Friday, November 17, 2017

Markets decline on tax plan worries

Dow dropped 100, advancers over decliners about 2-1 & NAZ lost 10.  The MLP index crawled up to 260 & the REIT index fell 1+ to the 359s.  Junk bond funds were higher & Treasuries moved up slightly.  Oil jumped up to the 56s & gold soared 17 to 1295 (it's highest in more than a month).

AMJ (Alerian MLP Index tracking fund)

Live 24 hours gold chart [Kitco Inc.]

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Unemployment rates fell to record lows in Idaho & Tennessee in Sep & dropped in 9 other states.  The Labor Dept report on state unemployment also showed the extent of Hurricane Irma's damage in Florida, which lost 127K jobs that month (about 1.5% of the state's total jobs).  Most of those losses were likely temporary.  The jobless rate dropped to 2.8% in Idaho from 2.9% in the previous month.  Tennessee's rate fell sharply, to 3.3% to 3% . Both figures are the lowest on records dating back to 1976.  Employers added jobs in 5 states in Sep & cut them in 6.  The biggest gains were in California, which added 52K jobs, followed by Washington state, with 13K & Indiana which gained 11K. After Florida, the states with the biggest job losses were NY, which shed 34K, followed by Missouri, with 10K.  Texas, which was slammed by Hurricane Harvey in late Aug, shed 7K jobs.

Unemployment hits record lows in two states, falls in 9

US GDP grew at rates of 3.1%-3.0% in Q2 & Q3 of this year, respectively.  Despite steady growth, inflation has yet to reach the Fed target of 2%, though Dallas Fed Pres Robert Kaplan says he is actively considering another interest rate increase.  According to Kaplan, the Dallas Fed's GDP forecast for the year is 2.5%, “sluggish by historical standards but certainly enough to continue to take slack out of the labor market.”  Kaplan said , “The reason I’ve said I’m actively considering next steps is we are at or near full employment and my own projection, our projection at the Dallas Fed is we’re likely to overshoot maximum, sustainable employment.”  Though inflation is falling short of the Fed target, Kaplan sees the overshoot in employment as a factor that needs to be considered.  Kaplan then explained that technology is a key headwind to the rise in inflation.  “Part of what’s going on is because we’re taking slack out of the labor market, we’re getting toward full employment, you do have cyclical pressures. We haven’t seen it show up in wages or prices in my opinion because we’ve got a very strong structural headwind and that’s primarily what I call ‘technology enabled destruction,’ to some extent globalization, but mainly disruption.”  He then explained that technology is a key headwind to the rise in inflation.  “Part of what’s going on is because we’re taking slack out of the labor market, we’re getting toward full employment, you do have cyclical pressures. We haven’t seen it show up in wages or prices in my opinion because we’ve got a very strong structural headwind and that’s primarily what I call ‘technology enabled destruction,’ to some extent globalization, but mainly disruption.”

Fed’s Kaplan: Full employment, healthy economy may trigger another rate hike

The number of rigs exploring for oil & natural gas in the US increased by eight this week to 915.  That's up from the 588 rigs that were active a year ago.  Baker Hughes said that 738 rigs sought oil & 177 explored for natural gas this week.  Among major oil- & gas-producing states, Texas gained 7 rigs, Louisiana added 4 & Ohio & Utah were up 1 apiece.  Alaska, Colorado, New Mexico, North Dakota, Oklahoma & Wyoming declined by one each.  The US rig count peaked at 4530 in 1981 & bottomed out in May of 2016 at 404.

US rig count up by 8 this week to 915; Texas up 7

A German auto parts manufacturer will build a new plant in Alabama & hire 300 workers to supply parts for regional automobile manufacturers.  Officials announced BOCAR's $115M investment.  BOCAR CFO Gerd Dressler said the company chose Huntsville as the plant site from among more than 40 options in the US, citing the area's workforce, infrastructure & universities as factors.  Huntsville Mayor Tommy Battle, whom Limestone County Commission Chairman Mark Yarbrough credited as the leader of the regional recruiting team, says the 300 jobs will pay "great wages."

German auto parts manufacturer to build new Alabama plant

China's central bank issued sweeping guidelines to tighten rules on asset management business, the latest step by Beijing to fend off systemic risks in the country's rampantly growing shadow banking sector. The guidelines unified rules covering asset management products issued by banks, trust firms, insurance asset management companies, securities firms, funds & futures companies, the People's Bank of China (PBOC) said.  At the end of 2016, the collective outstanding volume of their asset management business was 102T yuan ($15.38T), including 29T yuan of bank wealth management products & 17.5T  yuan in trust products, according to the PBOC.  The new rules aim to close loopholes that allow regulatory arbitrage, reduce leverage levels to curb asset price bubbles & rein in shadow banking activity.  The new rules will set leverage limits for asset management products.  They will cap the total assets to net assets ratio at 140% for open mutual funds & 200% for private funds.  Investors will be prohibited from pledging their shares in asset management products as collateral to obtain financing, a practice that would increase leverage.  The central bank also said financial institutions must break the practice of providing investors with implicit guarantees against investment losses.  Financial institutions will also be forbidden from creating a "capital pool" to manage funds raised thru asset management products.  The practice allows banks to roll over the products constantly.  The investment losses will be implicitly covered by the new product issuance. The draft guidelines are the latest & most comprehensive set of rules proposed by financial regulators to fend off shadow banking risks that could spread across different asset classes.

China sets sweeping new rules to regulate $15 trillion asset management products

The long stock market rally is stumbling.  The stock market had its first 2 week losing streak in 3 months.  The tax plan is in the Senate where it looks to be going nowhere fast.  Economic statistics continue fairly good, but do not count for much.  Now is the time when deals are made to make legislation happen.  But there are a lot of egos & getting 50 out of 52 to cooperate will be one tough task.  It must happen by next week.  The Dow closed t the lows.

Dow Jones Industrials

Markets slip lower on concerns about tax reform

Dow fell 73, advancers ahead of decliners 4-3 & NAZ was off all of 1.  The MLP index was fractionally lower in the 259s & the REIT index retreated 1+ to 360.  Junk bond funds were mixed & Treasuries crawled higher.  Oil climbed 1+ to the 56s (more below) & gold gained 7 to 1285.

AMJ (Alerian MLP Index tracking fund)

CL=FCrude Oil56.04

GC=FGold   1,284.60

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US new-home construction rebounded in Oct to the fastest pace in a year, partly reflecting recovery efforts in the hurricane-stricken South, gov figures showed.  A pickup in permit applications for one- family dwellings indicates building will remain firm in coming months.  Residential starts rose 13.7% to a 1.29M annualized rate (est. 1.19M) after upwardly revised 1.14M pace in prior month.  Single-family home starts rose 5.3% & multifamily jumped 36.8%.  Permits, a proxy for future construction of all types of homes, rose 5.9% to 1.3M rate (est. 1.25M) from a 1.23M pace.  Building permits for single-family homes improved in Oct to an 839K annualized pace, the fastest in 10 years.  Construction spending, which subtracted from GDP in Q2 & Q3, may add to economic growth in Q4 on the heels of rebuilding efforts.  New construction in the southern US rose 17.2%, the most since Jan, including the biggest gain for single-family starts since Jul 2014.  Areas in the South were hit particularly hard in Sep by 2 hurricanes, which caused flooding & delayed beginning home construction.  Activity typically rebounds in later months as rebuilding efforts begin in the affected regions.  A gauge of homebuilders' confidence surged in Nov to an 8-month high, indicating optimism about the outlook amid sustained demand, boosted by the steady job market & relatively low mortgage costs.  At the same time, the industry is dealing with a shortage of workers, higher materials prices & difficulty finding ready- to-build lots.  Economists expect residential construction will keep expanding gradually.  Single-family home starts rose to a 877K rate, the fastest since Feb, from 833K in the prior month & houses under construction totaled 1.1M, the most in a decade.

U.S. Home Starts Reach Highest Level in a Year, Permits Rise

Stocks edged lower after the best rally in 2 months, while Treasuries advanced as investors assessed the prospects for corp tax cuts.  The $ dropped as the € & ¥ gained.  The S&P 500 dipped after bouncing back yesterday from a bout of selling that saw the Volatility Index (VX) spike to the highest since Aug. The greenback remained linked to political developments in DC, where the Senate girded for negotiations on its version of tax reform & news swirled around Special Counsel Robert Mueller's investigation into Russian election tampering.  In Europe, equities headed for a 2nd weekly decline, while the euro € for the first time in 3 days after ECB Pres Mario Draghi said he was optimistic about wage growth in the region.  Japanese shares ended fractionally higher as the ¥ jumped to the strongest in 4 weeks.  Equities in Hong Kong & Australia rose, while Chinese stocks traded in Shanghai fell.  It has been tumultuous week in the US as shares saw the biggest gain & the largest drop in 2 months after touching records a week earlier.  Investors are trying to gauge whether benchmarks will continue a march to all-time highs on strong earnings &and faster growth spurred by corp tax cuts or if they will be pulled down amid lofty valuations, nearly the flattest yield curve in a decade & a selloff in junk bonds.  Commodities bounced after the recent selloff. West Texas crude jumped to around $56 a barrel as Saudi Arabia moved to dispel doubts over Russia's readiness to extend output curbs.

U.S. Stocks Decline With Dollar as Treasuries Rise: Markets Wrap

Oil climbed, paring losses earlier this week, as Saudi Arabia moved to dispel doubts over Russia's readiness to extend output curbs.  Futures rose almost 2%, trimming the weekly decline to 1.3%, after Saudi Arabia's Energy Minister Khalid Al-Falih said OPEC should announce an extension of output curbs when it meets on Nov 30.  Russia is said to be hestant to commit to a decision so soon, suggesting the group wait until closer to the deal's expiration at the end of Mar.  US crude output gained this week to the highest in more than 3 decades, according to gov data.  Oil rose to the highest in more than 2 years last week amid near certainty that OPEC & its allies would prolong the output deal & heightened geopolitical tension in the Middle East.  Prices retreated in the last few days after the International Energy Agency said milder-than-normal winter weather is putting a break on demand growth.  While Russia's reluctance is causing concern, Saudi Arabia's Al-Falih is trying to reassure the market the deal will be extended.  West Texas Intermediate for Dec delivery was at $56.01 a barrel, up 87¢.  Brent for Jan settlement was 62¢ higher at $61.98 a barrel.  Prices are down 2.4% this week & headed for the first weekly drop since the start of Oct.  The global benchmark was at a premium of $5.81 to Jan WTI.

Stocks are floundering while traders are watching the chaos in DC over tax reform.  There is not much investors can do but wait & see what those guys come up with.  Even those at the center of discussions have no idea how this will turn out.  If they come up empty handed, stocks will be sold.  That's scary & gold is on the rise again!

Dow Jones Industrials