Monday, July 31, 2017

Dow closes at a record on hopes for tax reform

Dow jumped up 60, advancers  slightly ahead of advancers & NAZ lost 26.  The MLP index was fractionally higher to the 298s & the REIT index slid back pennies to the 353s.  Junk bond funds were mixed & Treasuries fluctuated.  Oil climbed over 50 on optimism about production cuts & gold was essentially even but higher in Jul (more below).

AMJ (Alerian MLP Index tracking fund)

 stock chart

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A rebound in contract signings for the purchase of previously owned US homes shows housing demand is stabilizing after a 3-month downturn, National Association of Realtors figures released showed.  Index rose 1.5% (est. 1% advance) after 0.7% drop.  The gauge climbed 0.7% from Jun 2016 on unadjusted basis. 3 of 4 regions showed month-over-month increase.  The increase puts the gauge in line with its average since the start of 2016 & shows growth in the residential real estate market is being sustained while contributing little to the economy.  Housing remains driven by trade-up purchasers who have taken advantage of low mortgage rates & are taking in stride higher asking prices.  Limited choices of cheaper properties, however, are hindering entry-level buyers.  Jun saw a decline in sales to investors & those paying cash.  Less competition from investors may help alleviate the tight supply issue, which is good news for first-time buyers.  “Market conditions in many areas continue to be fast paced, with few properties to choose from, which is forcing buyers to act almost immediately on an available home that fits their criteria,” Lawrence Yun, NAR chief economist, said.  “Low supply is an ongoing issue holding back activity. Housing inventory declined last month and is a staggering 7.1 percent lower than a year ago.”  13% of sales went to investors, smallest share this year.  All-cash transactions accounted for 18% of , the smallest share since 2009. Yun forecasts 5.56M existing homes will be sold this year, up 2.6% from 2016.

As the White House turns its attention toward tax reform, National Economic Director Gary Cohn said that lawmakers will have a piece of legislation written in 3-4 weeks.  During a listening session with executives from the real estate industry, Cohn confirmed that the GOP, including both the administration & Congress, is in total agreement on the major, overarching tax reform issues.  That includes the border-adjustment tax, which Cohn, Treasury Sec Steve Mnuchin & Rep Congressional leaders announced last week would not be included in the tax reform bill.  Last week, officials outlined key proposals that will be contained in the legislation including lowering the business tax rate, reducing “tax rates as much as possible,” increasing capital expensing & making sure the legislation is permanent.  Today, Cohn also recommitted to the 2017 timeline for tax reform.  "The president is 100% committed to getting tax reform done this year," he said.  Cohn added Reps were intent on showing the public, particularly where tax reform is concerned, “how unified [they] are on the issues.”

Gary Cohn: GOP in total agreement on major tax reform issues

Gold futures ended marginally lower but saw a monthly gain.  Gold for Dec delivery, the most active contract, fell $1.90 (0.1%) to close at 1273 an ounce.  For the month, gold saw a 2.5% rise

Gold Ends Marginally Lower, But Posts Monthly Gain

The auto industry is expected to turn in an underwhelming month of sales in Jul, likely paving the way for big discounts later this summer.  Auto sales have slowed down this year after a record-setting 2016, when automakers sold 17.55M new vehicles in the US.   Although interest rates & gasoline prices remain low, sales figures have dropped after much of the market's pent-up demand was satisfied during 7 straight years of growth.  Automakers have also suffered from slumping demand for passenger cars.  Sales of trucks & SUVs continued to grow in H1.  Kelley Blue Book & Edmunds are forecasting a 6% decline in Jul sales, compared to the same month in 2016.  Sales are also on pace to post a sub-17M seasonally adjusted annual rate for a 5th month in a row.  That would mark the longest streak since Feb 2015.  With 2018 models beginning to arrive in dealerships, car shoppers should see better incentives as automakers look to move outgoing models off the lot.  “Kelley Blue Book expects to see sales start to jump back up again in August and September thanks to model-year closeouts and the Labor Day holiday,” said Kelley Blue Book.  Edmunds, which predicts a 3.1% decline in sales versus Jun, expects every major automaker to report weaker Jul sales.  The car-shopping website believes General Motors (GM) will post the largest decline, 10.8%.  Edmunds also says Ford (F) & Fiat Chrysler (FCAU) likely sold 5% & 7% fewer vehicles, respectively.

Slow July auto sales hint at late summer discounts

While the drama in DC is providing excitement for gossip lovers, the administration is moving forward on its agenda (which gets lost with headlines on hearsay).  While healthcare may be resurrected, tax reform will get the most attention.  Dow has had a good month, rising a solid 540, nearing 22K, while NAZ has been stumbling in the last couple of weeks but still close to record levels.

Dow Jones Industrials

Mixed markets while awaiting more earnings data

Dow gained 62, decliners modestly ahead of advancers & NAZ was down  6.  The MLP index gave back 1+ to the 296s & the REIT index fell 1+ to the 352s.  Junk bond funds did little & Treasuries pulled back slightly.  Oil is sliding lower in the 49s (more below) & gold was off a tad.

AMJ (Alerian MLP Index tracking fund)

CL=FCrude Oil49.46

GC=FGold  1,266.50

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Oil was flat near 2-month highs, putting Jul on track to become the strongest month so far this year, as news of a producers' meeting next week added to bullish sentiment driven by the threat of US sanctions against OPEC-member Venezuela.  Investors also eyed a tightening US market after heavy inventory falls & slower new oil rig additions last week.  Some OPEC & non-OPEC members will meet on Aug 7-8 to assess how the group can increase compliance with production cuts that began on Jan 1. US light crude oil traded briefly above $50 per barrel for the first time in 2 months before easing back to around $49.53 a barrel.  Hedge funds and money managers have raised bullish bets on US crude oil to their highest in 3 months.  The US is considering imposing sanctions on Venezuela's oil sector in response to Sun's election of a constitutional super-body, which DC has denounced as a "sham" vote.  US production has hampered efforts to rebalance the market but signs the market is tightening have emerged.  US output dipped 0.2% to 9.41M barrels per day (bpd) in the latest week, after rising more than 10% since mid-2016.

Oil near two-month high as producers set to meet again

China's official factory gauge dialed back a notch in Jul as a push by authorities to curb financial risks spreads.  The manufacturing purchasing managers index slowed to 51.4 in Jul, missing 51.5 forecast & down from 51.7 in Jun. The non-manufacturing PMI was 54.5 versus 54.9 a month earlier (numbers higher than 50 indicate improving conditions).  The world's 2nd-largest economy performed more strongly than anticipated in H1, buoyed by a turnaround for exports & resilient domestic demand.  A statistics official attributed the slowdown in manufacturing activities in Jul to high temperatures in some regions & floods in others, while some factories had regular equipment maintenance.  Challenges lie ahead for H2 as policy makers slow the pace of credit expansion & vow to tackle excessive leverage.  Reading of input prices accelerates to 57.9, output prices climbs to 52.7.  New export orders index slips to 50.9, manufacturing PM shows.  Large firms more optimistic, but confidence slides for small & medium-sized enterprises.  Companies kept increasing procurement & have higher confidence in future development.  Almost 40% of companies said labor costs are rising.

China's Factory Gauge Suggests Economic Momentum Faded in July

A senior Chinese trade official said the issue of China-US trade should be kept separate from the issue of North Korean security threats, pushing back on statements from Pres Trump.  Vice Commerce Minister Qian Keming's remarks came after Trump over the weekend complained that China had benefited massively from trade with the US while providing no help resolving problems with North Korea.  "North Korea's nuclear issue and the issue of trade between China and the United States are two different issues. They are not related. You cannot speak about them together," Qian told reporters.  He also emphasized the mutual benefits of China's trade and investment with the US, rebuffing Trump's repeated claims that Beijing has exploited liberal US trade policies to its own advantage.  Trump sent a pair of tweets on yesterday, saying: "I am very disappointed in China. Our foolish past leaders have allowed them to make hundreds of billions of dollars a year in trade, yet...they do NOTHING for us with North Korea, just talk. We will no longer allow this to continue. China could easily solve this problem!"  UN Ambassador UN Nikki Haley joined in the criticism, saying China "must decide whether it is finally willing to take this vital step" of getting tough on the North.  China is the North's biggest trade partner and food and fuel aid source, leading the U.S. and others to press Beijing to use its leverage to rein in Pyongyang's behavior by cutting off assistance or agreeing to harsher sanctions.  Chinese companies also have a virtual monopoly on investments in North Korea's economy, particularly natural resources.  China however says its influence with Pyongyang is overblown & has declared repeatedly that it would not agree to measures that could bring about the collapse of the regime and create chaos along its border.  Also, Qian said China reported trade volume rose in H1 against the same period last year, ending a 2-year decline.  Imports rose 19.6% in the period Jan-Jun, while exports rose 25.7%.

Chinese official says no link between US trade and N. Korea

The good news for stocks is that the Dow climbed to a new high, about 100 under 22K.  But market breadth is negative & NAZ is slipping lower.  Earnings season is winding down & the goings on in DC show no sign of calm.   Aug could be a volatile month for stocks.

Dow Jones Industrials