Wednesday, February 28, 2018

Markets snap a 10 month winning streak

Dow dropped a very big 380 (at the lows once again), decliners over advancers 5-2 & NAZ lost 57.  The MLP index was down 5+ to the 357s.  Junk bond funds retreated & Treasuries were purchased, reducing the yield on the 10 year Treasury 4 basis points to 2.87%.  Oil fell to the 61s on increased supply (more below) & gold was flattish at 1318.

AMJ (Alerian MLP Index tracking fund)

CL=FCrude Oil61.65
-1.36 -2.2%

GC=FGold  1,318.90

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Stocks were mostly higher in PM trading, paring the worst monthly decline in 2 years, while Treasuries climbed with the $.  The S&P 500 rose but finished with a loss of 3% for Feb in one of the wildest months in years.  After a torrid Jan, equities sunk into a recession a week later only to claw back ½ of the rout just as quickly.  Trading was light in the final session, with the stock market benchmark swinging between gains & losses.  The 10-year Treasury yield held just below 2.9%, roughly where it began a month that saw it fall as low as 2.7% & come within 5 basis points of 3%, a level it hasn't touched in 4 years.  The $ added to its monthly gain yesterday, strengthening versus major peers including the € & £.  Crude slumped after an unexpectedly strong rise in inventories.  Equities resumed their climb one day after most major indices fell more than 1%  based on a generally upbeat assessment of the US economy from Federal Reserve Chairman Jerome Powell.  His comments left investors wondering if the central bank planned more interest rate hikes than expected in 2018.   US & European bond yields have soared in recent months amid speculation that the Fed's monetary policy will be tightened at a faster pace.  But in the equity markets that possibility is increasingly testing nerves, as traders try to divine how many increases are coming.

Stocks Mixed, on Pace for Worst Month Since 2016: Markets Wrap

US oil production reached a record high in Nov as the shale boom puts the nation among the world's biggest suppliers & upends global markets.  Once the world's largest importer of crude, the US is passing Saudi Arabia & closing in on Russia to become the world's largest producer.  Oil prices above $60 a barrel have lured companies to ramp up production.  Oil & gas exploration last year was a money-maker for the first time in more than a decade.  As a result, drillers in the US are using the most oil rigs since 2015.  Efforts by OPEC to trim output & tighten global markets has fueled a surge in exports, with the first supertanker leaving an American port earlier this month.  The current “explosive growth” in US oil output may extend beyond 2018, International Energy Agency Executive Director Fatih Birol said this week.  Shale's impact on the global market can be felt as OPEC's head plans to meet with shale producers in Houston, the 2nd consecutive year he's met with the group's biggest rivals.  Compliance by OPEC & its allies to their supply deal came in at 133% last month.  And even though non-OPEC decline rates accelerated last year, US shale supply will fill the gap.  Nationwide monthly crude production was revised to 10.057M barrels a day for Nov, the highest figure on record in monthly data collected since 1920, the Energy Information Administration reported in its Petroleum Supply Monthly report.  Daily output slipped back to 9.949M in Dec.  The EIA's crude-oil production data includes lease condensate.  Weekly crude oil production is proving irrepressible, rising to near 10.3M barrels a day & heading for 11M late this year.

Shale Surge Sent U.S. Oil Production to Record High in November

The US economy's growth rate last quarter was revised slightly downward as inventories subtracted more than previously estimated, Commerce Dept data showed.  GDP grew at a 2.5% annualized rate (matching est), revised from 2.6% & after 3.2% gain in prior qtr.  Consumer spending, the biggest part of the economy, grew an unrevised 3.8% (est 3.6%) after 2.2% gain in previous qtr.  Nonresidential fixed investment expanded 6.6%, revised from 6.8% gain; downward revision reflected smaller gain in intellectual property.  Inventories subtracted 0.7 percentage point from GDP, more than the 0.67 percentage point initially estimated (farm inventories were revised lower due to fresh data from Dept of Agriculture).  The latest results for GDP, the value of all goods & services produced in the US, show the economy ended the year on a solid note, despite the downward revision.  Household & business spending remained robust.  Consumer spending, which accounts for about 70% of the economy, was the biggest contributor of growth in Q4, adding 2.58 percentage points.  The report also showed wages & salaries were revised higher for Q3 & Q4.  Pay increased $97.4B in Q3, an upward revision of $18.3B.  Q4 wages were revised up to $91.3B.  Business outlays were also solid, contributing 0.82 percentage point to growth.  The latest results were boosted by residential investment & gov spending.  Final sales to domestic purchasers, which strip out trade & inventories, the 2 most volatile components of GDP calculation, climbed an unrevised 4.3%, the strongest since Q3-2014.  Price data in the GDP report showed inflation near the Federal Reserve’s 2%  goal.  Excluding food & energy, the Fed's preferred price index tied to personal spending rose an unrevised 1.9%.

Lowe's (LOW) recorded falling profits in Q4 despite a red-hot housing market.  Shares slid as healthy same-store sales were overshadowed by the profit miss & lower overall revenue.  The company reported a 16.4%  drop in EPS to 67¢.  EPS, adjusted for non-recurring costs, came to 74¢, which is still 14¢ short of expectations.  Revenue fell 1.8% to $15.49B, which edged out expectations.   Same-store sales, usually considered a measure of a retailer's health, rose 3.7%.  Mortgage rates have been creeping higher, hitting their highest level in 4 years during the most recent report a week ago.  That, coupled with rising home prices, could hamper what has been a persistently strong housing market.  For the full year, LOW reported EPS of $4.09 ($4.39 per share excluding certain costs) on revenue of $68.62B.  Looking ahead, the company expects its fiscal 2018 EPS to be $5.40-$5.50 & revenue to rise 4%.  Same-store sales are forecast to increase 3.5%.  The stock dropped 6.09 (6%).
If you would like to learn moire about LOW, click on this link;

Lowe's 4Q profit miss overshadows impressive store sales

This was a dreary month for stocks.  There was a major rebound in the last couple of weeks, but that was followed by selling this week.  That gave the Dow a drop of more than 1K, big by any standards!!  Economic data continues to come in strong, but the thought of higher interest rates is worrying investors & traders.  The first rate hike by the Fed this year is expected in 3 weeks & everybody is nervous.  Selling was substantial in the last 90 minutes.  Price swings at month's end are difficult to evaluate although yesterday also saw selling into the close.  Not a good sign for Mar.

Dow Jones Industrials

Tuesday, February 27, 2018

Markets tumble after Powell's comments on possible rate hikes

Dow sank 299 (closing at the lows), decliners over advancers 3-1 & NAZ gave back 91.  The  MLP index fell 2+ to the 263s.  Junk bond funds slid lower & Treasuries were sold with the yield on the 10 year Treasury jumping up 5 basis points to 2.91% (more below).  Oil fell to the high 62s (more below) & gold declined a very big 13 to 1319. 

AMJ (Alerian MLP Index tracking fund

Live 24 hours gold chart [Kitco Inc.]

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US consumer confidence jumped to a 17-year high as optimism about employment prospects grew & Americans began seeing additional money in their paychecks from recently enacted tax cuts, data from the Conference Board showed.  The confidence index rose to 130.8 (est 126.5), highest since 2000, from downwardly revised 124.3 in Jan.  Present conditions measure climbed to 162.4, highest since 2001, from 154.7.  Consumer expectations gauge increased to 3-month high of 109.7 from 104.  The report reflects increased confidence in employment & incomes, which could support consumer spending.  The labor differential, which measures the gap between respondents saying jobs are plentiful & those who say they’re hard to get, rose to 24.7 percentage points, the highest since 2001.  Recent tax legislation signed in Dec may have also buoyed sentiment, as many Americans saw bigger after-tax paychecks in Feb due to the law.  That may have helped consumers shrug off the early Feb 10% decline in stock prices, which have since recovered most of their losses.  “Despite the recent stock market volatility, consumers expressed greater optimism about short-term prospects for business and labor market conditions, as well as their financial prospects,” Lynn Franco, the Conference Board's director of economic indicators, said.  “Overall, consumers remain quite confident that the economy will continue expanding at a strong pace in the months ahead.”  Share of respondents expecting stock prices to increase in the year ahead fell to 41.3% from a record 51%.  25.8% of consumers said they expect better business conditions in next 6 months, up from 21.5% in previous month.  The share of households who expect incomes to rise in next 6 months rose to 23.8%, highest since 2001, from 20.6% & buying plans for homes, major appliances & new cars increased.

U.S. Consumer Confidence Is at 17-Year High

Jerome Powell opened the door to the Federal Reserve raising US interest rates 4 times this year as he acknowledged strengthening economic growth & inflation may prompt policy makers to rethink their plan for 3 hikes.  “My personal outlook for the economy has strengthened since December,” Powell said in response to a question about what would cause the FOMC to step up the pace of policy tightening during his first testimony as Fed chairman before Congress.  “We’ve seen continuing strength in the labor market,” Powell told the House Financial Services Committee.  “We’ve seen some data that will in my case add some confidence to my view that inflation is moving up to target. We’ve also seen continued strength around the globe, and we’ve seen fiscal policy become more stimulative.”  Investors marked up the probability of a Fed rate hike in Q4 to about 50% following Powell's remarks.  Odds of increases in Q2 & Q3 ticked up to about 80% & 70%, respectively, while the chances of a boost when the Fed next meets in Mar remained near 100%.  Powell is taking over the rate-setting FOMC at a time when the world's largest economy may be shifting gear to faster growth & declining unemployment, though inflation remains below the central bank's 2% goal.  Adding to the momentum are tax cuts & spending increases signed into law in Dec.  When pressed on how such an improving assessment would affect the path of interest rates, Powell deferred to the FOMC's upcoming meeting on Mar 20-21, saying he wouldn't “want to prejudge” economic & rate-hike projections that will be drawn up for that gathering.  Powell’s remarks caused yields on 10-year notes to jump to their highest levels of the day as they touched 2.91% after closing at 2.86% yesterday.  Stocks slipped into losses, with the S&P 500 down 0.4%.  The Fed chief's opening comments were also positive on the outlook for growth.  He said “some of the headwinds the U.S. economy faced in previous years have turned into tailwinds.”  He added that monetary policy will try to strike a balance between “avoiding an overheated economy” & bringing inflation back to 2% on a sustained basis.  The recent correction in the stock market & rising rates on gov debt shouldn't hamper growth, he said.  “We do not see these developments as weighing heavily on the outlook for economic activity, the labor market, and inflation,’’ Powell said.  “Indeed, the economic outlook remains strong.’’  Powell repeated the FOMC’s Jan message, saying “further gradual increases’’ in the Fed's policy rate “will best promote’’ the attainment of the central bank's objectives of maximum employment & stable prices.

Crude fell the most in more than 2 weeks as the International Energy Agency warned about seemingly unstoppable US shale production.  Futures in New York dropped about 2% after IEA Executive Director Fatih Birol said "explosive growth" in US output may extend beyond this year.  Investors were also bracing for a gov tally tomorrow that's expected to show American crude inventories rose to the highest since 2017.  A strengthening $ further eroded the appeal of commodities.  As OPEC works to trim output, producers are committed to bringing supply & demand into balance, UAE Energy Minister Suhail Al Mazrouei said.  Strong US shale growth is a risk factor that could delay those efforts, Birol said.  West Texas Intermediate for Apr delivery tumbled 98¢ to $62.93 a barrel.  Brent for Apr settlement, which expires tomorrow, declined 88¢ to $66.62 & the global benchmark crude traded at a $3.69 premium to WTI.  Strength in the $ weighed on crude prices as a rising greenback diminishes the appeal of commodities priced in the US currency.  A gauge of the currency against 10 major peers, rose as much as 0.7% as Federal Reserve Chairman Jerome Powell said the economic outlook has strengthened.  A survey ahead of the release of Energy Information Administration data showed US crude inventories increased 3M barrels last week.  Still, at the Cushing, Oklahoma, pipeline hub, crude inventories probably dropped by 1.2M barrels making for a 10th straight week of declines.  US crude output has surged above 10M barrels a day & the oil rig count climbed for a 5th straight week.

Macy's broke out of its 3-year sales funk, reporting a healthy sales gain at existing stores for the holiday period as it benefited from an improving economy & its own initiatives like an overhauled customer loyalty program.  The department store chain also posted sharply higher earnings for Q4, boosted by the sale of certain real estate assets & issued an upbeat outlook.  Macy's & other department stores are trying to regroup as shoppers spend more online & on items other than the clothing on which the chains are very dependent.  That has forced retailers to revamp their businesses, from closing poorly performing stores to changing their product lineups to expanding their online services.  Sales at established stores rose 1.4%, which includes sales in licensed departments like jewelry, well above the 0.4% increase analysts expected & reversed nearly 3 years of quarterly declines in that measure.  For the year, that figure was down 1.9%.  CEO Jeff Gennette, who took over nearly a year ago, says the company's focus has been expanding online, stabilizing its stores & laying the foundation for growth.  Macy's had said earlier in the year it will close another 11 stores, cut jobs & streamline non-store functions to save about $300M.  The chain, which has 140K employees, said those changes will affect 5K jobs.  Macy's is seeing many of its initiatives starting to bear fruit, & said that it's using the windfall from the corp tax reform law to accelerate some of them.  The company is adding its off-price concept called Backstage to another 100 stores.  For the first time, it will be adding them to stores located in premium malls. Macy's execs said that existing shoppers are spending more in stores that have a Backstage, which is currently in 45 stores. The company has also been testing new initiatives like mobile checkout, new lighting & fixtures at its Woodbridge, New Jersey store.  Those elements will be rolled out to 50 more stores this year.  It's also been trying to get more value out of its real estate holdings & said asset sales in the latest fiscal year, stores & other facilities like warehouses & parking garages, came to $411M.   EPS was $4.31 in Q4.  EPS adjusted for pretax gains were $2.82, easily beating expectations of $2.69.  Revenue of $8.67B was just short of expectations.  Macy's expects full-year EPS of $3.55-3.75.  Analysts expected EPS of $3.05.  The stock gained 95¢.
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Macy's tops expectations, optimistic outlook sends shares up

Consumer confidence data looks great, but traders are more concerned with the prospects of a 4th rate hike this year.  The worriers are missing the connection that more rate hikes will be related to a strong economy.  That's what the consumer confidence data is talking about.  Today's decline is not really significant after the rise off lows in early Feb.  But more negative thoughts from the worriers will drag stocks lower & the Dow closing at the lows today is very chilling.

Dow Jones Industrials