Monday, April 30, 2018

Markets decline on last day of trading in April

Dow sank 148, decliners over advancers about 2-1 & NAZ lost 53.  The MLP index was flat at 258 & the REIT index went up 4+ to above 330.  Junk bond funds  crawled higher & Treasuries rose, taking the yield on the 10 year Treasury down to 2.94%.  Oil rose in the 68s (more below) & gold dropped 7 to 1315.

AMJ (Alerian MLP Index tracking fund)

Live 24 hours gold chart [Kitco Inc.]

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Stock indices were lower in the PM after an early burst of buying faded away.  The S&P 500 jumped at the open of trading following a series of buyout deals & strong earnings reports.  But the index sagged as noon approached, weighed down by losses for telecom stocks & other areas of the market.  The S&P 500 was down 14 (0.5%) at 2655.  It had been up 0.5% earlier.  The Dow average fell 74  (0.3%) to 24,237 & the NAZ was off 45 (0.6%) to 7074.  Telecom stocks in the S&P 500 fell nearly 2% for the largest loss among the 11 sectors that make up the index.  McDonald's (MCD), a Dow Stock & Dividend Aristocrat, joined the wave of companies to report not only big earnings growth for Q1, but bigger than analysts expected.  Just over ½ the companies in the S&P 500 have reported earnings for the first 3 months & they're on pace to deliver overall growth of 23%, the strongest showing since the summer of 2010.

U.S. Pending Home Sales Increased Less Than Forecast in March

The Federal Reserve is all but sure to leave interest rates unchanged this week, though steady economic growth & inflation pressures will likely keep the Fed on a path toward further rate hikes later this year.  The central bank is meeting as its board is undergoing a makeover, with a raft of new appointees by Pres Trump who appear generally supportive of the Fed's cautious approach to rates since the recession ended.  Despite Trump's complaints during the presidential race that the Fed was aiding Dems in keeping rates ultra-low under Pres Obama, his choices for a chairman & for other slots on the Fed's board have been moderates rather than hard-core conservatives who would favor a faster tightening of credit.  The Fed does seem inclined to continue raising rates modestly this year to reflect a steadily improving economy & to keep inflation pressures under control.  Economic growth remains solid & most inflation gauges show annual price increases finally moving close to the Fed's 2% target level.  But few analysts expect any aggressive pickup in the pace of rate hikes.  Most foresee either 2 or 3 additional increases in the Fed's benchmark rate by year's end, coming after an earlier hike in Jan.  As Jerome Powell, Trump's new Fed chairman, said at a news conference after the most recent meeting in Mar,  "We're trying to take the middle ground, and the committee continues to believe that the middle ground consists of further gradual increases in the federal-funds rate."  Bond investors are signaling that they expect a pickup in US inflation, having bid up the yield on the 10-year Treasury note last week above 3% before the yield settled just below that by week's end.  A year ago, the 10-year yield was just 2.3%.

Fed is set to leave rates alone but to hike later in year

Chinese factory growth has slowed slightly, according to a monthly survey that showed activity in the world's #2 economy holding up despite worries over trade tensions with the US.  The purchasing managers index came in at 51.4 for Apr, easing from 51.5 in the previous month but still above the 50-point mark that separates expansion from contraction on the index's 100-point scale.  The latest numbers come amid simmering trade tensions between Beijing & DC, with potential implications for China's sprawling export-oriented manufacturing sector.  The trade conflict will be in the spotlight again this week as Treasury Sec Steve Mnuchin leads a delegation to Beijing for talks aimed at defusing the threat to economic relations between 2 largest economies.  The China Federation of Logistics & Purchasing's survey found that factory output was stable but new orders & new export orders weakened for the month, indicating waning demand.  "Imports and exports continued to maintain growth, (but) the growth rate has slowed down," said Zhao Qinghe, senior statistician at the National Bureau of Statistics.  The latest numbers assuaged fears about a slowdown in China's economy, which grew at an unchanged 6.8% pace in Q1.  Forecasters are expecting growth to cool this year as Beijing tries to rein in rising debt levels.  Activity in the rest of China's economy also held up fairly well, with further growth in the services sector, which is playing an increasingly important role as communist leaders in Beijing pivot the country away from its agricultural & industrial roots. T he group's non-manufacturing purchasing managers' index rose to 54.8 from 54.6 in Mar.

China factory activity eases, service sector gains in April

Mar marked the official start of the spring, but it didn't cause more home buyers to leap into action.  Signed contracts to purchase existing home rose just 0.4% in Mar compared to Feb, according to a monthly pending home sales index from the National Association of Realtors (Feb's reading was revised down).  These contracts are a forward-looking indicator of closed sales in Apr & May.  The index was down 3% compared to Mar 2017, marking the 3rd straight month of annual declines.  "Healthy economic conditions are creating considerable demand for purchasing a home, but not all buyers are able to sign contracts because of the lack of choices in inventory," said Lawrence Yun, chief economist for the Realtors.  "Steady price growth and the swift pace listings are coming off the market are proof that more supply is needed to fully satisfy demand."  The biggest challenge in today's housing market continues to be a severe shortage of homes for sale, especially at the lower end of the market, where demand is highest.  There were about 9% fewer homes on the market in Mar compared to a year ago, pushing prices up 8%.  Homebuilders are also focused on the move-up, rather than entry-level market, as the cost of construction continues to rise.  Rents are also up 2.7% compared to a year ago, making it even harder for renters, especially millennials, to save for a down payment on a home.  "What continues to hold back sales is the fact that prospective buyers are increasingly having difficulty finding an affordable home to buy," Yun said.  Yun's forecast is for existing-home sales in 2018 to total 5.61M, up 1.8% from 2017. The national median existing-home price is expected to increase around 4.4%.  In 2017, existing sales increased 1.1% & prices rose 5.8%.  Mar buyers got in just before the jump in mortgage interest rates in Apr.  Rates are now at the highest level in 4 years, prompting more buyers to try to get in before they move even higher.

March pending home sales barely rose as buyers struggled to afford what little is available

Oil prices climbed after Israeli Prime Minister Netanyahu revealed documents that he said proves Iran ran a secret nuclear weapons program.  West Texas Intermediate crude spiked as high as $69.55 a barrel following these remarks, which added to concern that Mideast turmoil will curtail global supply.  Oil was 1.2% higher at $68.88 in recent trading, up from a session low of $67.17.  The oil market began to jump after Netanyahu's office said he would announce a “significant development” related to the nuclear deal with Iran.  Pres Trump is facing a May 12 deadline to decide whether the US will continue to waive sanctions as part of the nation's deal with Iran, the 3rd-largest oil producer in OPEC.  Under the 2015 deal, Iran was allowed to restart oil exports.  Netanyahu said the Iranian files he revealed show how Iran was seeking to develop nuclear weapons, which the country had denied.  “I’m sure [Trump will] do the right thing,” he added, referring to the nuclear deal.

Oil spikes after Netanyahu claims on Iran nuclear weapons

Apr was another tough month for stocks, hurt by a continuing threat on the unknown of where trade negotiations are going. The Dow inched up slightly in the month while remaining in the red YTD.  The days of the stock market rally seem like ancient history already.  The US & global economies are generally strong.  Confidence by consumers & business execs is quite high, a solid plus for stocks.  The next rate hike may be a couple of months away.  But trade negotiations are one huge question mark.  Chances are that new rules for trade will turn out to be good.  But the road is very bumpy, something investors do not like to see.  Large price swings in trading can be expected for some time which will make it difficult to resume the stock market rally.

Dow Jones Industrials

Higher markets led by McDonald's earnings report

Dow jumped up 115, advancers over decliners 4-3 & NAZ gained 31.  The MLP index was fractionally higher in the 358s & the REIT index rose 4 to 330.  Junk bond funds were mixed & Treasuries were fluctuated.  Oil was even in the 68s & gold dropped 9 to 1314.

AMJ (Alerian MLP Index tracking fund)

CL=FCrude Oil67.70

GC=FGold   1,311.30

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Treasury Sec Steve Mnuchin is getting ready for his upcoming trip to China.  “We’re looking to have a very frank discussion on trade and the issues of the trade imbalance, Mnuchin said.  “President Trump has been very clear over the past year that he very focused on the trade deficit and we are looking to correct that.”  Mnuchin made the comments at the 2018 Milken Institute Global Conference in California.  He said there are several issues to discuss during the trip including, intellectual property rights, forced technology & forced joint ventures.  When asked if China will slap tariffs on things like agricultural products & other things like airplanes, making those products more expensive for consumers, he said he's not concerned about China retaliating.  “We are just concerned that we have a good deal for American companies and American workers and that is something President Trump has been focused on,” he added.  “President trump has been very clear about the economic agenda going back to the campaign. It's been all about tax reform, regulatory relief and trade,” said Mnuchin.  “We’ve made incredible progress, we’re seeing the tax cuts just beginning to kick in, we’re making big progress on the economy, we’ve done a lot on regulatory relief and we’re focused on trade and the president is determined that we have free and fair and reciprocal trade.”  Mnuchin is cautiously optimistic about the meetings.  “I don’t want to predict what is going to happen or not going to happen. We are going to go over there, we’re going to have very frank discussions, these are issues President Trump has been focused on for over the last year & hopefully we’ll have significant progress" he said.  “We’re going there to make progress and that is our objective.”  The deadline for exempting certain nations from the tariffs on aluminum and steel is tomorrow.  “We are very careful about what we are doing. I think the president has been very clear, there have been ongoing discussions, said Mnuchin.  ”I think when these came out the president gave us time to address these issues and the president will make a decision on this.”

Treasury’s Mnuchin is optimistic about improved trade, tariffs and the economy

McDonald's (MCD), a Dow stock & Dividend Aristocrat, reported Q1 results that topped the forecast, helped by strength in intl markets & US consumers opting for more expensive burgers over value meals.  A multiyear turnaround plan launched by CEO Easterbrook 3 years ago, has brought menu changes, new technology to stores & restaurant upgrades to drive more traffic.  High-margin "gourmet" burgers which offer fresh and more expensive ingredients, costing $6 or $7 a time compared to the chain's $1 to $3 value options, raised the average US check value.  Sales at US restaurants rose 2.9%, topping expectations of 2.7%.  Global sales at stores open at least 13 months rose 5.5%, easily topping the estimate of 3.94% & reflecting a 7.8% surge in the company's more mature intl markets - Australia, Canada, France, Germany & the UK.  Excluding items, EPS was $1.79, beating the estimate of $1.67.  Revenue overall fell 9% as a result of refranchising, a cost-cutting move where the company sells MCD-owned outlets to a franchisee investor & receives only a cut of sales.  The shape of the results also ran contrary to recent qtrs, when MCD & other fast food chains have focused on battling each other with $ menus, discounts on beverages & limited-time menu items as consumer spending cools.  EPS rose to $1.72, from $$1.47 a year earlier.  The stock shot up 7.65.
If you would like to learn more about MCD, click on this link:

McDonald's gourmet burgers, global sales drive quarterly results beat

WASHINGTON (AP) — Americans boosted their spending by 0.4% in Mar, the best showing in 3 months . Meanwhile, a key gauge of inflation closely watched by the Federal Reserve rose at the fastest pace in more than a year.  The Mar increase in consumer spending followed 2 months of very weak readings with no gain in Feb & only a 0.2% increase in Jan, the Commerce Dept reported.  The result is an encouraging sign that economic growth, which slowed in Q1, will accelerate in the current qtr.  Personal incomes advanced a moderate 0.3% in Mar, matching the Feb gain.  Consumer spending is considered key to economic growth, accounting for 70% of economic activity.  The economy slowed to growth of 2.3% in Q1, reflecting a slowing in consumer spending.  Many analysts believe stronger consumer spending this qtr will lift overall growth back to rates above 3%.  An inflation gauge tied to consumer spending advanced 1.9% in Mar compared to 12 months ago, the fastest pace since a similar 12-month gain of 1.9% in Feb 2017.  The Fed seeks to achieve moderate annual increases in inflation of around 2% but has fallen below that target for the past 6 years.  Now with unemployment at a 17-year low of 4.1%, economists expect that tight labor markets will finally start to lift wage gains & overall inflation.

US consumer spending rebounded 0.4% in March

Stocks got off to a good start in the new week.  MCD earnings are responsible for much of the advance in the Dow & ther indicators are giving signals of a mild advance.  So far earning reports have have been mixed with some high profile companies disappointing.  Mnuchin's talks with China will be more important in determining where stocks are going next.  The Dow keeps hanging in modestly above 24K.

Dow Jones Industrials