Thursday, June 22, 2017

Markets crawl higher ahead of release of Senate healthcare plan

Dow added 19, advancers over decliners about 2-1 & NAZ went up 3.  The MLP idnex rose 2+ to the 278s & the REIT index lost a fraction to the 351s.  Junk bond funds were little changed & Treasuries crawled higher.  Oil had a mild recovery (more below) & gold gained 6.

AMJ (Alerian MLP Index tracking fund)

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Senate Reps would cut Medicaid, end penalties for people not buying insurance & erase a raft of tax increases as part of their long-awaited plan to scuttle Obama's health care law, according to leakers.  After weeks of closed-door meetings, Majority Leader Mitch McConnell., planned to release the proposal today.  The package represents his attempt to quell criticism by party moderates & conservatives & win the support he needs in a vote he hopes to stage next week.  In a departure from the version the House approved last month, the Senate plan would drop the House's waivers allowing states to let insurers boost premiums on some people with pre-existing conditions.  It would largely retain the subsidies Obama provided to help millions buy insurance, which are pegged mostly to people's incomes & the premiums they pay.  The House's tax credits were tied to ages, a change the Congressional Budget Office said would boost out-of-pocket costs to many lower earners.  Starting in 2020, the Senate version would begin shifting increasing tax credits away from higher earners, making more funds available to lower-income recipients.  Facing uniform Dem opposition, the Senate plan would fail if just 3 of the chamber's 52 Reps defect.  More than ½ a dozen GOP senators have expressed problems with the measure & a defeat would be a humiliating setback for Trump & McConnell on one of their party's top priorities.  "We have a responsibility to move forward, and we are," said McConnell.  GOP Senate leaders were eager for a seal of approval from Trump, who had urged them to produce a bill more "generous" than the House's.  "It's going to be important to get the president's support to get us across the finish line," #2 Senate GOP leader John Cornyn of Texas said yesterday.

AP sources: Senate GOP health bill would overhaul Obama law

Slightly more people sought US unemployment benefits last week, but the number of applications remained at a historically low level that suggests the job market is healthy.  The Labor Dept says weekly applications rose 3K to a seasonally adjusted 241,K.  The less-volatile four-week average ticked up 1K to 244K.  Applications are a proxy for layoffs & they have come in below 300K, a historically low level, for 120 weeks in a row (the longest such stretch since 1970).  Employers have added jobs at a steady pace this year, though somewhat slower than in 2016 & the unemployment rate is at a 16-year low of 4.3%.  Businesses are hiring despite slow growth in the first 3 months of the year.  Analysts, however, expect faster growth in the current qtr.

Applications for US unemployment aid rise to still-low 241,000, a sign of healthy job market
Oil edged up from multi-month lows, but prices remained under pressure from a supply glut that has persisted despite OPEC-led efforts to balance the market.  US crude futures were up 40¢ at $42.93 a barrel.  Yesterday, it touched $42.05, the lowest intraday level since August 2016.  Since peaking in late Feb, crude has dropped around 20%, erasing gains at the end of the year in the wake of the initial OPEC-led production cut.  OPEC & other producers agreed to reduce output by 1.8M barrels per day (bpd) from Jan for 6 months, & last month extended the deal for a further 9 months.  But oversupply has persisted, particularly with output rising in Libya & Nigeria, which were exempt from the cuts due to unrest that had limited their output.  The decline has tested OPEC's pledge to do "whatever it takes" to support oil prices.  Prices slid on Wednesday despite a bigger-than-expected drop in US crude stockpiles, & a drop in gasoline stocks.  Tropical storm Cindy traveling thru the Gulf of Mexico, home to about 17% of US crude & 5% of dry natural gas output, disrupted some operations, also offered limited support.  Overall, output is still increasing in the US, where some shale producers can produce profitably even if oil prices drop below $40 a barrel.  Oil stocks in Europe's Amsterdam-Rotterdam-Antwerp hub hit 64.2M barrels last week, the highest in a year, & 24% above the Jan low.
The stock market is marking time, waiting for the release of the Senate's healthcare plan.  Leaks are shown above.  It will be different than the House plan & Trump's plan.  Early indications are that it will have a tough time getting passed.  Whatever is passed (assuming that happens), it will then be blended with the house plan.  It spells more & bitter arguments.  Then Congress hopes to move forward on tax reform.  That's a lot to get done even though Congress is planning for a lot of breaks so those guys can go home to hear from the folks.  Unsettled DC is not changing!

Dow Jones Industrials

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Wednesday, June 21, 2017

Markets retreat led by US crude falling to the $42s, a 10 month low

Dow pulled back another 57 (closing near the lows), decliners over advancers almost 2-1 & NAZ gained 45.  The MLP index was off 2 to the 276s (another multi month low) & the REIT index fell 1+ to the 352s.  Junk bond funds slid lower & Treasuries were flattish.  Oil sank to a 10 month low & gold crawled higher (more on both below).

AMJ (Alerian MLP Index tracking fund)

Live 24 hours gold chart [Kitco Inc.]

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A pickup in sales of previously owned US homes signals the housing market is making progress despite inventory constraints that are sending prices to all-time highs, according to the National Association of Realtors.  Contract closings rose 1.1% to a 5.62M annual rate (est. 5.55M) from revised 5.56M the prior month.  The median sales price rose 5.8% y/y to record $252K.  Inventory of available properties fell 8.4% from May 2016 to 1.96M, the 24th straight year-over-year decline.  Wages have been steadily increasing, unemployment is at a 16-year low & Americans are feeling confident about the economy, factors that support continued demand for housing.  Mortgage rates are also near historically low levels after erasing a post-election surge.  At the same time, buyers are limited by inventory shortages that have kept property prices rising faster than worker pay.  There's little sign that any supply rebound is in the pipeline.  Construction starts for new homes have declined for 3 straight months & permits were at a one-year low in May, according to gov data.  The increase in sales for previously-owned properties contrasts with an 11% drop in Apr for new-home sales, which account for about 1/10 of the market.  “It is a very fast-moving market, meaning that homes placed on the market are being picked up very fast by buyers,” Lawrence Yun, NAR's chief economist, said.  “We have job creation, yet home creation is not breaking out. There’s sizable pent-up demand.”

U.S. Home-Sales Pickup Signals Market Withstanding Weak Supply

Philadelphia Fed Pres Patrick Harker said the Sep meeting could be a good time for the central bank to begin the process of shrinking its balance sheet.  Harker stressed that no final decision had been made & negative economic data would delay the start of the program.  Fed officials agreed earlier this month on details to allow a fixed amount of assets to run off the $4.5T balance sheet every month.  The initial cap will be set at $10B.  The Philadelphia Fed pres, who is a voting member of the Fed policy committee, said he advocated a "pause" on rate hikes while the central bank starts to pare its balance sheet.

Fed's Harker Says Plan To Start To Shrink Balance Sheet Could Start In September

Gold prices settled higher for the first time in 3 sessions, finding support as the $ weakened.  Philadelphia Fed President Patrick Harker said (above) he advocated a "pause" on rate hikes while the central bank starts to pare its balance sheet.  Prices had ended yesterday at a 5-week low.  Aug gold rose $2.30 (0.2%) to settle at $1245 an ounce.

Gold Settles Higher For First Time In Three Sessions

Oil prices fell to a 10-month low in heavy trading, as nagging fears about the global crude glut fed a sell-off that was interrupted only briefly after news of a larger-than-expected drop in US inventories.  US crude futures touched a low of $42.13, the lowest since Aug 2016, down 3% today.  Since peaking in late Feb, crude has dropped by more than 20%.  The US Energy Information Administration said crude inventories declined 2.7M barrels in the latest week, exceeding expectations for a 2.1M-barrel drop.  This data supported prices only briefly.  Compliance with an agreement by OPEC & other producers to cut output by 1.8M barrels per day from Jan reached its highest in May.  However, production is rising in Nigeria & Libya, exempt from the deal, offsetting cuts by other OPEC members.  Nigeria's crude exports are set to surpass 2M barrels per day (bpd) in Aug, highest in 17 months, as the country recovers from militant attacks that crippled production in 2016.  Investors were discouraged by data showing that oil refineries in China, the world's top crude importer, are cutting operations during the peak demand summer season.  So far this year, oil has slid 20%, its weakest performance since 1997 in H1, a period when prices have tended to rise.  Brent has risen in H1 in all but 6 years over that period.

Oil drops to 10-month low; biggest first-half slide in 20 years

There was buying in tech related stocks, giving NAZ a boost today.  But the rest of the stock market is soggy & remains heavily overbought long term (shown in the chart below).  Declining prices for oil is being taken seriously by stock traders.  Demand that is less than robust can be considered evidence of sluggish economic growth around the globe.  Popular stock averages continue to be close to record highs (Dow is up more than 3K in the post election rally), but a correction is needed to flush out investors who are "Nervous Nellies."

Dow Jones Industrials