Wednesday, January 10, 2018

Markets drift lower while waiting for earnings season to begin

Dow fell 16, decliners over advancers better than 3-2 & NAZ retreated 10.  The MLP index gained 1+ to the 291s.  Junk bond funds declined in price & Treasuries were even at the end of trading.  Oil jumped up to the 63s (more than a 3 year high) & gold went up 5 to 1319.

AMJ (Alerian MLP index tracking fund)

Live 24 hours gold chart [Kitco Inc.]

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Federal Reserve policy dove Charles Evans argued for a 6-month delay in raising interest rates when central bankers met in Dec, because he wanted to give tepid inflation a chance to rise.  He lost that debate & they increased rates anyway.  4 weeks later, during which time 10-year Treasury yields have risen by almost a qtr percentage point to around 2.6%, the pres of the Chicago Fed remains pessimistic about the prospects for US price pressures to heat up.  “I don’t see any evidence of inflation moving up really fast, or even moving up enough,” Evans said, when he disclosed that at the Dec policy meeting he thought “it would be good to sort of put off the increases until about the middle of this year just to make sure the inflationary concerns resolve themselves.”  The Dec hike was the 3rd increase of 2017 & comes as Fed officials balance the risks of a hot labor market against weak inflation, which has been under their 2% target for most of the last 5 years.  Policy makers also raised their forecasts for 2018 growth a bit in anticipation of a boost from a $1.5T package of tax cuts, which Pres Trump signed into law in Dec.  Long-bond yields have been moving higher since last month, buoyed by a range of factors including the prospect of extra Treasury supply to finance the shortfall in US budget needs since the tax cuts, as well as events abroad.  Yields rose further today after a report that Chinese officials have recommended slowing or halting purchases of US Treasuries.  China has the world's largest holding of foreign exchange reserves.  Evans & Minneapolis Fed Pres Neel Kashkari dissented against the Dec rate increase & both cited low inflation among the reasons for their opposition.  Evans said he didn't expect inflation to rise to 2% until the end of 2019 or 2020.  Officials penciled in 3 rate increases this year in quarterly forecasts they released last month.  Evans declined to say how many moves he projected.  Dallas Fed President Robert Kaplan, speaking separately today, said he backed 3 moves this year.  “We’re going to have to watch, because we want to avoid a situation where we have such an overheating that we’re playing catch-up,” Kaplan said.  “Cyclical pressures are building substantially, and they will offset some of the structural headwinds. We will have to see.”

Fed’s Evans Wanted Rates on Hold Until Mid-2018 to Lift Inflation

Sub-par inflation over the past 5 years has cost the US economy nearly $1T in nominal growth, St. Louis Fed Pres James Bullard said as he fleshed out a proposal for a more dynamic system of setting price increase goals.  Several policymakers are encouraging the US central bank to review its method for controlling inflation & consider a system that makes up for weak inflation in one year by allowing prices to rise more quickly in future years so that the overall level, over time, stays on a set path.  The Fed currently aims to get annual inflation to a rate of 2%.  Bullard said the Fed's inability to get inflation to its target over the past 5 years has allowed a 4.6% gap to emerge in where the economy, measured in nominal terms before adjusting for price increases, would have been otherwise.  That amounts to more than $820B  in an $18T economy.  The inflation shortfall since 2012 "has opened up a substantial gap between the actual and desired price level," Bullard said.  To compensate, the Fed would have to allow annual inflation of 2.5% for a decade, a sign of just how large the gap has become but also of how aggressive the central bank would have to be in its commitment to make up for it.  One of the criticisms of price-level targeting is that it would require central bankers to not only convince politicians & the public that the higher inflation would improve the economy overall, but also that the level of price increases could be brought seamlessly back into line.  Bullard said shifting to such a system "would likely take a lot of preparation and debate."  Several policymakers are encouraging just such a discussion as Fed Chair Janet Yellen winds down her 4-year term & her successor, Jerome Powell, prepares to take over.

Fed's Bullard says inflation miss "cost" nearly $1T in nominal growth

Lennar (LEN) reported fiscal Q4 EPS of $1.29.  The results did not meet expectations of $1.50.  The homebuilder posted revenue of $3.79B, exceeding the forecasts of $3.62B.  For the year, the company reported EPS of $3.38 & on revenue of $12.65B.  The stock rose 1.58.
If you would like to learn more about LEN, cllick on this link:

Lennar misses 4Q profit forecasts

The Federal Reserve said the payments it will make to the federal govt based on its 2017 operations will drop to $80.2B, down 12.3% from 2016.  It will be the 2nd year that the payments have declined although they still remain about 3 times higher than the level in effect before 2008, when the Fed began a massive expansion of its bond holdings.  After covering its own operating costs, the Fed sends the Treasury its remaining profits each year, money that is used to lower the gov budget deficit.  The Fed said higher interest payments to banks on their reserves were a major reason for the drop in payments to the government.  The $80.2B is preliminary & may change slightly when final results are released in Mar.  Based on the preliminary figures, the Fed said it earned $80.7B in net income in 2017, a drop of $11.7B from 2016.  That decline reflected an increase of $13.8B in interest payments the Fed made to banks which was partially offset by an increase of $2.5B in the interest income the Fed earned on its holdings of Treasury bonds & mortgage-backed securities.  Operating expenses for the Fed system, which covers 12 regional banks, totaled $4.1B in 2017.  In addition the 12 regional banks were assessed $724M to cover costs related to producing and issuing currency.  In addition, the Fed's payments to fund the operations of the Consumer Financial Protection Bureau totaled $573M.  The Fed's bond holdings increased 5-fold to $4.5T starting in late 2008 as the central bank engaged in 3 rounds of bond purchases aimed at lowering long-term interest rates to help the country emerge from the recession.  Starting last Oct, the Fed has been gradually trimming its bond holdings by not re-investing a portion of its maturing securities.   But the holdings still total $4.4T, far above the levels in effect before the 2008 financial crisis hit.

Fed projects $80.2 billion payment to Treasury for 2017

Stocks did not do much of anything today.  Traders are waiting to see the first earnings reports to get an idea of what Q4 will be.  Of course, the goings on in DC are also encouraging stocks buyers to stay home.  While in the red for about all of the day, the Dow spent most of the time around a loss of only 25, remaining close to its record highs.  Bank earnings are coming & they should bring back stock buyers.

Dow Jones Industrials

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