Thursday, February 16, 2017

Markets slip lower as gold rises to 3 month highs

Dow inched up 7, decliners over advancers 3-2 & NAZ lost 4.  The MLP index fell 3+ to the 334s & the REIT index rose 1+ to the 345s.  Junk bond funds drifted lower & Treasuries traded higher.  Oil gained & gold is up to a 3 month high (more on both below).

AMJ (Alerian MLP Industrials

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Live 24 hours gold chart [Kitco Inc.]

US households increased their borrowing in Q4-2016 at the fastest pace in 3 years, according to the Federal Reserve Bank of New York.  Consumer debt rose $226 (1.8%), led by a $130B increase in mortgage loan balances & a $32B increase in credit-card borrowings.  The rise brought total consumer debt to $12.58T, just shy of the $12.68T peak in Q3-2008.  New mortgages originated totaled $617B, marking the biggest 3 months for volumes since Q3-2007.  “Debt held by Americans is approaching its previous peak, yet its composition today is vastly different as the growth in balances has been driven by non-housing debt,” Wilbert van der Klaauw, a senior VP at the New York Fed, said.  Student loan balances rose to a new record high of $1.31T auto loan debt also increased to a record $1.16T in the 18-year history of this data series.

U.S. Households Ramp Up Borrowing to Levels Approaching 2008 Peak

Builders started work on more US homes than forecast in Jan after an upward revision to starts in the prior month, a sign construction was on a steady path entering 2017.  Residential starts totaled an annualized 1.25M, easing from a 1.28M pace in the prior month, a Commerce Dept report showed.  The forecast was 1.23M.  Permits, a proxy for future construction, increased at the fastest pace since Nov 2015 on a pickup in applications for apartment building.  Even with a recent pickup in mortgage costs, demand for housing is poised for growth as potential buyers benefit from increased hiring and healthier finances.  At the same time, builders say a shortage of skilled workers & ready-to-build lots remain a headwind for a bigger acceleration in residential construction.  Home starts in Dec were revised up from a previously reported 1.23M pace, representing an 11.3% surge from the prior month & was due to a jump in multifamily unit construction.  Single-family house construction increased 1.9% in Jan to an 823K annualized rate, the first gain in 3 months.  Work on multifamily homes, such as apartment buildings, fell 10.2% last month to an annual rate of 423K.  Data on these projects, which have led housing starts in recent years, can be volatile.  Total housing starts rose 20% in the South & 55.4% in the Northeast.  Beginning construction in the South, the nation's largest region, reached the highest level since Aug 2007.  They fell 41.3% in the West & 17.9% in the Midwest.  Permits increased 4.6% to a 1.29M annualized rate & were projected at a 1.23M pace.  While builder optimism eased this month, it's still close to an 11-year high on hopes that Trump will ease regulations, making it easier to purchase or build a house.  The National Association of Home Builders/Wells Fargo index of homebuilder sentiment fell to 65 in Feb from 67 the prior month.  Readings greater than 50 mean more respondents reported market conditions as good.  The measures of prospective buyer traffic, current sales & the 6-month outlook all showed a decrease.

Oil prices reversed gains to trade lower but continued to hold in a tight range as the market weighed swelling US inventories against possible renewed efforts by major oil producers to reduce a price-sapping glut.  Crude futures rose earlier after sources said OPEC may consider extending its oil supply-reduction pact with non-members & might even apply deeper cuts if global crude inventories failed to drop to a targeted level.  US light crude dropped 26¢ (0.4%) to $52.85 a barrel.  Prices have traded in a tight $5-range since OPEC & other exporters including Russia agreed last year to cut output by 1.8M barrels per day (bpd) to reduce a price-sapping glut.  The deal took effect on Jan 1 & lasts 6 months.  Most producers appear to be sticking to the deal so far but it is unclear how much impact the supply reductions are having on world oil inventories that are close to record highs.  US oil inventories have risen sharply in the past 6 weeks, with crude & US gasoline inventories hitting all-time records last week, the Energy Dept said yesterday.  Analysts say that the market is setting up for a possible fall if inventories do not start to decline soon.  The anticipation that OPEC's cuts, & surprisingly high level of adherence to those production reductions, will start to reduce inventories has kept traders heavily invested in futures contracts betting on more gains.

Oil Down Despite News OPEC Could Extend Output Cut

Gold futures climbed to finish at their highest level in more than 3 months.  Weakness in the $ & equities & a decline in Treasury yields combined to lift investment demand for the metal.  Apr gold rose $8.50 (0.7%) to settle at $1241 an ounce, the highest finish for a most-active settlement since Nov 10.

Gold Futures Finish At a More Than 3-month High

The stock market had a chance to catch its breath today.  Dow is up a staggering 500 in just 6 days & that was from a start at essentially record levels.  In the last 12 months it is up an eye popping 4+K (more than 25%).  Most investors are feeling good.  But economic growth remains drab & the low unemployment rate overstates what is going on with the work force.  Gold, a negative bet on the stock market, continues in demand.  The disconnect between record high stock indices & rising gold prices will have to be corrected & the stock market looks like the vulnerable one.

Dow Jones Industrials


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