Friday, July 19, 2019

Markets slide lower as Fed signals smaller rate cut

Dow fell 68 (closing at the lows), decliners over advancers about 5-4 & NAZ pulled back 60.  The MLP index rose 1+ to the 254s & the REIT index sank 6+ to the 382s.  Junk bond funds hardly budged in price & Treasuries slid lower in price.  Oil went up in the 55s (more below) & gold drifted back 1 to 1426 following recent strength.

AMJ (Alerian MLP Index tracking fund)

House Speaker Nancy Pelosi is rejecting the White House's latest debt limit proposal, which demanded $150B in spending cuts cuts.  Last night, the Trump administration sent Dems a budget agreement, requesting they choose an area to cut $150B in spending, out of an option of $574M in saving options, to offset the costs of a 2-year budget cap agreement.  Officials said that the proposal is a starting point.  Negotiations between administration officials & congressional leaders are expected to continue today, as they hope to pen a deal in order to set up a House vote on it next week -- ahead of Congress' impending Aug recess.  Treasury Secretary Steve Mnuchin said yesterday that lawmakers were close to an agreement & that he was confident the gov is not at risk of defaulting on its debt.  “I think that everyone is in agreement that we won’t do anything that puts the U.S. government at risk in terms of our issue of defaulting,” he said.  “I think that nobody wants a shutdown in any scenario.”  In the “most conservative” scenario, Mnuchin said it's possible the federal gov has an issue at the beginning of Sep before lawmakers are scheduled to return from their summer recess on Sep 9.   He previously warned House Speaker Nancy Pelosi that the gov could run out of cash by early Sep if Congress didn't raise the debt ceiling ahead of its Aug recess.  “That’s why I’ve encouraged them to raise the debt ceiling before they leave,” he added.  The debt ceiling, currently set at $20.46T, is the legal limit on the total amount of debt that the federal gov can accrue; according to the Committee for a Responsible Federal Budget, it applies to both the $16.2T held by the public & the $5.9T owed by the gov.


The Univ of Mich's preliminary estimate of consumer confidence remained stable in Jul.  The consumer sentiment index came in at 98.4, little changed from the Jun's figure of 98.2.  The current conditions index dropped slightly lower, but was countered by a rebound in the expectations index.  Overall, sentiment continues to be at elevated levels & is supportive of consumer spending.  Consumers' income expectations continued to be positive, with around 61%  of all respondents expecting income to either surpass or keep pace with inflation.  Similarly, 45.2% expect family income levels to surpass inflation over the next 5 years.  This is in line with consumers' favorable expectations of labor market conditions.  Moreover, 55% of all respondent now anticipate interest rates to either fall or remain the same, compared with 41% in May & 28% at the start of this year.  Looking at inflation expectations, the year-ahead rate moved one-tenth lower, to 2.6%, while the long-term inflation expectations measure rose 3-tenths to 2.6%.

U.S. consumer confidence remains stable in July, University of Michigan’s sentiment index rises to 98.4

Federal Reserve officials signaled they are ready to cut interest rates by a qtr-percentage point at their coming meeting, while indicating the potential for additional reductions because they are worried about a slowdown in global growth, an increase in trade-policy uncertainty & a pullback in inflation.  Officials aren’t prepared for bolder action by making a ½-point cut, as analysts & traders have speculated in recent days, according to the officials' recent public statements & interviews.

Fed Officials Signal Quarter-Point Rate Cut Likely at July Meeting

Shares of American Express (AXP), Dow stock, slumped, after a positive earnings report & confirmation of its full-year outlook wasn't quite good enough for the recent rally to record highs to resume.  The decline was enough to make the stock the biggest among components.  EPS rose to $2.07 from $1.84 in the year-ago period & beat the estimate for EPS of $2.03.  Revenue increased 8% to $10.84B, just above the consensus of $10.83B, as the consumer services business showed the fastest growth.  The company also affirmed its 2019 financial guidance ranges, of adjusted EPS of $7.85-8.35 & revenue growth of 8-10%.  On the post-earnings conference call, CFO Jeff Campbell indicated that the 2019 EPS outlook was actually increased slightly.  In Mar, the company said EPS would be at the “lower end” of the guidance range.  “Given where we are today, I will expect our full-year EPS results to be more in line with the middle part of our original guidance range,” Campbell said.  The stock fell 3.58.
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American Express stock leads Dow losers after 2019 outlook disappoints bulls

Oil futures finished higher after reports that Iran seized a U.K.-flagged ship in the Gulf of Oman.  Prices still settled lower for the week, however, on worries about a slowdown in demand.  Aug West Texas Intermediate oil added 33¢ (0.6%) to settle at $55.63 a barrel.  It fell 7.6% for the week after settling yesterday at its lowest in a month.

Oil gains for the session, but U.S. prices drop over 7% for the week

Stocks saw selling in the PM as hopes for a ½ point rate cut diminished.  Earnings are not getting a warm reception by investors.  Good enough does not seem to be quite good enough.  Gold is at multi year highs while stock averages are essentially at new records.  The disconnect between safe & risky investments continues.   That can not last!

Dow Jones Industrials

Higher markets after clarification on Fed rate cut comments

Dow rose 45, advancers over decliners 4-3 & NAZ gained 4.  The MLP index was steady in the 253s & the REIT index dropped 2+ to the 386s.  Junk bond funds fluctuated & Treasuries slid back a tad.  Oil crawled higher in the 55s & gold rose 3 to 1431 (another 6 year high)..

AMJ (Alerian MLP Index tracking fund)

CL=FCrude Oil55.41
 +0.11 +0.2%

GC=FGold  1,442.30

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Stocks opened with gains as new indications the Federal Reserve will cut interest rates and strong earnings overshadow ongoing concerns over the fate of US-China trade talks.  In a speech, Federal Reserve Pres John Williams urged the central bank to “act quickly” amid a slowdown in US economic growth.  The comments, which investors interpreted as a nod to the expected rate reductions at the end of Jul, took markets into positive territory after declines for much of the day.  A Fed spokesperson, however, later clarified that the speech was not meant to give any indication to the central bank's pending decision at the 2-day meeting beginning on Jul 30.  Later, Federal Reserve Vice Chair Richard Clarida backed a quick cut to interest rates.  While investors continue to guess at the Fed's future actions, the dashed hopes for a quick trade deal with China after negotiations broke down in May continued to be a drag on the top 3 equity benchmarks.

Wall Street opens higher as rate cut expectations grow

A US warship yesterday destroyed an Iranaian drone in the Strait of Hormuz after it threatened the ship, Pres Trump said.  The incident marked a new escalation of tensions between the countries less than one month after Iran downed an American drone & Trump came close to retaliating with a military strike.  In remarks at the White House, Trump blamed Iran for a "provocative and hostile" action & said the US responded in self-defense.  He said the Navy's USS Boxer, an amphibious assault ship, took defensive action after the Iranian aircraft closed to within 1K yards of the ship & ignored multiple calls to stand down.  "The United States reserves the right to defend our personnel, facilities and interests and calls upon all nations to condemn Iran's attempts to disrupt freedom of navigation and global commerce," Trump added.  The Pentagon said the incident happened while the Boxer was transiting the waterway to enter the Persian Gulf.  "A fixed-wing unmanned aerial system approached Boxer and closed within a threatening range," the Pentagon said in a written statement.  "The ship took defensive action against the UAS to ensure the safety of the ship and its crew."  It was the latest in a string of moves by the US & Iran that have brought them closer to armed conflict since early May when DC accused Tehran of threatening US forces & interests in Iraq & in the Gulf.  In response, the US accelerated the deployment of an aircraft carrier strike group to the Arabian Sea & deployed f4 B-52 long-range bombers to the Gulf state of Qatar.  It also has deployed additional Patriot air defense missile batteries in the Gulf region since then.

Trump says American warship destroyed Iranian drone

Microsoft (MSFT), a Dow stock, reported quarterly profit of $13.2B, boosted by a steadily growing cloud computing business that the company says now accounts for almost a 1/3 of its total revenue.  EPS adjusted for non-recurring gains, were $1.37.  The results exceeded expectations for $1.21.  The increase in net income was 49%, but was affected by a one-time tax benefit of $2.6B from transferring some properties from foreign subsidiaries to the US & Ireland.  The software maker also surpassed forecasts by posting revenue of $33.7B in the period, a 12% increase over the same time last year.  The forecast was for $32.7B.  The fastest-growing segment was what it calls the "intelligent cloud," which includes server products & its Azure cloud computing platform.  The segment's revenue was $11.4B, up 19% from a year ago.  Cloud business sales accounted for 30% of the $125.8B total revenue over the past year, up from 24% the previous year.  The stock went up 2.20.
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Microsoft cloud growth beats expectations, lifts shares

NY Fed Pres John Williams' assertion that policymakers need to “act quickly” as economic growth slows was drawing from research, not hinting at what may happen at this month's FOMC meeting, a spokesperson for the central bank said.  “This was an academic speech on 20 years of research. It was not about potential policy actions at the upcoming FOMC meeting,” the spokesperson said in a statement.  In his speech at the annual meeting of the Central Bank Research Association, Williams said, “It’s better to take preventative measures than to wait for disaster to unfold.”  His comments came amid expectations that the central bank will cut its benchmark interest rate during the Jul 30-31 meeting.  After Williams’ remarks, market expectations for a 50 basis point rate cut leaped to about 59%.  Prior to his speech, predictions for a ½-point cut had hovered at 20-30%.  Later, Fed Vice Chair Richard Clarida said that cutting interest rates quickly is a good strategy.  Market expectations for a ½-point cut surged even higher to about 69%.  But after the clarification on Williams' comments, expectations for a 50 basis point cut fell to about 50% around.

NY Fed clarifies Williams speech that market took as signal of a rate cut

Stocks are treading water with a slight bias to the upside.  Earnings are mixed while trade disputes are nagging thoughts for traders to keep in mind.  But the Dow at 27.3K is keeping the bulls happy even though gold is in strong demand by investors with negative thoughts..

Dow Jones Industrials

Thursday, July 18, 2019

Markets recover losses after NY Fed's Willliams' comments on rate cut

Dow finished the day up 3 (after earlier losses), advancers over decliners 5-4 & NAZ climbed 22.  The MLP index was off 1+ to the 253s & the REIT index slid back a tad to the 388s.  Junk bond funds drifted lower & Treasuries rose in price.  Oil retreated 1+ to the 55s (more below) & gold jumped up 23 to 1446, a new 6 year high.

AMJ (Alerian MLP Index tracking fund)

Live 24 hours gold chart [Kitco Inc.]

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Central bankers need to act quickly & forcefully when rates are low & economic growth is slowing, NY Federal Reserve Pres John Williams said.  The influential policymaker delivered a speech discussing what should be done when central banks are near the “zero lower bound,” or close to as low as rates can go.  “It’s better to take preventative measures than to wait for disaster to unfold,” he said.  Rather than keep rates elevated to give central banks room to cut in the face of a crisis, Williams said the proper move is not to “keep your powder dry.”  “When the ZLB is nowhere in view, one can afford to move slowly and take a ‘wait and see’ approach to gain additional clarity about potentially adverse economic developments. But not when interest rates are in the vicinity of the ZLB,” he said in his remarks.  “In that case, you want to do the opposite, and vaccinate against further ills. When you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress.”  Williams spoke as the policymaking FOMC is expected to cut its benchmark interest rate during the Jul 30-31 meeting.  Officials are worried about persistently low inflation, spillover from a global slowdown & the fallout from back-&-forth tariffs between the US & China.  The Fed currently pegs the overnight funds rate at 2.25%-2.5% — above zero, but still well below normal levels that have prevailed during past economic expansions.  Williams did not directly address whether he favors a cut, though markets are pricing in a 100% chance of a qtr-point reduction & a 38% probability that the Fed might cut by ½ a point.  However, he said that when faced with low rates and slowing growth, the best strategy is to “take swift action” & “keep interest rates lower for longer.”  “The expectation of lower interest rates in the future lowers yields on bonds and thereby fosters more favorable financial conditions overall.  This will allow the stimulus to pick up steam, support economic growth over the medium term, and allow inflation to rise,” he added.

NY Fed President John Williams says the Fed needs to ‘act quickly’ if there is ‘economic distress’

IBM (IBM), a Dow stock, reported better-than-expected Q2 earnings, but the stock bounced around as the company's guidance for the year held steady.  The key numbers were:
  • Earnings: $3.17 excluding certain items, vs. $3.07 per share as expected.
  • Revenue: $19.16B, vs. $19.16B as expected.
Revenue fell 4% from a year earlier even as earnings grew 3%,. Year-over-year revenue has now declined for the 4th quarter in a row.  IBM's biggest business segment, Global Technology Services — which includes technology support services as well as infrastructure & cloud services — produced $6.84B in revenue, down almost 7% & below the $7B consensus estimate.  The Cloud & Cognitive Software unit — including cloud & data platforms, cognitive applications & transaction processing platforms — contributed $5.65B in revenue, above the estimate of $5.55B   IBM's Global Business Services segment, which includes application management, consulting & global process services, had revenue of $4.16B, just under the $4.17B estimate.  Systems revenue totaled $1.75B, down almost 20% & shy of the $1.82B estimate.  IBM said growth from the Power product line more than offset the impact from “product cycle dynamics” in the company’s storage & Z mainframe-computer products.  The Z line in past qtrs helped to lift IBM’s revenue as businesses made upgrades, but now it making for tougher comparisons.  In Q2, IBM announced a partnership with Cloudera & the sale of commerce & marketing software properties to funds advised by affiliates of Centerbridge Partners.  The company also announced layoffs.  It also took a charge because of “an unfavorable legal ruling” in a case against the state of Indiana that had been outstanding for around 10 years, James Kavanaugh, the company’s senior VP & CFO said.  Kavanaugh said that large deals in the qtr were down 20% on an annualized basis.  “Signings are not all equal. Signings vary,” he said.  IBM closed its $34B acquisition of Red Hat earlier this month.  The stock rose 6.56.
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IBM reports better-than-expected earnings, maintains full-year guidance

The leading economic index fell 0.3% in Jun to mark the biggest decline in 3 years, suggesting US growth is likely to be softer in the months ahead.  The decline in Jun, however, appears to be a bit of an anomaly.  Weekly jobless claims spiked in Jun, but have since fallen again.  And manufacturing orders & housing permits were unusually weak last month, suggesting a rebound might be in the cards soon.  A measure of current conditions rose 0.1% & a " lagging" index climbed 0.6%.  The LEI is a weighted gauge of 10 indicators designed to signal business-cycle peaks & valleys.

U.S. leading economic index posts biggest drop since 2016

The Philadelphia Fed said its gauge of business activity in its region rebounded strongly in Jul after hitting its lowest level in 4 months in Jun.  The regional Fed bank's index rose to 21.8 in Jul from 0.3 in Jun.  The Jul level is the highest in a year after the index was 16.6 in May.  Any reading above zero indicates improving conditions.  The forecast called for a 4.5 reading.  The barometer on new orders increased 11 points to 18.9 while the shipments index rose 8 points to 24.9.  The measure on 6-month business outlook rose 17 points to 38, its highest reading since last May.  51% of the manufacturers surveyed said they have seen a “modest“ increase in demand for their products over recent months.  The surprising gain offsets some of the gloom surrounding manufacturing.  On Mon, a similar survey conducted by the NY Fed saw sentiment rebound partially in Jul.  Manufacturing has hit a rough patch this year, with the impact of intl trade policy tensions & a strong $ holding down activity.   Industrial production has declined for 2 straight qtrs, according to figures released Tues.

Philadelphia Fed manufacturing gauge rebounds sharply in July to highest level in a year

Earlier gains for oil futures on the back of increased tensions in the Middle East gave way to sizable declines, pushing US & global benchmark prices to their lowest settlements in a month.  Aug WTI crude lost $1.48 (2.6%) to settle at $55.30 a barrel after falling 1.5% yesterday.  Intl benchmark Sep Brent declined $1.73 (2.7%) to $61.93 after tumbling 1.1% yesterday.  Both benchmarks logged their lowest front-month contract finish since Jun 19.  Prices had been trading higher early today, after Iran's Revolutionary Guard said it seized a foreign oil tanker, which it claims was smuggling 1M liters of fuel near the island of Larak in the Persian Gulf on Sun.  Prices also posted declines yesterday after the Energy Information Administration yesterday reported that domestic crude supplies fell for a 5th consecutive week, but by less than the market expected—& petroleum products posted sizable gains.

Oil prices drop nearly 3% to lowest settlement in a month

There was some excitement for stocks today.  The market was lower on dreary word about trade talks.  Then Williams gave helpful comments (above) about a rate cut at the end of Jul.  The Dow shot up more than 100.  Meanwhile gold, bets against the stock market, had a stellar day.

Dow Jones Industrials