See What Sticks
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DOW – 27 = 20,913
SPX + 4 = 2388
NAS + 44 = 6091
RUT + 6 = 1407
10 Y + .04 = 2.32%
OIL – .56 = 48.77
GOLD – 11.60 = 1257.10
Once again, the Nasdaq hit a record high close. And the VIX, the volatility index dipped down under 10. Nothing to worry about here. Meanwhile, investors braced for another heavy week of quarterly corporate results in an earnings season that has exceeded expectations.
Overall, profits at S&P 500 companies are estimated to have risen between 12 percent and 13.6 percent in the first quarter, the most since 2011. First quarter GDP came in at 0.7 percent. The difference between earnings per share growth and gross domestic product expansion in the first quarter is the widest since the third quarter of 2011.
S&P 500 companies that generate more than half their revenue overseas are posting quarterly earnings growth of 19.9 percent on average, double that of companies that conduct most of their business domestically. About 46 percent of S&P 500 sales overall come from foreign markets. Other factors helping earnings and overseas economic growth are softness in the U.S. dollar and stabilizing oil prices.
The greenback has traded mostly lower this year after sharp gains in 2014 and 2015 that cut into overseas profits. Meanwhile, oil recovered from a sub-$30 a barrel low last February to trade in a range near $50 a barrel. U.S. crude is up about 7 percent over the last 12 months.
To be sure, there’s another reason why earnings look so good: A year ago, they were bad. Last year’s poor results for S&P 500 companies overall, including four straight quarters of earnings decline, set a low bar for companies to overcome.
You’ve heard the old axiom, Sell in May and Go Away; that is the simplified version. If you follow the directions, you could sell in May, or slightly before or after depending on when the market gives a sell signal. The critical reference point for the adage is the MACD. A traditional sell signal occurs when the MACD line crosses below the signal line. The Sell in May refers to the best and worst six month, so the idea is to stay away until the end of October.
The saying may be better at avoiding volatility in September and October than any big downturn in May. If you don’t want to sell in May, you might consider more defensive positions, or even a few short trades. The next week could provide direction for the markets. We have a Federal Reserve policy meeting on Wednesday, a jobs report on Friday, and Sunday brings the French election between Macron and Le Pen. Buckle up.
Over the weekend, congressional negotiators have hammered out a bipartisan agreement on a spending package to keep the federal government funded through the end of the current fiscal year on Sept. 30. You are probably shocked by the news that congress worked over the weekend. Congress is expected to vote on the roughly $1.1 trillion package early this week.
The White House sought funding to begin building the wall, as well as $18 billion in cuts to domestic agencies, and both demands were rebuffed. The spending deal includes money for Planned Parenthood. The package includes $12.5 billion in new military spending and $1.5 billion more for border security, but not for a wall or additional Immigration and Customs Enforcement agents.
The Environmental Protection Agency, which Trump has sought to shrink dramatically, would receive a 1 percent reduction of $81 million in funding and no staff cuts. The deal also includes steady or slight increases in funding for agencies within the Department of Energy, such the Office of Energy Efficiency and Renewable Energy, which would get a $17 million increase, and the Office of Science, which would get a boost of $42 million compared to fiscal 2016 funding levels.
One provision allows the secretary of Homeland Security to temporarily increase the cap in H-2B visas for temporary labor through the end of September. Agencies Trump has sought to eliminate, like the National Endowment for the Arts and the National Endowment for the Humanities and the Appalachian Regional Commission, would get modest increases in funding instead.
Today, President Trump told Bloomberg News that he’s considering breaking up giant Wall Street banks by reinstating Glass-Steagall, the 1933 law that separates investment banking from traditional banking. Trump also suggested raising the gas tax to fund infrastructure.
The Trump administration released an outline of a tax plan last week that would slash tax rates for businesses and reduce the number of tax brackets for individuals. The plan, however, was silent on gasoline taxes. So, throw it on the wall and see if it sticks.
The European Union’s summit in Brussels ended with EU leaders suggesting that British Prime Minister Theresa May’s ambitions for the looming Brexit negotiations are unrealistic. May stuck to her guns, however, arguing that Britain should be allowed to line up a “comprehensive” free-trade deal with the EU post-Brexit and denying accusations that she’s in a “different galaxy.”
Meanwhile, Marine Le Pen and Emmanuel Macron are kicking off the final week of the French presidential campaign with major rallies in Paris. Macron is still leading the polls, although his margin has slipped slightly in recent days.
Oil and gold moved lower, but in the commodity markets, it was a big jump for wheat. A winter storm dropped more than 12 inches of snow across four Midwest states. While it will take several days before the damage can be assessed accurately as the snow melts, early estimates suggest losses could exceed 50 million bushels but quite possibly more.
Heavy rains are forecast for the region later in the week. Many reports of snapped wheat stems, and for a crop in the early stage of forming grain, that suggests there could be “substantial” production losses. For hard red winter wheat, a variety of the grain used to make bread, futures for July delivery surged 6.5 percent to close at $4.6575.
July futures for soft red winter wheat, which is used to make cookies and cake, jumped 5.5 percent to $4.56, also a record, while corn prices climbed 3 percent in active trading. Wheat has been in a long-term bear market thanks to near ideal growing conditions the past couple of years, and the feeling among many traders was that the only direction for wheat was down. The dominant position for speculative traders has been short. The freak storm caught many by surprise.
America’s largest oil refinery is now fully owned by Saudi Arabia. Saudi Aramco, the kingdom’s state-owned oil behemoth, took 100% control of the sprawling Port Arthur refinery in Texas on Monday, completing a deal that was first announced last year. Port Arthur is considered the crown jewel of the US refinery system.
The Gulf Coast facility can process 600,000 barrels of oil per day, making it the largest refinery in North America. Aramco previously owned 50% of Port Arthur through a joint venture co-owned with Royal Dutch Shell.
The ISM manufacturing report shows manufacturers scaled back hiring plans in April and demand for new products slowed, but most companies said business was still quite brisk, a survey of executives found. The Institute for Supply Management said its manufacturing index slipped to 54.8% in April from 57.2%. Any reading above 50 indicates expansion.
Spending on construction dipped 0.2% in March following an unusually strong pace of spending in February. For the first three months of the year, spending was 4.9% higher than in the same period in 2016. Much of the increase came from housing. Residential construction was up 1.2% during the month, but stood 7.3% higher than a year ago.
Overall private construction was flat in March, as lower levels of spending on public works continued to drag. Overall public construction was 0.9% lower during the month, and 6.5% lower than in March 2016.
Personal income rose less than expected in March while spending was flat, according to the Bureau of Economic Analysis. Personal income rose 0.2%, missing the forecast for 0.3% growth. The report also included data on personal consumption expenditures, a gauge of consumer purchases that the Fed prefers to measure inflation. The PCE deflator fell 0.2% month-on-month and rose 1.8% year-on-year, slipping from 2.1% in February.
American consumers are holding $1 trillion in revolving credit, mostly in credit card debt. So how well is this segment of consumer debt holding up? Synchrony Financial – GE’s spin-off that issues credit cards for Walmart and Amazon says net charge-offs would rise to at least 5% this year.
Credit-card specialist Capital One disclosed in its Q1 earnings report last week that provisions for credit losses rose to $2 billion, with net charge-offs jumping 28% year-over-year to $1.5 billion. Synchrony, Capital One, and Discover – a gauge of how well over-indebted consumers are managing to hang on – have together increased their Q1 provisions for bad loans by 36% year-over-year. Other worries about consumer debt in the US are piling up.
The $1.4 trillion in student loans are already in crisis, though the government backs them, and they cannot be charged off in bankruptcy. Of the $1.1 trillion in auto loans, subprime loans packaged into asset backed securities are getting crushed by net charge-off rates that are worse than during the Financial Crisis.
In a new study, life insurer and financial services provider Northwestern Mutual found that 45% of Americans that have debt spend “up to half of their monthly income on debt repayment.” Those are the true debt slaves. Excluding mortgage debt, American carry an average debt of $37,000. Of them, 47% carry $25,000 or more, and more than 10% carry $100,000 or more in debt, excluding mortgage debt.
