Thursday, March 31, 2016

Markets finish the quarter with minimal fluctuations

Dow fell 31, advancers over decliners 3-2 & NAZ was up fractionally.  The MLP index jumped up 8+ to go 271 & the REIT index went up 2+ to 241.  Junk bond funds traded higher & Treasuries advanced.  Oil was about even & gold finished the qtr with a modest gain.

AMJ (Alerian MLP Index tracking fund)

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CL.NYM....Crude Oil May 16....38.44 Up ...0.12 (0.3%)

Live 24 hours gold chart [Kitco Inc.]

In the 3 months since the U.S. lifted its 40-year ban on crude oil exports, a curious thing has happened.  Rather than flooding global markets, US crude shipments to foreign buyers have stalled.  At the same time, imports into the US jumped to a 3-year high in what looks to be a reversal of a years long decline in the amount of foreign crude brought into the American market.  US producers, who reaped the benefits of the shale revolution, no longer enjoy a steep price advantage over foreign rivals in selling to domestic refiners.  Production has fallen by about 600K barrels a day from its peak of 9.6M in 2015.  Now refineries are buying foreign oil to replace the lost US output, &, along with traders, are storing much of the less-expensive imported oil to sell when prices rise.  During the early years of the shale boom, the millions of barrels of light, sweet crude had one big problem: no affordable access to refiners on the coasts of Texas & Louisiana.  To tap into the cheaper oil pooling in Oklahoma, pipelines that used to bring imported oil up from the Gulf were reversed to take shale oil down to the coast.  Refiners in Philadelphia & NJ also began buying North Dakota crude instead of foreign oil, moving it by train across the country.  By Oct 2014, imports had fallen by about 40% from a high in 2006.  Now refineries along the coasts are choosing to buy imports instead of WTI.  One of the biggest winners is Nigeria, which is regaining lost market share.  Imports from Nigeria surged to 559K barrels a day in mid-Mar, compared with an average of 52K for all of 2015.  Refiners are also taking more heavy oil from Mexico & Venezuela.  Not only is it about $9 a barrel cheaper than WTI, it’s also what US refineries prefer to handle.  The US is hoarding a lot of the imported oil.  As of Mon, US commercial crude inventories hit 534M barrels, near the all-time high in 1929, when US commercial storage hit 545M barrels, as huge oil finds coincided with the beginning of the Great Depression.  Today, producers & traders are opting to wait for prices to rise instead of selling, especially with the futures market signaling that oil prices will rise.

The U.S. Is a Big Oil Importer Again

Midwest business activity picked up in Mar as firms amped up production & hiring, more evidence that pressures hurting US producers may be dissipating.    The Chicago Business Barometer, also known as the Chicago PMI, climbed to 53.6 from 47.6 in Feb.  The 50 mark is the threshold between expansion & contraction.   Economists expected a rise in the index to 50.0.  Sharp bounces in production & employment pulled the index higher this month.  Producers reported an upturn in demand & expressed optimism that orders would continue to rise over the next 3 months.  As demand resurfaced & sentiment improved, firms across the region increased hiring.  The employment gauge rose back above the 50 mark to the highest level in nearly a year, breaking what had been a trend of weak hiring in the region.  The Chicago PMI is the last in a batch of regional surveys looked to for clues on the state of the national manufacturing sector.  Reports this month have shown marked improvement across the country as a break in the $ climb has helped exporters, though manufacturers most exposed to the price of oil are still struggling.  Unlike other regional purchasing managers' reports, the Chicago-area survey includes some firms from the much bigger service-sector, where more favorable conditions have offset manufacturing weakness.

Midwest Manufacturing Jumps Out of Contraction in March

McDonald's, a Dow stock & Dividend Aristocrat, is adding more than 1K restaurants in China & is hunting for an investment partner in Asia to speed its expansion & smooth over a rough recent history in the region.  Over the next 5 years, the company wants to build out its franchise business in China, Hong Kong & South Korea, adding more than 1.5K restaurants to its current 2.8K.  In China alone, it aims to have 3.5K restaurants by 2020, up from 2.2K now, CEO Steve Easterbrook said.  The expansion plans come after a MCD announcement last year that it was closing 350 restaurants in China, Japan & the US.  It uses franchisees & licensees in its more mature markets, like the US.  But elsewhere it has largely relied on a more costly model of operating its own restaurants to oversee their quality & growth.  MCD has had trouble finding collaborators in Asia.  It announced last year plans to sell its restaurants in Taiwan & Japan to a franchise operator but hasn't yet closed a deal.  This announcement also zeroes in on a goal to make China the company's #2 market, up from the 3rd-largest behind the US & Japan.  In the next 5 years, MCD will open at least 250 restaurants a year & boost the rate of its franchised outlets beyond 30%, closer to the US rate of 90%.  MCD operated all its restaurants in China for more than 2 decades, until 2008 when it turned to franchising.  The stock lost 15¢.  If you would like to learn more about MCD, click on this link:

McDonald's Plans to Add More Than 1,000 Restaurants in China

McDonald's (MCD)

Trading today turned out to be uneventful with little news to drive traders.  The article about oil is interesting.  Low prices have changed that market.  For 3 weeks, oil has been unable to crack thru the important 40 resistance level & lately has fluctuated in the 38s.  Dow rose almost 300 in Q1, but if oil prices stall or retreat, that advance may be over.

Dow Jones Industrials


Markets crawl higher on the last day of the quarter

Dow gained 13, advancers over decliners 4-3 & NAZ rose 10.  The MLP index went up 4+ to the 266s & the REIT index was flattish in the 339s.  Junk bond funds edged higher & Treasuries had a modest advance.  Oil rose in the 38s & gold also traded higher (see below).

AMJ (Alerian MLP Index tracking fund)

CL.NYM...Crude Oil May 16...38.07 Down .....0.25  (0.7%)

GC.CMX...Gold Apr 16......1,237.60 Up ...10.70 (0.9%)

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Initial jobless claims increased by 11K to 276K last week, the highest since the end of Jan, according to the Labor Dep.  The forecast called for filings to hold at 265K.

The data may indicate that improvement in the labor market, which has been the strongest part of the economy lately, is being tempered by still-weak manufacturing, flagging business investment & soft consumer spending.  Initial claims would still need to show a sustained trend higher to confirm that layoffs are on the rise.  Jobless claims have been below 300K, a level associated with a healthy labor market, for 56 consecutive weeks.  That's the longest since 1973.  The 4-week moving average of claims, a less volatile measure than the weekly figures, increased to 263K from 259K.  The number continuing to receive jobless benefits fell 7K in the latest reporting week to 2.17M, the lowest level since mid-Oct.  The unemployment rate among people eligible for benefits held at 1.6%.

Initial Jobless Claims in U.S. Rose Last Week to Two-Month High

S&P has cut the outlook for China's credit rating to negative from stable, saying the nation's economic rebalancing is likely to proceed more slowly than the ratings firm had expected.  The credit rating is AA- with a negative outlook.  S&P also affirmed the long-term & A-1+ short-term sovereign credit ratings.  “We revised the outlook to reflect our expectation that the economic and financial risks to the Chinese government’s creditworthiness are gradually increasing,” S&P said.  “This follows from our belief that, over the next five years, China will show modest progress in economic rebalancing and credit growth deceleration.”  China's economic expansion will remain at or above 6% a year in the next 3 years, S&P forecast.  The investment rate may be “well above” what S&P says are sustainable levels of 30-35% of GDP.  “In our opinion, these expected trends could weaken the Chinese economy’s resilience to shocks, limit the government’s policy options, and increase the likelihood of a sharper decline in trend growth rate,” it added.  A downgrade could follow if S&P sees a higher likelihood that China seeks to stabilize growth at or above 6.5% by increasing credit at a “significantly faster rate” than nominal GDP growth.  Ratings could stabilize if credit growth is moderated to levels in line with economic expansion, S&P said.

China Rating Outlook Cut to Negative From Stable by S&P

Gold is headed for the biggest quarterly advance since 1990 as demand for haven assets surged to make the metal this year's best performing major commodity.  Bullion rose 0.5% to $1230 in Singapore.  The metal is up 16% since the start of Jan, the first quarterly gain since Jun 2014.  Gold rallied this year as it cemented its status as a store of value amid financial market turbulence & concern about the global economy, which led to speculation that the Federal Reserve would pause on tightening monetary policy.  A gauge of the US currency headed for the biggest quarterly loss since 2010 after Fed Chair Janet Yellen said the central bank will act “cautiously” as it looks to withdraw stimulus. Investor holdings in exchange-traded products have expanded by about 300 metric tons this qtr, the most in 7 years. 

Gold Heads for Best Quarterly Rally in 25 Years on Haven Demand

Q1 is closing out with little excitement.  Thanks to a major climb in Mar, Dow is up 300 YTD.  Earnings season is very near near & expectations have been revised lower.  GDP is also expected to have another weak qtr.

Dow Jones Industrials