Monday, August 31, 2015

Markets sell off on worries about an interest rate hike

Dow dropped 114, decliners over advancers  3-2 & NAZ pulled back 51.  The MLP index slipped back 1+ to the 358s even though oil had a spectacular day & the REIT index lost 6+ to the 299s.  Junk bond funds slid lower & Treasuries were sold, raising the yield on the 10 year Treasury to 2.2%.  Oil surged to the 48s (see below) & gold was flattish.

AMJ (Alerian MLP Index tracking fund)

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CLV15.NYM....Crude Oil Oct 15....48.46 Up ...3.24 (7.2%)

Live 24 hours gold chart [Kitco Inc.]

Oil capped the biggest 3-day gain in 25 years after OPEC said it’s ready to talk to other global producers to achieve ‘fair prices’ & the US gov reduced its crude output estimates.  NY crude surged 27% in 3 days, the most since 1990 when Iraq invaded Kuwait.  The contract has climbed more than 20% from its closing low on Aug 24, meeting the common definition of a bull market.  OPEC, responsible for about 40% of the world’s supply, said it’s willing to talk, “but this has to be on a level playing field.”  Prices erased last week’s drop to a 6-year low as the OPEC comments & signs that the US shale boom is fading faster provided optimism that a global supply glut will evaporate sooner than estimated.  A measure of oil-price fluctuations rose to a 5-month high as traders sought protection from market swings.  West Texas Intermediate for Oct delivery surged 3.98 (almost 9%) to close at 49.20, the highest since Jul 21.  Prices had slipped as much as 1.62 to 43.60 earlier.  Volume was almost double the 100-day average.

OPEC Says It's Ready to Talk to Producers, Oil Jumps to 1-Month High

The Chicago Business Barometer, also known as the Chicago PMI, dipped to 54.4 from 54.7 in Jul, similar to the forecast of 54.5.  A reading above 50 reflects growth, while a sub-50 print indicates contraction.  The index held up above its 6-month average of 49.1.  Most subindices declined in Aug.  Order backlogs fell 1.7 points to 46.2, the 7th straight month of contraction.  While employment, aided by the Jul surge in output & orders, rose in Aug to the highest since Apr, the labor component remained in contraction for the 4th consecutive month.  From Jul, the gauge rose 2.9 points to 49.1.  In response to a special question, 63% of survey participants said they didn't plan to expand their workforce over the next 3 months.   Meanwhile, production & new order indexes eased, but both remained above their 12-month averages & were significantly up from the depressed levels seen in Feb-Jun.  The prices paid gauge fell sharply to 47.3, down 7.2 points from Jul, alongside steep declines in commodity prices.  Supplier deliveries rose into expansion, hitting the highest level since Mar.   The Aug survey was conducted before the rout in Chinese markets.

Midwest Manufacturing Activity Slides

Atlanta Federal Reserve pres Dennis Lockhart said Americans shouldn’t worry about a recession, despite recent turmoil in global markets.  “We’re not falling into a recession,” he said.  “The economy actually is performing quite solidly, I think. Most of the data we’ve looked at recently had been positive and has confirmed my basic view-- and that is we’re growing at a moderate pace, we’re making steady progress in employment markets and I have every reason to believe that will continue.”  Lockhart added that from the central bank’s point of view, monetary policy has been supportive of the economic growth America has achieved, but to continue to build on that momentum, the economy has to rely on itself, not accommodative policies.  One of those substantial improvements has to come in the form of inflation, for which the Fed has set a 2% target, & full employment in the labor market before the Fed hikes rates.  "I do believe there is still a considerable amount of slack in the employment markets, particularly represented by under employment by people who are working part time involuntarily,” he added.  As far as when the Fed is likely to raise rates, Lockhart said, essentially, it’s a wait-and-see approach.  “I think the next three meetings should all be live meetings and I think we should keep our options open. I don’t think I can ignore the events of the past couple of weeks, but I think I have to evaluate them as a risk to the economy. Always stay focused on the broad, general economy, not the financial economy per say, but the overall economy,” he said.

Lockhart: Still Significant Slack in the Labor Market

Aug can only be described as a dreadful month for the markets.  Dow plunged 1.1K, for one of its worst months ever.  The market crash in China & low oil prices (which were just reversed) were the major culprits.  A looming rate hike by the Fed in Sep did not help, weighing on the markets today when rising oil prices could have been viewed as bullish.  Sep is statistically the worst month for stocks & that is followed by Oct, remembered for brutal crashes.  Dow fell 1.3K YTD.  With fears about rising interest rates dominating trader thinking, tough times lie ahead for the markets.

Dow Jones Industrials

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Markets decline on China woes and rate hike concerns

Dow sank 145, decliners over advancers 3-1 & NAZ dropped 39.  The MLP index fell 4+ to the 354s & the REIT index lost 2+ to the 302s.  Junk bond funds drifted lower & Treasuries rose.  Oil ran into selling after last week's advance & gold was also lower.

AMJ (Alerian MLP Index tracking fund)

CLV15.NYM....Crude Oil Oct 15...44.38 Down ...0.84  (1.9%)

GCU15.CMX...Gold Sep 15......1,124.80 Down ...8.30  (0.7%)

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China’s stocks fell, capping the benchmark index’s biggest 2-month tumble since 2008, amid concern that gov intervention to prop up the market will fail.

The Shanghai Composite Index dropped 0.8% to 3205.  The gauge lost 12% this month after sliding 14% in Jul.  The SSE 50 Index of the nation’s biggest stocks rebounded 6.7% from its intraday low.  Bearish bets in the options market climbed as traders weighed the level of state support before a WW II victory parade this week.  The Shanghai Composite closed near its highest level of the day for the 3rd straight session amid speculation state-backed funds are using afternoon share purchases to bolster the market before the parade, which the gov will use to demonstrate its rising military & political might.  Swings in Chinese markets this month have rattled investors worldwide as they struggle to anticipate policy actions in the economy.  The gov revived its intervention in equities on Thurs to halt the biggest selloff since 1996.  The effort to support markets was part of a broader push to ensure nothing detracts from the parade.  China’s financial markets will be shut Thurs & Fri to commemorate the event.

China’s securities regulator asked brokerages to step up their support for share prices by contributing 100B yuan ($15.7B) to the nation’s market rescue fund & increasing stock buybacks, according to leakers.  Investor sentiment is getting increasingly pessimistic.  Puts that pay out on a 10% drop in the China 50 exchange-traded fund cost 9.3 points more on Mon than calls betting on a 10% gain.  As recently as last Mon, the bullish contracts were more expensive.

China Stocks Extend Biggest Selloff Since 2008

Federal Reserve Vice-Chair Stanley Fischer, in a speech at Jackson Hole, provided a detailed description of the conditions the Fed is seeking before pulling the trigger on an interest rate hike; he suggested the Fed is confident the US economy is headed in that direction; but he gave no clue as to when it might happen.  Fischer addressed the recent turmoil in global markets, noting that it would have an impact on US monetary policy.  "In making our monetary policy decisions, we are interested more in where the U.S. economy is heading than in knowing whence it has come.  That is why we need to consider the overall state of the U.S. economy as well as the influence of foreign economies on the U.S. economy as we reach our judgment on whether and how to change monetary policy,"  Fischer said.  "That is why we follow economic developments in the rest of the world as well as the United States in reaching our interest rate decisions.  At this moment, we are following developments in the Chinese economy and their actual and potential effects on other economies even more closely than usual," he added.  Fischer also reiterated the Fed's long-held position that rates could start moving higher before inflation reaches the Fed's goal of 2% annual rate.  However, again repeating a long-held & often-stated position, he said the Fed would take a "cautious" approach toward raising rates.  "There is good reason to believe that inflation will move higher as forces holding down inflation dissipate further," Fischer said, citing the fading impact of a highly-valued dollar, volatile energy prices & a tightening jobs market.  Bcause of Fed optimism with regard to the trajectory of inflation "we should not wait until inflation is back to 2% to begin tightening."  But "we will most likely need to proceed cautiously in normalizing the stance of monetary policy."

Fischer: Fed Shouldn't Wait for 2% Inflation

Wal-Mart, a Dow stock & Dividend Aristocrat, in the midst of spending $1B to raise employees’ wages & give them extra training, has been cutting the number of hours some of them work in a bid to keep costs in check.  Regional executives told store managers at the annual holiday planning meeting this month to rein in expenses by cutting worker hours they’ve added beyond those allocated to them based on sales projections.  The request has resulted in some stores trimming hours from their schedules, asking employees to leave shifts early or telling them to take longer lunches, according to more than 3 dozen employees.  The reductions started in the past several weeks, even as many stores enter the busy back-to-school shopping period.  CEO Doug McMillon is trying to balance a desire to improve service, partly through increased spending on his workforce, against investors’ pressure to keep profit growing.  Labor costs, which rose after it increased the minimum wage to $9 an hour in Apr, have weighed on earnings, which missed expectations last qtr. At the same time, WMT is trying to maintain low prices to fend off rivals.  The stock fell 33¢.  If you would like to learn more about WMT, click on this link:

Wal-Mart Cuts Some Workers’ Hours After Pay Raise Boosts Costs

Wal-Mart (WMT)

Stocks are being sold on increased worries about the Chinese economy & stock market.  Uncertainty about the interest rate hike is adding to nervousness in the market.  This is traditionally a holiday week, but may not be much of a holiday for many investors.  Dow is down more than 1K in Aug, a month to remember.

Dow Jones Industrials

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