Friday, October 31, 2014

Markets climb on optimism about the US economy

Dow surged 194 to a new record, advancers over decliners 3-1 & NAZ rose 64.  The MLP index inched higher to 502 & the REIT index was up 2+ to the 318s, a new yearly high.  Junk bond funds did little & Treasuries retreated as stocks rose.  Oil fell but was able to close above the key 80 support level (see more below).  Gold sold off again & is well under the 1200.

AMJ (Alerian MLP Index tracking fund)

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CLZ14.NYM....Crude Oil Dec 14....80.56 Down ...0.56  (0.7%)

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Business activity in the Chicago area expanded in Oct at the fastest pace in a year, a sign manufacturing is overcoming a global slowdown & is contributing to growth in economy.  The Institute for Supply Management-Chicago Inc.’s business barometer rose to 66.2, the highest in a year, from 60.5 in the prior month.  A reading greater than 50 signals growth.  The forecast was for 60.  Demand for long-lasting goods such as automobiles & the need to replace aging equipment is lifting manufacturing, which makes up about 12% of the economy.  A strengthening job market, lower gasoline costs & improving consumer sentiment will help households to boost their spending, further strengthening orders at American factories.  A report next week may show the Tempe, Arizona-based Institute for Supply Management’s national factory index continued to indicate expansion, with a 56.4 reading in Oct following 56.6 the prior month.  Today's report showed orders, production & employment all grew at a faster pace in Oct than in the prior month.

Manufacturing in Chicago Area Expands at Fastest Rate in a Year

Chinese bank deposits dropped following a crackdown on lenders manipulating their numbers & “illicit” means of attracting money, threatening to weigh on credit growth & hinder efforts to reignite the economy.  4 of the 5 biggest banks posted a drop in deposits as they reported Q3 earnings this week.  Central bank data showed it was the first quarterly decline for the nation’s banking industry since at least 1999.  The lower deposit levels are likely to curtail credit as banks are prohibited from lending more than 75% of their qtr-end holdings, while a sustained drop could hamper gov efforts to rejuvenate an economy forecast to expand this year at the weakest pace since 1990.  The lenders may also come under pressure to tap more expensive financing.  ICBC, the world’s largest lender by assets, posted the biggest decline in funds during Q3, with its deposits dropping by 388B yuan ($63B) from Jun to 15.3T yuan.  Only China Construction Bank Corp., the 2nd-largest, had an increase.  As a housing-market slump drags on the nation’s growth, bad loans are piling up.  ICBC reported its biggest jump in soured credit since at least 2006 in Q3.  Smaller rival Bank of China more than doubled its provisions for bad loans, while the combined profit growth of the 5 biggest banks slowed to 6% from 10% a year earlier.  In Sep, the China Banking Regulatory Commission introduced rules to curb volatility in deposits & eliminate the use of what it termed as “illicit” means such as kickbacks & higher-than-regulation interest rates to attract money.  Previously, lenders reported surging deposits at the end of each qtr, with a slump typically in the next month.  Industrywide data show it’s unusual for yuan-denominated deposits to decline on a quarterly basis.   A 950M yuan fall in Q3 to 112.7T yuan was the first since at least 1999, according to data from the People’s Bank of China.

Shrinking Chinese Bank Deposits Add to Warning Signs for Economy

Brent crude, the price used by the rest of the world headed for a 6th weekly loss, the longest losing streak since 2002, as OPEC boosted production to a 14-month high amid a global surplus.  West Texas Intermediate (the US price) was on track for its biggest monthly decline in more than two years.  October’s drop has been about 10%.  Brent & WTI had their biggest monthly declines since 2012 after US crude production climbed to the highest level in at least 3 decades.  Traders are split on whether Saudi Arabia will deepen the crude price cuts that propelled oil into a bear market this month.  Brent is $85 & WTI for Dec declined to a low of $79.98.  US crude output rose to a record 8.97M barrels a day last week, according to EIA estimates.  The EIA’s monthly data shows production at the highest since 1986.  Crude inventories have increased by 23M barrels in the past 4 weeks, according to the EIA.  The combination of horizontal drilling & hydraulic fracturing has unlocked supplies from shale formations in the central US.  WTI & Brent are down more than 20% from their Jun peak as leading OPEC members resisted calls to reduce supply.  Iraq’s oil minister told parliament yesterday that there is a “price war” among OPEC members because the market’s fundamentals have changed.  Output from OPEC increased by 53K barrels a day to 31M, a 3rd monthly gain.  Production from OPEC is responsible for about 40% of the world’s oil supply.  Saudi Arabia, Iraq, Iran & Kuwait have cut their export prices this month, fueling speculation that they’ll compete for market share.  OPEC ministers are scheduled to meet on Nov 27 to discuss their output target of 30M barrels a day.

Brent Oil Set for Longest Run of Weekly Losses Since 2002 on Supply Glut

Stocks had nothing short of one spectacular week.  Dow finished up more than 580, one of its  best weeks ever.  It also gained 340 in an unusually volatile month & rose a stunning almost 1.3K from the Oct 16 low.  Also of note, volatility was wild in Oct when triple digit daily swings were common.  The VIX, volatility index, spiked at mid month but settled back to 14, not far above the sub 12 area where it has been for much the year.  Record stock prices feel good but wild times in the stock market not welcomed by all investors, & intl economic & military problems will be troubling for the balance of the year.

Dow Jones Industrials

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Markets rise on consumer sentiment data

Dow climbed 177 to a new record, advancers over decliners 3-1 & NAZ gained 63.  The MLP index slid 1+ to the 499s & the REIT index rose 2+ to the 217s, a yearly high.  Junk bond funds were mixed & Treasuries saw selling.  Oil dropped below 80 & gold tumbled to the lowest since 2010.

AMJ (Alerian MLP Index tracking fund)

CLZ14.NYM....Crude Oil Dec 14...79.74 Down .....1.38  (1.7%)

GCX14.CMX...Gold Nov 14.....1,167.20 Down ...30.90  (2.6%)

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Consumer sentiment rose in Oct to a 7-year high as employment opportunities & declining gasoline prices boosted Americans’ spirits.  The Thomson Reuters/University of Michigan final index of sentiment increased to 86.9, the highest since Jul 2007, from 84.6 in Sep.  The projection called for the measure to hold at its preliminary Oct reading of 86.4.  Cheaper fuel, rebounding stock prices & job gains on pace for their strongest year since 1999 are keeping households upbeat.  Bigger wage gains that accompany the increase in hiring would help provide a bigger push for consumer spending that unexpectedly dropped last month.  The survey’s index of expectations 6 months from now increased to 79.6, also the highest since Jul 2007, from 75.4 last month.  The preliminary reading was 78.4.  The gauge of current conditions, which measures Americans’ views of their personal finances, fell to 98.3 from 98.9.

Consumer Sentiment in U.S. Rises to Highest Since July 2007

Consumer spending in the US unexpectedly dropped in Sep as incomes rose at the slowest pace of the year, indicating the economy will have difficulty sustaining a pickup in growth into the end of the year.   Expenditures decreased 0.2% last month, weaker than projected, after rising 0.5% in Aug, according to the Commerce Dept.  Incomes increased 0.2%, the smallest gain since Dec.  Wages that are barely outstripping the pace of inflation may be restraining spending by some households, while slower increases in home prices & volatility in the stock market is also limiting wealth gains.  Continued improvement in employment will be needed to further boost confidence & give consumers the means to spend at reatilers.  Today’s consumption data showed that after adjusting consumer spending for inflation, which generates the figures used to calculate GDP, purchases dropped 0.2% last month after a 0.5% gain in Aug.  Spending on durable goods, including automobiles, decreased 1.9% after adjusting for inflation following a 2.3% gain.  Purchases of non-durable goods, which include gasoline & clothing, declined 0.3%.  Household outlays on services rose 0.1% after adjusting for inflation. In addition to health care.  Today’s report also showed that prices tied to consumer spending rose 1.4% in the year ended Sep, matching the downwardly revised reading from the prior month.  Federal Reserve policy makers aim for annual increases of 2%.

Consumer Spending in U.S. Unexpectedly Drops as Incomes Cool

Starbucks quarterly revenue missed estimates as increased competition for breakfast diners’ dollars restrained US sales.  Revenue in fiscal Q4 rose 10% to $4.18B.  Analysts projected $4.24B.  SBUX has been introducing new food & drinks to draw diners later in the day while competitors are pushing more breakfast fare.  Same-store sales in the Americas region gained 5%, trailing the average estimate for a 6.2% increase, according to Consensus Metrix.  Q4 EPS was 77¢.  Excluding some items, EPS was 74¢, matching estimates.  In Q4 a year earlier, SBUX posted a loss of $1.2B ($1.64 a share) as it paid $2.78B to resolve a dispute with Kraft Foods (KRFT) over its packaged-coffee business.  The company forecast fiscal 2015 EPS excluding certain items of as much as $3.13 & analysts are estimating $3.16.  “We are in the same kind of difficult retail traffic environment as our competitors are,” COO Troy Alstead said.  More people are shopping online instead of being out in brick-and-mortar stores, he said.  SBUX also is coping with higher coffee-bean & dairy prices.  About 2/3 of the company’s coffee needs are locked for this fiscal year, Alstead said.  The stock fell 2.06.  If you would like to learn more about SBUX, click on this link:

Starbucks Sales Trail Estimates on U.S. Breakfast Competition; Shares Fall

Starbucks (SBUX)

Japan is throwing money at the market, which gave a big lift to markets around the world.  Macro economic data in the US continues to stumble around, up one day followed by a drab report the next.  But the bulls have taken over command of the market as the month closes.  Dow is now up 80 from the prior record set in Sep.

Dow Jones Industrials