (0.38 expected) and operating revenue of $8.42 billion ($8.38 billion forecast.) Of course, that was all before last week’s incident where a doctor was dragged from a plane to make way for United employees to fly. The earnings call will be tomorrow.

After the closing bell, Netflix reported a miss on both domestic and international subscriber growth in its first quarter earnings. The bright spot: Netflix turned in a rosier forecast for Q2 than Wall Street was expecting, both domestically and internationally. Earnings beat expectations, and revenue was in line with analysts’ estimates. Shares dropped in after-hours trade.

Netflix said in the fall that it plans to spend $6 billion on content this year, above last year’s predicted spending from companies like Amazon and CBS. Netflix also said in January it plans to produce 1,000 hours of premium original content this year — even as tech giants like Apple try their hand at original shows.

As of last year, Netflix was by far the most-watched streaming service in America, at 52.6 million American households – nearly double the number streaming Amazon.

HCA Holdings warned its first-quarter results would come up short of analyst expectations. HCA pre-announced first-quarter revenues of $10.6 billion, which is one percent below the $10.78 billion top-line consensus estimate. The hospital operator, which specializes in trauma and surgical centers, said emergency room admissions rose 1.1 percent in the latest quarter, down from the 1.6 percent gain in the same quarter a year ago, and below analysts’ expectations.

Boeing plans to lay off hundreds of engineers in Washington state and other locations – and may eliminate more jobs later this year. The latest workforce reduction, which should take effect June 23, follows a separate exodus of 1,500 mechanics and 305 engineers and technical workers who agreed to leave voluntarily earlier this year. Both union and non-union workers will be affected.

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