Monday, July 24, 2017

Lower markets while Nasdaq reaches a new record

Dow fell 66, decliners over advancers 5-4 & NAZ added 23.  The MLP index was up 1+ to the 299s & the REIT index lost chump change to the 351s.  Junk bond funds did little & Treasuries were sold.  Oil gained in the 46s & gold was about even.

AMJ (Alerian MLP Index tracking fund)

Live 24 hours gold chart [Kitco Inc.]

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The world is leaning less on its biggest economy to sustain the global recovery, according to the IMF.  The fund left its forecast for global growth unchanged in the latest quarterly update to its World Economic Outlook.  The world economy will expand 3.5% this year, up from 3.2% in 2016 & by 3.6% next year.  The forecasts for this year & next are unchanged from its projections in Apr.  Beneath the headline figures, though, the drivers of the recovery are shifting, with the world relying less than expected on the US & UK, & more on China, Japan, the euro zone & Canada.  The $ fell to its lowest in 14 months last week as investors discounted the ability of Pres Trump's administration to deliver on its economic agenda after efforts by the Rep Senate to overhaul health care collapsed.  The IMF estimated US growth at 2.1% this year & again in 2018, consistent with what the fund said in Jun in its annual assessment of the US economy . In the Apr world economic outlook, it had forecast US growth of 2.3% & 2.5%, respectively, in 2017 & 2018.  The economy expanded by 1.6% in 2016.  “U.S. growth projections are lower than in April, primarily reflecting the assumption that fiscal policy will be less expansionary going forward than previously anticipated,” the IMF said.  In Jun, the IMF said it had dropped assumptions of a boost to growth from Trump's plans to cut taxes & increase infrastructure spending.  Trump's budget director, Mick Mulvaney, wrote in Jul that the administration's goal is “sustained 3 percent economic growth,” & he named the program “MAGAnomics” after Trump's campaign slogan, “Make America Great Again.”  Meanwhile, as the UK works thru its Brexit negotiations, the IMF also chopped its forecast for UK growth this year by 0.3 percentage point to 1.7% on weaker-than-expected activity in Q1.  “This forecast underscores exactly why our plans to increase productivity and ensure we get the very best deal with the EU, are vitally important,” the UK Treasury said.  “The fundamentals of our economy are strong.”  Other countries are picking up the slack.  The IMF’'ection for growth in China is 6.7% for 2017, the same as its estimate made in Jun, & up 0.1 point from Apr's world economic outlook.  For 2018 the fund sees Chinese growth at 6.4%, an increase of 0.2 points from 3 months ago.  The IMF is looking for average annual growth of 6.4% in China during 2018 thru 2020.

IMF Sees U.S. Fading as Global Growth Engine

A slowdown in sales of previously owned US homes shows how lean inventories are keeping prices elevated & limiting purchasing options, National Association of Realtors data showed.  Contract closings fell 1.8% M/M to a 5.52M annual rate (forecast was 5.57M).  The median sales price rose 6.5% Y/Y to a record $263K.  Inventory of available properties fell 7.1% Y/Y to 1.96M, marking the 25th consecutive year-on-year decline.  A limited number of properties listed for sale remains the biggest hurdle for the market.  Lean inventory is pushing up asking prices at a faster pace than worker pay.  While job growth is steady & mortgage rates remain attractive, higher prices are making entry difficult for those looking to make their first purchase.  The data are in line with contract signings for US previously owned houses, which unexpectedly fell in May for a 3rd straight month.  New-home sales, which account for about 10% of the residential market, have recently shown more growth, suggesting steady progress in the trade-up market.  “Housing is recovering but it’s not a healthy situation,” Lawrence Yun, NAR chief economist, said.  “There are affordability challenges. Homes prices have easily outpaced income growth and first-time buyers are struggling to get into the market.”  At the current pace, it would take 4.3 months to sell the homes on the market, compared to 4.2 months in May (the realtors group considers less than a 5 months' supply as consistent with a tight market).  Single-family home sales decreased 2% last month to an annual rate of 4.88M, the lowest since Feb.  First-time buyers made up 32% of all sales in Jun, compared with 33% the prior month (40% is ‘normal’ share, the NAR says).  Homes typically sold in 28 days, compared with 34 days in Jun 2016 & 54% of homes sold in Jun were on market for less than a month

OMB Director Mick Mulvaney said health care reform must happen before Sep & expects tax cuts to pass within the year.  He added that elected officials have a responsibility to follow through on their political promises.  “What do you tell people, even if somebody else is this person who killed it, how do you defend your party as a republican by saying, ‘well, thanks for giving us the House, the Senate and the White House but we didn’t actually follow through on our biggest promise,’ I think that weighs very heavily on my Senate friends and it should and that’s why I think you’ll see health care and I think you’ll see tax reform shortly thereafter,” he said.  A founding member of the Freedom Caucus, Mulvaney said he is open to the Senate's tax hikes on the upper income for Medicare & related expenses, so long it repeals ObamaCare.  “I do encourage the Senate to go ahead if that’s what it takes to get rid of ObamaCare on that side of the building. They should go ahead press on with that & we'll deal taxes next chance we get,” he said.  The Congressional Budget Office (CBO) report revealed 22M more Americans would be uninsured under Senate health care bill care prompting the White House budget director to criticize how the CBO arrived to its projection.  “What the methodology they’re using says is that you will chose to be uncovered rather than take a free government program that’s just absurd and I think it sort of exposes the weaknesses in the CBO system for what they are,” Mulvaney said.

Health care has to happen before September, Mick Mulvaney says

NAZ is back in vogue & investors are buying tech stocks.  A few weeks ago they were out of favor, but those memories have faded.  Meanwhile the Dow is just off its record pace.  Not bad considering the confusing mess in DC & the inability by Congress to pass meaningful legislation so important for increasing the growth rate in the economy.  The bulls figure that those problems will take care of themselves.  Maybe, maybe not!!

Dow Jones Industrials

Markets slide lower ahead of Fed meeting

Dow gave back 39, decliners over advancers 3-2 & NAZ went up 3.  The MLP index hardly budged in the 298 & the REIT index was off a fraction to the 351s.  Junk bond funds were a little lower & Treasuries are heading south.  Oil climbed in the 47s (more below) & gold advanced 9 to 1255, one its highest levels in several months.

AMJ (Alerian MLP Index tracking fund)

CL=FCrude Oil46.28

GC=FGold   1,255.00

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OPEC & allies indicated they weren't planning any big changes to their supply deal, even as oil prices remain below $50 a barrel amid growing skepticism that their output cuts are working.  Capping rising oil production from Nigeria & Libya, both exempt from the current agreement, won't be on the agenda, at the meeting today.  There'll be no discussion of deeper cuts, Saudi Minister of Energy & Industry Khalid Al-Falih told reporters.  Without any changes on that scale, OPEC &, Russia & allies will be doubling down on a bet that rising demand will combine with the existing curbs to rapidly deplete fuel stockpiles, buoying prices in H1.  That could prove to be a risky wager if production from nations not bound by any restrictions, notably US shale producers, keeps growing to fill the gap left by OPEC.  “Of course, rising output from Libya and Nigeria increases market supply,” Russian Energy Minister Alexander Novak said.  “But at the same time we have to remember that demand for oil is also quite high, and the countries that supported the stabilization initiative have been very assiduous in honoring their commitments.”  Oil slumped into a bear market last month & Brent crude, the intl benchmark, is trading at about $48, a gain of less than $2 since the cuts were agreed on last year.  While demand will be almost 2M  barrels a day higher in H1 compared with H1, according to OPEC estimates, rising supply inside & outside OPEC suggests the cuts won't put a significant dent in bloated global inventories.

OPEC Signals No Big Changes to Supply Deal at Russia Meeting

Former Federal Reserve Governor Daniel Tarullo said weak inflation could weigh on the central bank's discussions about whether to raise interest rates again, with only little risk that prices will surge out of control.  “People are thinking about what’s going on with inflation,” Tarullo, who stepped down from the Fed on Apr, said.  “We don’t know whether in the next couple of meetings those concerns will be strong enough that the Fed will hold off from another rate increase or not.”  Fed Chair Janet Yellen told lawmakers on Jul 13 that policy makers were watching inflation “very carefully” after weak readings clouded the prospects for its rise to the Fed's 2% target, though she didn't signal a change in the outlook for further gradual rate increases.  Officials raised borrowing costs in Jun & are projected to hike again before year-end.  “It’s a little hard to make the case for the kind of inflation runaway that we saw in the late ’70s,” Tarullo added.  The risks of runaway inflation “seem pretty modest at this juncture.”  A survey showed that a clear majority expects the Fed will wait until Dec before raising interest rates again & will begin shrinking the $4.5T balance sheet in Sep.  The FOMC wll begin a 2-day meeting tomorrow.

Tarullo Says Weak Inflation Clouding Fed's Rate-Hike Outlook

Greece will return to the bond market after a 3-year hiatus, banking on investor interest in its recovery story.  The country, which was the epicenter of the European sovereign crisis that began in 2009, is looking to sell 5-year bonds.  It'is also inviting holders of 4.75% bonds due in 2019 to tender the notes for cash.  The bonds are expected to be priced tomorrow.  With the sale, the gov of Prime Minister Alexis Tsipras is seeking to chalk out a path for an exit from the current bailout program, which ends in Aug 2018, while also capping the country's financing needs in 2019, expected to be about €19B  ($22B).  After not being able to convince creditors to reduce its debt burden & being left out of the ECB's bond-purchase program, Greece is testing the market.  The bond sale follows the successful conclusion of the 2nd bailout review & the disbursement of the first part of the €8.5B tranche by the European Stability Mechanism on Jul 10.  The IMF agreed to a new $1.8B conditional loan for Greece on Thurs, with disbursement contingent on euro-zone countries providing debt relief.  S&P Global Ratings raised the country's sovereign credit-rating outlook to positive on Fri, while affirming the long-term foreign currency debt rating at B-, 6 levels below an investment-grade ranking.

Greece to Return to Bond Market After Three-Year Hiatus

The stock market is marking time ahead of the Fed meeting & earnings reports.  The Fed meeting is not expected to produce any excitement, but earnings are another story.  They always have to potential for drama & the early ones have been coming in inconclusive.  There will be more hearings in DC, another distraction from getting anything done.  The popular stock average remain essentially at record highs.

Dow Jones Industrials