Wednesday, July 27, 2016

Mixed markets after the Fed leaves interest rates unchanged

Dow rose lost pocket change (close to the lows), decliners slightly ahead of advancers & NAZ gained 29.  The MLP index lost 3+ to the 315s & the REIT index slid back 3 to the 369s.  Junk bond funds crawled higher & Treasuries went up.  Oil fell to 42 & gold rose on hints of an interest rate hike later this year.

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The Federal Reserve left interest rates unchanged while saying risks to the US economy have subsided & the labor market is getting tighter, suggesting conditions are getting more favorable for an increase in borrowing costs.  “Near-term risks to the economic outlook have diminished,” the FOMC said, before repeating language from Jun that the panel “continues to closely monitor” inflation and global developments.  Job gains were “strong” in Jun & indicators “point to some increase in labor utilization in recent months,” the Fed said.  The central bankers are taking stock of the economy’s progress in the wake of the UK's vote last month to leave the EU, as well as the large swing from May's soft labor report to June's rebound.  While Janet has repeatedly stated that the Fed is likely to raise interest rates gradually, market volatility & the unexpected dip in job gains have delayed such plans.  The committee repeated that it expects “economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.”  There was no reference to the specific timing of the next potential rate hike.  The central bank left the target range for the benchmark federal funds rate at 0.25-0.5%, where it’s been since Dec.  Household spending “has been growing strongly,” while business investment “has been soft,” the FOMC said.  The Fed reiterated that it expects inflation to rise to its 2 % target over the medium term.

Fed Says Risks Have Diminished as It Leaves Rate Unchanged

Oil dropped to another 3-month low after gov data showed that US crude stockpiles unexpectedly climbed last week, halting the longest streak of declines on record.   Futures fell almost 3% after crude inventories rose 1.67M barrels, according to the Energy Information Administration.  Analysts had forecast a 2M barrel decline.  Refineries reduced operating rates, which had been at the highest level of the year.  US refiners usually don't begin to curb processing until Aug as the summer driving season nears its end.

While the global oversupply has eased amid supply disruptions from Nigeria to Canada, high inventories of both crude & refined fuels coupled with signs of faltering demand growth have stifled the recovery.  US crude inventories climbed to 521M barrels in the week ended Jul 22, leaving supplies at the highest seasonal level in decades, EIA data show.  Stockpiles at Cushing, Oklahoma, & the biggest US oil-storage hub, increased by 1.11M barrels to 65.2M.  Crude production in the US rose by 21K barrels a day to 8.52M last week, marking the longest series of gains since Jan.  US oil explorers have boosted the number of active rigs by 55 since the start of Jun to 371, with 14 added last week.  Refineries bolstered operating rates by 0.8% point to 92.4% of capacity.  Gasoline supplies rose 452K barrels to 241.5K, the highest since Apr.  Stockpiles of distillate fuel, a category that includes diesel & heating oil, slipped 780K barrels to 152M.

Oil Falls to Three-Month Low

Coca-Cola, a Dow stock & Dividend Aristocrat, posted Q2 sales that missed estimates as falling revenue abroad outweighed modest gains in the US.  Sales dropped 5.1% to $11.5B & analysts projected $11.6B.  EPS was 60¢, beating the 58¢ estimate.

CEO Muhtar Kent has introduced new package sizes & started a $3B cost-cutting initiative to boost profit, but those efforts were outweighed by slowing intl revenue.  Q2 sales slipped in all of the regional units except for North America, where they gained 2.2%.  The company trimmed its forecast for organic revenue.  The figure, which excludes the effects of acquisitions, divestitures & currency-exchange rates, will grow about 3% this year, compared with an earlier forecast for a gain of 4-5%.  EPS will fall 4-7% this year, excluding some items.  That equates to EPS of 1.86-1.92.  Analysts estimated 1.94, which would be a 3% drop.  KO said that global sales volume was little changed in Q2.  Pricing & sales mix improved by about 3%.  To combat the long-term decline in soda consumption, KO has broadened its portfolio of products.  “Are we transforming our portfolio? Yes,” Kent said. “That’s what really the future is all about for us.”  The stock sank 1.48.  If you would like to learn more about KO, click on this link:

Coca-Cola Sales Trail Analysts’ Estimates on Declines Abroad

Coca-Cola (KO)

Stocks had a quite day when Janet left interest rates  alone.  But there was a hint about one interest rate hike this year (that's just one), so the bulls were not thrilled.  There was late day selling which may be significant coming after Janet spoke.  Dow is near its record high & the stock market is highly overbought, making for dangerous times.

Dow Jones Industrials


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