Wednesday, January 16, 2019

Higher markets after China adds financial stimulus to spur growth

Dow gained 141 (with selling in the last hour), advancers over decliners 3-2 & NAZ added only 10 (finishing well below session AM highs).  The MLP index inched higher in the 247s & the REIT index rose 3+ to the 342.  Junk bond funds were mixed & Treasuries slid lower.  Oil crawled higher in the 52s & gold was up 4 to 1293.

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China's central bank pumped a net 560B yuan ($83B) into its banking system — a record amount of money injected in one day — in a sign that the economy may be facing enormous stress.  The yield on the 10-year Chinese government bond fell below 3.1%, its lowest in more than 2 years.  Yields fall when bond prices rise & a decline in yields typically signals expectations of a slowdown in economic growth.  “At present, it is the peak of the tax period, and the total liquidity of the banking system is declining rather quickly,” the People's Bank of China said in a statement.  Liquidity, the ease by which assets can be turned into cash, is particularly important for companies needing to pay taxes while maintaining regular operations.  For more than a year, many Chinese businesses have already been struggling with sluggish economic growth, increased financing difficulties & greater obligations to provide benefits for employees.  The Chinese New Year holiday, when most companies shut down for at least a week, is also less than 3 weeks away.  The central bank's record cash injection of 560B yuan into the banking system came thru “reverse repurchase agreements,” or buying short-term bonds from some commercial lenders so banks have more cash on hand.  Sales of the bonds are called “repurchase agreements” & both measures comprise the central bank's “open market operations.”

China just injected a record amount of money to stimulate its economy

The downturn in mortgage interest rates that began in Nov finally has homebuilders feeling better.  Builder sentiment rose 2 points to 58 in Jan on a monthly index from the National Association of Home Builders (NAHB).  This came after 2 months of sharp drops in sentiment to the lowest level in more than 2 years.  The index stood at 72 last Jan.  Anything above 50 is considered positive.  “The gradual decline in mortgage rates in recent weeks helped to sustain builder sentiment,” said NAHB Chairman Randy Noel.  “Low unemployment, solid job growth and favorable demographics should support housing demand in the coming months.”  Of the index's 3 components, current sales conditions rose 2 points to 63, sales expectations over the next 6 months increased 3 points to 64 & buyer traffic thru new home models rose 1 point to 44.  Buyer traffic is the only component in negative territory.  Some of the nation’s largest public homebuilders reported weak quarterly earnings last week, indicating a slowdown in sales. They indicated that high prices had sidelined buyers, especially as mortgage rates rose in the early fall.  Now that rates are lower, builders could see renewed demand.  Builders, however, are not lowering prices significantly. There remains a tight supply of homes for sale at the entry level because builders are unable to profit as much on lower-priced homes.  “Builders need to continue to manage rising construction costs to keep home prices affordable, particularly for young buyers at the entry-level of the market,” said NAHB chief economist Robert Dietz.  “Lower interest rates that peaked around 5 percent in mid-November and have since fallen to just below 4.5 percent will help the housing market continue to grow at a modest clip as we enter the new year.”

Homebuilder sentiment turns higher in January after mortgage rates drop

Bank of America (BAC) reported Q4 EPS of 70¢ on revenue of $22.7B.  The forecast called for EPS of 63¢ on revenue of $22.4B.  Earnings were helped by the corp tax cut passed in late 2017.  In the same qtr a year ago, BAC took a large one-time charge related to the tax overhaul, reporting adjusted EPS of 20¢ on revenue of $20.4B.  Rising interest rates also helped as the bank was able to charge higher rates on loans & didn't pay out more to depositors.  Q3 EPS came in at 66¢ on revenue of $22.8B.  The stock rose 1.90.
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Bank of America 4Q earnings rise sharply

UnitedHealth Group (UNH), a Dow stock, beat estimates for Q4, helped by growth in services business as well as its mainstay health insurance plans.  The largest health insurer reporting $46.2B in sales in its insurance business, an 11.1% rise from a year earlier.  Revenue from Optum, which includes a pharmacy benefits management business, grew 13% to $27.56B, benefiting from growth in care delivery, behavioral health & health financial services.  It's 2018 medical care ratio, percentage of premiums paid out for medical services, improved to 81.6% from 82.1% last year.  The health insurer also affirmed its 2019 profit forecast.  EPS fell $3.10 in the qtr.  Excluding items, EPS was $3.28 & total revenue rose 12 % to $58.4B.  The forecast called for EPS of $3.21 on revenue of $58B.  The stock advanced 4.59.
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UnitedHealth profit beats on strength in Optum, insurance units

Stocks had another good day.  The Dow is up almost 2½K since the Christmas eve low.  That's eye popping considering there has been a lack of good news.  Indeed, much of the recent news has been soggy.  China trade talks are going nowhere & the gov shutdown is looking like it could last weeks, if not months.  But optimists are ignoring the negatives, hoping earnings will justify higher prices for stocks.  Maybe, maybe not.  In the meantime most of macro economic news is dreary.

Dow Jones Industrials

Higher markets on early earnings reports

Dow gained 92 (but off early highs), advancers over decliners better than 3-2 & NAZ went up 10 after yesterday's big rise.  The MLP index was fractionally higher to the 248s & the REIT index rose 3+ to the 342s.  Junk bond funds crawled higher & Treasuries slid lower in price.  Oil was steady & gold added another 5 to 1293, getting close to the important 1300 ceiling.

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GC=FGold   1,292.30

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Stocks were trading higher following better-than-expected profit reports from Dow stock Goldman Sachs (GS) & Bank of America (BAC).  In Europe, London's FTSE slipped 0.4%, Germany's DAX was slightly higher & France's CAC gained 0.2%.  In Asian markets today, China's Shanghai Composite ended trading flat & Hong Kong's Hang Seng finished the session up 0.3%.  Japan's Nikkei ended the day lower by 0.6%.  US stocks closed higher yesterday as rising shares of tech & biotech companies boosted major equity averages.  Shares also got an boost early in the day's trading session as the People's Bank of China said it will increase efforts this year to stimulate its economy by improving credit availability for small companies & cut taxes.  On the economic calendar, producer prices fell 0.2% last month after edging up 0.1% in Nov.  NY manufacturers reported tepid growth in Jan as the pace of new orders & shipments slowed.

Stocks rise on bank earnings

US import prices fell for a 2nd straight month in Dec as the cost of petroleum products tumbled & a strong & curbed prices of other goods, leading to the largest annual drop in more than 2 years.  The Labor Dept said import prices declined 1.0% last month after a downwardly revised 1.9% drop in Nov.  The forecast called for import prices decreasing 1.3% after a previously reported 1.6% decline in Nov.  In the 12 months thru Dec, import prices fell 0.6%, the biggest annual drop since Sep 2016.  It was also the first year-on-year decline since Oct 2016 & followed a 0.5% rise in Nov.  Import prices fell 0.6% in 2018, the first calendar year drop since 2015, after increasing 3.2% in 2017.  Coming in the wake of data showing declines in headline producer & consumer prices in Dec, the import prices report strengthens expectations of a pause in interest rate increases from the Federal Reserve in the near term.  Imported food prices edged up 0.1% after dropping 2.2% in the prior month.  Excluding fuels & food, import prices were unchanged last month after slipping 0.1% in Nov.  Import prices rose 0.6% in the 12 months thru Dec.  Core import price readings are likely being held down by the strong $, which gained about 7.5% last year against the currencies of the US main trade partners.

US import prices fall for 2nd straight month

As the partial gov shutdown enters its 4th week, the housing market has already begun to show signs of stress.  A survey conducted among 2211 members of the National Association of Realtors (NAR) found that while ¾ of respondents said contract signings & closings have proceeded without issue, 11% said that the shutdown impacted current clients, while another 11% cited an effect on prospective clients.   The most common complaint, which accounted for 25% of shutdown-related complications, was that a buyer decided not to go thru with a purchase due to the ongoing uncertainty, even though he or she was not a federal employee.  Nearly ½ of non-homeowners told the NAR they hadn't purchased a home because they could not afford to do so – another area where the shutdown could add to pain for potential homebuyers.   As previously reported, the shutdown has impacted the ability of some borrowers to get a loan for a mortgage.  While Fannie Mae & Freddie Mac are not gov agencies, & therefore will likely continue operations as normal, the Federal Housing Administration, a branch of the Dept of Housing & Urban Development, has shown some signs of delay.  Lower-income people tend to turn to the FHA for assistance because it offers as little as 3.5% down for those with a credit score of as little as 580.  Lenders for a traditional mortgage prefer a score in the 700 range.  Other borrowers in small suburbs, financing homes with mortgages backed by the Dept of Agriculture (USDA), are already running into challenges.  According to a survey from the NAR, of those affected by the gov shutdown, 17% had a closing delay because of a USDA loan, 13% had a delay due to IRS income verification & 9% had a delay due to a VA loan.  Over the weekend, the partial gov shutdown became the longest in US history.  The pres has said it could go on for months, even years.

Record shutdown's affect on the housing market

US online shoppers spent a record $126B during the holiday season, with a sizable portion of sales coming from shoppers buying items on their smartphones, according to a report by Adobe Analytics.  The sales haul marked a 16.5% increase compared to the same period one year ago.  Shoppers spent an average of more than $2B per day in Nov & Dec for the first time on record.  Smartphones accounted for 51% of traffic on online retail platforms during the period, according to Adobe, which tracks data from 80 of the top 100 US e-commerce outlets.  Roughly 1/3 of all sales revenue stemmed from smartphone purchases.  Shoppers spent $24.2B in the 5-day period between  Thanksgiving & Cyber Monday, marking a 23% year-over-year increase.  Major online holiday sales events on Black Friday & Cyber Mon broke existing records, drawing $6.2B & $7.9B, respectively.  Top-selling items for online retailers included blockbuster video games, streaming devices & Fingerlings dolls.  Online shoppers spent $108.2B during the previous online holiday shopping season.

US online holiday sales hit record $126B as smartphones drive traffic

Traders seem to be dazzled by early earnings reports.  However more are coming & they have to be written.  The economy is beginning to stumble.  Holiday retail sales look good but they are history.  This is a new year & the gov shutdown, WHICH IS GOING NOWHERE FAST, is pinching harder.  This month & next month may be gloomier than investors have become used to.  Even as stocks have risen recently, demand for safe haven gold continues strong.

Dow Jones Industrials