Wednesday, May 7, 2014

Dow rises while tech stocks drag down Nazdaq

Dow shot up 117, advancers over decliners 3-2 & NAZ lost 13.  The MLP index bounced back 5 to 493 (for another record) & the REIT index went up 3+ to 299 (an 11 month high).  Junk bond funds were mixed while Treasuries hardly budged.  Oil advanced to a 6 day high & gold dropped.

AMJ (Alerian MLP Index tracking fund)

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Treasuriy yields:

U.S. 3-month


U.S. 2-year


U.S. 10-year


CLM14.NYM....Crude Oil Jun 14....100.76 Up ...1.26 (1.3%)

Live 24 hours gold chart [Kitco Inc.]

Photo:   Bloomberg

Federal Reserve (FED) Chair Janet Yellen made it clear she believes the economy still requires a strong dose of stimulus 5 years after the recession ended because unemployment & inflation are well short of the its goals.  “A high degree of monetary accommodation remains warranted,” Yellen said.  “Many Americans who want a job are still unemployed,” & inflation is below the central bank’s 2% target, she said.  Data show “solid growth” in Q2, bolstering the case for a faster expansion this year, Yellen added.  Gains in household wealth from rising home prices, less drag from federal & state & local budgets, & stronger growth abroad should all drive investment & consumption.  The FED chair cited the slowdown in US housing as a risk, along with “heightened geopolitical tensions” & financial stress in emerging markets.  “While conditions in the labor market have improved appreciably, they are still far from satisfactory,” Yellen said.  She called the unemployment rate, which stood at 6.3% in Apr, “elevated,” & said the share of the labor force that has been unemployed for more than 6 months, as well as those working part-time who would prefer full-time work, “are at historically high levels.”  “We’ve never really seen a situation where long-term unemployment is so large a fraction of unemployment,” she said in response to a question.  Yellen also discussed financial conditions, saying she saw “reach-for-yield” behavior in lower-rated corp debt markets.  At the same time, she said stock & home values remain within “historical norms.”  The FED also “is considering whether additional measures are needed to further reduce the risks associated with large, interconnected financial institutions,” Yellen said, without elaborating.

Yellen Says ‘High Degree’ of Accommodation Still Needed

China’s Deflating Property Market Seen Raising Local-Debt Risk
Photo:   Bloomberg

China's weakening property market poses an increasing danger to local govs, threatening to strain their finances & intensify an economic slowdown.  Land sales in 20 major cities fell 5% in Mar from a year earlier, the biggest drop in at least a year, according to China Real Estate Information.  The value of land sales in 3rd-tier cities declined 27% last month, according to SouFun Holdings, the nation’s biggest real-estate owner.  Failure to find other revenue sources increases the risk of defaults & financial turmoil that curb economic expansion already projected this year at the slowest pace since 1990.  Some cities plan to reverse controls implemented to make home prices more affordable or give residency benefits to out-of-town buyers.  The weakness adds to the urgency of expanding China’s municipal-bond market so regional govs can sell debt directly to the public instead of thru off-budget corps called local-gov financing vehicles.  A sample of provincial, municipal & county administrations shows they have guaranteed repayment of about 37%, or 3.5T yuan ($560B) of debt with land sales.  The People’s Bank of China said it will strengthen monitoring of credit extended to LGFVs, real estate companies & industries with overcapacity to minimize risks to the financial system.  The central bank will maintain a “prudent” monetary policy, according to a quarterly report.  A worsening market downturn would increase pressure on national leaders to ease monetary policy for the first time since 2012.  Premier Li Keqiang has outlined plans for railway spending & tax breaks to support growth while pledging to avoid any short-term, large-scale stimulus that could exacerbate debt risks.  The gov budgeted for an 11.8% drop in land-sales revenue in 2014, according to the Finance Ministry’s annual work report in Mar.  Nationwide, land sales in 2013 were equivalent to about 61% of local-gov revenue.

China Property Slump Adds Danger to Local Finances

Whole Foods stock fell the most in 7½ years after profit growth stalled & the company cut its forecast amid increasing competition from traditional supermarkets & other organic-food sellers.  The company has been opening more stores & trying to lower its prices to attract more customers.  At the same time, the competition is pushing organic beef & is opening more locations.  EPS was 38¢, about the same as a year earlier & below the estimate of 41¢.  Sales rose 9.7% to $3.32B, missing projections for the 6th straight qtr.  The retailer lowered its forecast for EPS this fiscal year to as much as $1.56 a share, excluding certain items, compared with a previous projection of as much as $1.65.  Analysts estimated $1.61.  WFM said the natural & organic food market has “gotten to be a very big niche, & in some ways it has gone mainstream.”  Sales at stores open at least 53 weeks rose 4.5% & will gain as much as 5.5% in the year.  The stock tumbled 9.02 (19%).  If you would like to learn more about WFM,  
Click here for a FREE analysis of WFM and be sure to notice the intermediate time frame

Whole Foods Growth Stalls as Rival Grocers Sell Organics; Shares Tumble

Whole Foods (WFM)

Techs have lost favor quietly this year & that decline is getting noticed now.  NAZ has fallen 300 to 4067 in just 2 months while Dow is regained strength & is flirting with its record highs.  Nobody understands this disconnect.  Alibaba has filed for a whopper size IPO in the US & the response today is less than enthusiastic.  Maybe techs have some connection to Putin or Obamacare which has caused the sell-off.  But as long as techs are weak & stumbling, new money will flow into high yield securities such as MLPs & REITs at recent highs.

Dow Jones Industrials

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