Monday, November 14, 2016

Markets crawl higher on thin market breadth

Dow gained another 21 (eking out a new record close), advancers modestly ahead of decliners & NAZ lost 18.  The MLP index went up 3+ to the 299s & the REIT index shot up 6+ to the 326s.  Junk bond funds saw more selling (down about 10% from recent highs) & Treasuries saw selling again (more below).  Oil losses were limited ahead of Nov 30 meeting for OPEC (more below) & gold is down to the low 1200s from the mid 1300s just 2 months ago.

AMJ (Alerian MLP Index tracking fund)

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Live 24 hours gold chart [Kitco Inc.]

OPEC nations embarked on a final diplomatic effort to secure a deal on oil cuts, with Qatar, Algeria & Venezuela leading the push to overcome the divide between the group's biggest producers.  The behind-the-scenes diplomacy comes after bilateral meetings over the weekend failed to resolve the rifts, leaving just 2 weeks to finalize an agreement before the Nov 30 ministerial meeting.  Saudi Arabia, Iraq & Iran are still at odds over how to share output cuts.  OPEC has yet to find a path to finalize the preliminary cuts deal reached in Algiers on Sep 28, which ended a 2-year policy of pumping without limits.  After an initial rally to nearly $54 a barrel, Brent crude has dropped to $44 as doubts spread about the implementation of the agreement.  Members’ total output is still growing as Libya & Nigeria recover from violence that halted production.  Saudi Arabia, the de-facto leader, is ready to cut production, but only if the effort is built around 4 pillars.  All members must agree to collective action, pledge to share the burden of cuts equitably, & do so in a way that is transparent & has credibility with the market.  The latter can be achieved by using OPEC estimates of how much each member pumps, rather than relying on the country's own estimates.  In practice, that means Saudi Arabia still thinks Iraq needs to cut output & Iran has to freeze production around current levels & neither country has agreed to do that.  As initially outlined, Libya & Nigeria would be exempt from supply curbs.  Iran is considering a proposal to freeze its oil production near the level the country says it pumps, nearly 4M barrels a day, rather than OPEC's estimate of about 3.7M.  Iraq is mulling a cut, but only from the official level of about 4.8M barrels a day, not the 4.6M barrels a day OPEC says it pumps.

OPEC Starts Final Diplomatic Push to Heal Oil-Cut Divide

General Electric, a Dow stock, will buy ServiceMax, a cloud-based software company, for $915M to expand its digital operations & enhance equipment maintenance.  The deal will help GE automate & digitize the servicing of heavy-duty machinery.  It expects the acquisition to close in Jan.  “It’s no secret our services revenue is the bulk of our earnings and is a key part of what makes us successful,” Bill Ruh, chief exec officer of GE Digital, said.  “We’re moving away from where it’s all on paper to where it’s all becoming fully automated. Services are becoming a key part of the digital economy.”  GE is investing in software operations and attempting to position itself as a “digital industrial” company that makes equipment outfitted with sensors to improve productivity.  CEO Jeffrey Immelt has sold off most finance & consumer businesses while focusing on industries such as energy and aviation.  GE Digital, established last year & based on the outskirts of Silicon Valley, may become a $15B business by 2020.  GE has developed an operating system called Predix to help run industrial equipment more reliably & efficiently.  The stock was off 20¢.  If you would like to learn more about GE, click on this link:

GE Deepens Silicon Valley Push With $915 Million Cloud Purchase

General Electric (GE)

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Treasury yields rose sharply as the spot market (closed on Fri) caught up with moves in the futures market.  Yields climbed in the US & Europe, with the yield on the 10-year Treasury rising 9.1 basis points to 2.243%, its highest level in a year, while the yield on the German 10-year bund, the European benchmark, advancing 2.7 basis points to 0.177%.  The 2-year yield climbed 4.9 basis points to 0.964%, its highest level since Jan.  The yield on the 30-year bond gained 4 basis points to 2.978%, its highest since Dec.  The bond-market selloff, the latest leg of which began last week after the presidential election, persisted on, despite weak retail & output figures out of China, which suggested a pause in growth momentum in that economy.  A heightened sense of uncertainty following Trump's victory has passed more quickly than expected.  Now, the emphasis Trump has placed on infrastructure spending, as well as the conciliatory tone of his acceptance speech, has helped calm equity & currency markets, & triggered a shift toward higher growth & inflation expectations.  Typically, higher inflation expectations lead to a repricing in the long end of the Treasury yield curve, as investors demand a higher-term premium to compensate for the corrosive effect of inflation on real returns. 
One week ago, this post was talking about the Clinton rally going into the election.  By Tues night when it looked like Trump might win, Dow futures plunged (& that's the word to use) by almost 1K.  Since then it has been straight up for the Dow, although the NAZ has stumbled on fears of the unknown for tech stocks.  Dow is roughly 100 away from topping 19K, difficult to imagine early last week under this scenario.  Bank stocks are heading higher on expectations of reduced regulation but Treasuries & junk bond funds (stocks with high yields) are being sold.  The stock market is vastly overbought & the expected correction might be painful when reality sets in.  The bull run is very tired.

Dow Jones Industrials

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