Wednesday, January 31, 2018

Markets gain is pared but still had an excellent January

Dow reduced its AM gain to 72, advancers narrowly ahead of decliners & NAZ added 9.  The MLP index gave back 1+ to the 289s.  Junk bond funds drifted lower & Treasuries inched higher (with the yield on the 10 year Treasury at 2.72%).  Oil climbed in the 64s & gold advanced 8 to 1348.

AMJ (Alerian MLP Index tracking fund)

Live 24 hours gold chart [Kitco Inc.]

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Federal Reserve officials, meeting for the last time under Chair Janet Yellen, left borrowing costs unchanged while adding emphasis to their plan for more hikes, setting the stage for an increase in Mar under her successor Jerome Powell.  “The committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate,” the FOMC said, adding the word “further” twice to previous language.  The changes to the statement, collectively acknowledging stronger growth & more confidence that inflation will rise to the 2% target, may spur speculation that the Fed will pick up the pace of interest-rate increases.  Officials also said inflation “is expected to move up this year and to stabilize” around the goal, in phrasing that marked an upgrade from Dec. At the same time, the Fed repeated language saying that “near-term risks to the economic outlook appear roughly balanced.”  With her term ending later this week after Pres Trump chose to replace her, Yellen is handing the reins to Powell, who has backed her gradual approach & is widely expected to raise interest rates at the FOMC’s next meeting for the 6th time since late 2015.  Fed officials are hoping to keep a tight labor market from overheating without raising borrowing costs so fast that it would stifle the economy.  “Gains in employment, household spending and business fixed investment have been solid, and the unemployment rate has stayed low,” the Fed said, removing previous references to disruptions from hurricanes.  “Market-based measures of inflation compensation have increased in recent months but remain low.”  With a gradual pace of rate increases, policy makers want to nudge inflation back up to their 2% target, a goal they have mostly missed for more than 5 years.  Even with a brightening outlook for global growth & Fed tightening, financial conditions continue to ease.

Janet Yellen’s Fed Era Ends With Unanimous Vote of No Rate Hike

US oil production is gaining faster than expected as the country races to challenge giants Russia & Saudi Arabia.  Output topped 10M barrels a day in Nov, reaching the highest level since 1970 & beating gov forecasts by several months, according to the Energy Information Administration.  The agency previously predicted the country would reach the threshold in Feb 2018.  Nov output rose 4% from Oct, with the gains led by the usual producers: Texas, North Dakota & the Gulf of Mexico.

U.S. Reaches Oil-Output Milestone Months Earlier Than Expected

Trump's administration will increase the amount of long-term debt it sells to $66B this qutr, marking the first boost in borrowing since 2009 as the Treasury seeks to cover mounting budget deficits.  The Treasury is shaping the gov's borrowing plans against a budget shortfall that grew to $665.7B last fiscal year because of higher spending on Medicare, Social Security & other programs for an aging population.  The gap is expected to widen further due to tax cuts enacted this year that are projected to reduce revenue by almost $1.5T over the next decade.  Treasury Secretary Steve Mnuchin's dept also partly linked the larger sales of debt to the Federal Reserve cutting its crisis-era portfolio of Treasury bonds, which it bought to stimulate the economy following the financial crisis.  As the Fed slows the amount of gov debt it reinvests, the Treasury has to make it up thru public borrowing.  Mnuchin's debt management team will sell next week $26B of 3-year notes versus $24B in Nov.  The dept also lifted to $24B the sale of 10-year notes from $23B & 30-year bonds to $16B from $15B, also to be auctioned next week. Total offerings rose to $66B from $62B in Nov.  The Treasury expects to lift sales of 2- & 3-year note auctions by $2B per month over the qtr & will boost 5-, 7- & 10-year notes & 30-year bond auction by $1B each month starting in Feb.  Sale of 2-year floating-rate notes will also be increased by $2B beginning next month.  Additional borrowing needs will be addressed by increasing bill sales.  The changes will result in an additional $42B of new issuance for the upcoming qtr.  Auctions sizes of Treasury Inflation Protected Securities will remain unchanged over the 3-month period.  “Treasury anticipates these changes will stabilize the weighted-average maturity (WAM) of the debt outstanding at or around current levels, notwithstanding large, unexpected changes to borrowing needs,” it said.  A big chunk of the new supply over the year will also come thru more bill sales, yet that may be temporarily stymied as Treasury waits for lawmakers to hoist or suspend the debt limit again.  Mnuchin said yesterday that extraordinary measures he's been using to stay under the suspension will last thru the end of Feb.  The Treasury statement reiterated the end-Feb date as well.

U.S. Raises Longer-Term Debt Sales as Budget Deficit Worsens

US companies added 234K jobs in Jan, a report from ADP Research Institute said, a day after Pres Trump touted labor market strength in his State of the Union address.  The forecast had projected that private payrolls would grow by 185K.  “Since the election, we have created 2.4 million new jobs, including 200,000 new jobs in manufacturing alone,” Trump said.  The ADP report was published 2 days before the Labor Dept's payrolls report, which includes data from both the public & private sectors.  In addition to pointing to labor market strength, Trump also said that business confidence is high & that the stock market has gained $8T in value.

Companies add 234,000 jobs in January, buttressing Trump claim

Contracts to buy previously owned homes in the US rose for the 3rd straight month in Dec, bolstered by a robust job market.  The National Association of Realtors said its pending home sales index increased to a reading of 110.1 last month, up 0.5% from Nov.  The forecast called for pending home sales rising 0.4% last month.  Pending home contracts are seen as a forward-looking indicator of the health of the housing market because they become sales 1-2 months later.  Pending sales rose 0.5% in Dec from the same month in 2016.  Pending home sales rose 4.0% in the South from a year earlier, while they were up 0.3% in the Midwest.  Pending home sales fell 2.7% in the Northeast & 3.1% in the West on a year-on-year basis.

US pending home sales rise 0.5% in December

Eli Lilly (LLY) reported a bigger-than-expected quarterly profit, helped by demand for new diabetes & psoriasis treatments, while raising its adjusted earnings forecast for 2018 due to US tax changes.  The drugmaker raised its 2018 adjusted EPS forecast to $4.81-$4.91 from $4.60-$4.70.  However, the company incurred $1.94B in charges in Q4 related to the overhaul of the US tax code.  LLY also recognized asset impairment, restructuring & other charges of $1B in the qtr, primarily due to its cost-reduction efforts, including the US voluntary early retirement program.  The charges pushed LLY to a net loss of $1.66B ($1.58 per share) in Q4, compared with a year-ago profit of $771.8M (73¢ per share).  Excluding items, EPS was $1.14.  Revenue rose nearly 7% to $6.16B.  Analysts had expected EPS of $1.07 on revenue of $5.94B.  The stock dropped 4.64 (5%).
If you would llike to learn more about LLY, click on this link:

Drugmaker Eli Lilly beats estimates, raises 2018 profit forecast

Janet spoke (for the last time) & the markets listened.  There was a hint of a rate hike in Mar & the Dow dropped 200 in the next hour.  Uh, Oh!!  Her words continue to count, but that thought was not welcomed by traders.  The bulls returned in the last hour & recovered most of that loss.  In the meantime there is plenty of turmoil in DC.  Next week those guys have to figure out how to fund the gov for the rest of the & that looks gloomy.  Raising the debt ceiling is around the corner & they haven't bothered with that.  Meanwhile the economic data is encouraging & the jobs report on Fri should be quite favorable.  The Dow's advance was up over 1.4K (6%) in Jan.  Not bad at all!

Dow Jones Industrials

Markets climb higher led by Boeing

Dow vaulted 192 after 2 days of losses, advancers over decliners almost 2-1 & NAZ gained 39.  The MLP index rose 1+ to the 292s.  Junk bond funds fluctuated & Treasuries edged higher.  Oil was off pennies in the 64s & gold went up 8 to 1348.

AMJ (Alerian MLP Index tracking fund)

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The global stock declines that have shaped the week showed signs of easing, with US & European equities edging higher.  The $ slump deepened in the wake of Pres Trump's State of the Union address & the € rose after inflation data.  The S&P 500 gained for the first time in 3 days ahead of the release of earnings after the close popular tech companies.  The Stoxx Europe 600 Index pared an advance but stayed in the green amid a flurry of corp results.  The $ fell against almost every major peer after Trump offered few new clues on US policy in his speech & most bonds gained as the Bank of Japan increased asset purchases.  It's been a big month for stock markets, with stellar gains across most major gauges that were followed this week by the MSCI All-Country World Index's biggest 2-day slide since Sep 2016.  Investors will now be focusing on the Federal Reserve rate decision, the accelerating earnings season & more big economic data points to see if the uptrend can resume.  The yield on the benchmark Treasury fell, fluctuating around 2.7%.  The MSCI Asia Pacific Index declined for a 3rd session as a slump in Japanese shares weighed on the broader gauge.  The £ rose for a 2nd day.  South Africa's rand hit the strongest level in almost 3 years as Pres Jacob Zuma's future once again came into focus.  Oil extended its decline & industrial metals reversed losses.  A measure of China's manufacturing sector came in below expectations, while the services gauge topped estimates.

U.S. Stocks Surge After a Two-Day Losing Streak

Boeing (BA), a Dow stock, jumped as earnings rose on surging deliveries of the 737, the company's largest source of profit & an unexpectedly large one-time gain from US tax cuts.  BA pocketed a tax boost of $1.74 a share in Q4 & expects more benefits to come this year.  Corp levies are falling just as the company starts to see large cash gains from its 787 Dreamliner after a decade of losses.  Lower taxes are combining with record jetliner deliveries to fuel the cash gush at BA, the biggest gainer on the Dow in 2017 & so far this year.  The company predicted the first annual sales growth since 2015 & said operating cash flow would climb to $15 B.  Adjusted Q4 EPS was $4.80 ($3.06 excluding the tax gain).  Analysts had predicted $2.90.  Revenue rose 8.9% to $25.4B, compared with the $24.7B expected.  The aerospace manufacturer has pledged to return the equivalent of its free cash flow to investors thru an $18B share buyback program & 20% dividend increase approved in Dec.  Revenue has declined since 2015 as BA slowed deliveries of its highly profitable 777 jetliners amid waning sales & a shift to a new model.  But EPS have continued to rise as buybacks contributed to a 15% drop its average share count.  The stock surged 19.36 (6%).
If you would like to learn more about BA, click on this link:

Boeing Blows Past Estimates With Help From Tax Cut; Shares Surge

Total US employee compensation rose in Q4 & matched the biggest 12-month gain since 2008, as private-sector pay picked up, Labor Dept figures showed.  Index rose 0.6% Q/Q (matching est) after 0.7% gain in prior 3 months.  Wages & salaries rose 0.5% Q/Q following 0.7% gain. & benefit costs increased 0.5% Q/Q after rising 0.8%.  Total compensation, which includes wages & benefits, rose 2.6% over past 12 months; matches Q1-2015 as highest since 2008.  Private-sector wages & salaries rose from a year earlier by 2.8%, also matching the best gain of this expansion.  Several industry groups registered increases of 3% or higher, led by transportation & material moving at 3.5% & service occupations at 3.3%, underscoring demand for labor.  While wage growth has gradually improved, a sustained acceleration is yet to occur in the current economic expansion.  The latest year-over-year increase in compensation indicates employers are making more generous offers as they compete for workers in the tightening labor market.  The gov's quarterly read on the ECI, which measures employer-paid taxes such as Social Security & Medicare in addition to the costs of wages and benefits, offers Federal Reserve policy makers another look into how compensation may feed into inflation.  Central bankers later today will conclude a 2-day policy meeting & they're expected to leave interest rates unchanged in Janet Yellen's final gathering as chair.

Employment Costs in U.S. Match Fastest 12-Month Gain Since 2008

The bulls have returned after the earnings report from BA blew traders away.  Economic data remains strong & the earnings reports continue strong.  The Dow is within 400 of the record set on Fri & chances are that Janet's last press conference in a few hours will bring more stock buying.

Dow Jones Industrials