Friday, December 21, 2018

Markets plunge, worst week in 10 years

Dow sank another 414 (finishing close to lows), decliners over advancers better than 3-1 & NAZ dropped 195.  The MLP index was off 4+ to the 221s & the REIT index fell 4+ to the 332s.  Junk bond funds remained weak & Treasuries were off a tad.  Oil fell lower in the 45s (more below on oil's bear market) & gold was off 9 to 1258.

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Oil prices fell to their lowest since Q3-2017, recording losses of more than 11% for the week, as global oversupply kept buyers away from the market ahead of the long festive break.  Brent crude fell $1.56 to a low of $52.79 a barrel, its weakest since Sep 2017, before rallying to trade around $53.10, down 11.9% on the week.  US light crude oil was down 60¢ at $45.28, down 11.6% for the week.  Crude has lost ground along with major equity markets as investors fret about the strength of the global economy heading into next year.  The prospect of a possible gov shutdown in the US, the world's biggest oil consumer, added to investor worries.  Falls were exaggerated by thin trade & risk aversion ahead of Christmas & the New Year holidays.  Since reaching multi-year highs at the beginning of Oct, both crude oil benchmarks have lost more than a 1/3 of their value in their steepest collapse for 3 years.  Driving the sell-off has been sustained oversupply as the US has emerged as the world's biggest crude producer thanks to the success of its shale industry.  The US now pumps 11.6M barrels per day (bpd) of crude, putting it ahead of Saudi Arabia & Russia.  The big oil producers in OPEC, dominated by Middle East Gulf states which mostly rely on energy exports, have agreed to reduce production to try to push up prices.

Oil hits new lows as pessimism persists

Chinese leaders promised more help to entrepreneurs in 2019 to shore up weakening economic growth as Beijing tries to resolve a tariff war with DC over technology.  An annual planning meeting led by Pres Xi Jinping called for reforms to state industry & to reduce financial risks.  Beijing will "promote high-quality development of manufacturing," the statement said, suggesting the ruling Communist Party is sticking to plans for state-led industry development.  But it gave no indication whether strategies DC, Europe & other trading partners say violate China's market-opening obligations might be changed.  Xis gov is trying to shore up cooling growth in the world's 2nd-largest economy & avoid politically dangerous job losses without reigniting a rise in debt levels that economists warn are already dangerously high.  "The external environment is complicated and severe, and the economy is facing downward pressure," the statement warned. "It is necessary to enhance the sense of urgency."  Such meetings set Beijing's priorities for the coming year, but companies usually have to wait weeks or months to see detailed regulations.  The statement echoed earlier ruling party promises to support entrepreneurs who generate China's new jobs & wealth.  Reform advocates complain Beijing is dragging its feet on promises to rein in the dominance of state industry.  Beijing is due to start talks in Jan with DC aimed at resolving a tariff battle over US complaints that China steals or pressures companies to hand over technology.  Pres Trump raised US tariffs on $250B of Chinese goods, adding to pressure on export industries that support Ms of jobs at a time of weakening global demand.  The US also objects to development plans including Made in China 2025, which calls for state-led creation of global champions in robotics, biotech & other fields.  American officials worry those might threaten US industrial leadership.  Chinese officials have indicated those programs might be opened to foreign companies, though it is unclear whether that would satisfy DC.  This announcement follows a decline in economic growth to a post-global crisis low of 6.5% over a year earlier in the latest qtr.  Consumer demand is weakening & auto sales have contracted for the past 4 months.  The slowdown, combined with Beijing's fight with Trump, has fed gloom among companies, consumers & investors.  China's stock market is on track to end this year down 25%.  The ruling Communist Party's Politburo called Dec 13 for efforts to stabilize employment, finance, trade & investment & to "boost market sentiment."  Chinese leaders have stepped up promises to help private business as economic growth weakened.  The party needs to create conditions to "let the private economy create vitality," Xi said in a Nov 1 speech to an audience of entrepreneurs.  The 2019 economic plan promises tax cuts & to "solve the financing difficulties of private enterprises," according to today's statement.  This week, Beijing unexpectedly announced a 100B yuan ($15B) lending program for entrepreneurs.  Analysts said that "targeted easing" appears to be aimed at shoring up growth without reigniting a rise in debt.

Chinese leaders promise tax cuts, help for entrepreneurs

The US economy slowed in Q3 a bit more than previously estimated, but the pace was likely strong enough to keep growth on track to hit the Trump administration's 3% target this year, even as momentum appears to have moderated further early in Q4.  GDP increased at a 3.4% annualized rate, the Commerce Dept said in its 3rd reading of Q3 GDP growth.  That was slightly down from the 3.5% pace estimated in Oct & well above the economy's growth potential, which is estimated to be about 2%.  The revisions to the Q3 GDP reading reflected markdowns to consumer spending & exports.  Inventory accumulation was, however, much bigger than previously estimated.  There were downward revisions to business spending on equipment & nonresidential structures, as well as residential investment.  The economy grew at a 4.2% pace in the Apr-Jun qtr.  The Federal Reserve raised interest rates on Wed for the 4th time this year, but forecast fewer rate hikes next year & signaled its tightening cycle is nearing an end in the face of financial market volatility & slowing global growth.  The central bank slightly lowered its growth projections for 2019.  Growth is being driven by the Trump administration's $1.5T tax cut package, which has given consumer spending a jolt.  The fiscal stimulus is part of measures adopted by the White House to boost annual growth to 3% on a sustainable basis.  But the economy appears to be slowing in Q4 amid a widening trade deficit, sluggish business spending on equipment & a weak housing market.  The slowdown in growth is expected to spill over into 2019 as the fiscal stimulus fades & a bitter trade war with China & strong $ undercut manufacturing.  Growth estimates for Q4 are around a 2.9% pace.  An alternative measure of economic growth, gross domestic income (GDI), increased at a rate of 4.3% in Q3, instead of the 4.0% pace reported last month.  The average of GDP & GDI, also referred to as gross domestic output & considered a better measure of economic activity, increased at an unrevised a 3.8% rate in the Jul-Sep period.  After-tax corp profits were revised up to show them rising at a 3.5% rate in Q3 instead of the previously estimated 3.3% rate.  Corp profits rose at a 2.1% pace in Q2.  Inventories increased at an $89.8B rate, instead of the $86.6B rate estimated in Nov.  Inventory investment added 2.33 percentage points to GDP growth.  That was more than the 2.27 percentage points reported last month & was the biggest contribution since Q4-2011.  Consumer spending, which accounts for more than 2/3 of US economic activity, increased at a 3.5% rate in Q3, slightly down from the 3.6% rate estimated in Nov.

US third-quarter economic growth revised down to 3.4%

Surging demand & strong occupancy in the nation’s apartment market is “surprising” experts who say the continued strength is “unexpected.”  Just a year ago, as dozens of cranes swarmed over major US cities, there was concern that the rental apartment market was overheated & overbuilt.  Apartment absorption, which is the rate at which new units are rented out, is now at the highest level in 3 years, according to the US Census.  Apartment construction took off in 2012 & reached a 20-year high in 2017.  It remained elevated this year, despite warnings that demand would slow as more millennials aged into their homebuying years.  While buyer demand did surge, sales were thwarted by tight supply that has pushed prices higher in the past few years, weakening affordability.  When mortgage rates surged this year, even fewer people were left with the means to buy a home.  The Q3 this year marks the 4th consecutive qtr of positive operating “surprises” for apartments, according to a recent report from Green Street, which noted that the asset values of these apartment properties remain on firmer footing than most core property types.  Apartment earnings were also better than expected because rents remain strong.

Demand for apartment rentals surges unexpectedly as home sales slump

These are tough times for investors, but experienced ones will keep the faith.  The Dow was down a massive 1600 this week & off 3300 this month.  More statistics mean little.  The biggest short problem problem is avoiding or limiting the gov shutdown which is getting a lot of publicity.  Then Chinese trade, higher interest rates & a slowing economy, among other problems, will be dealt with.  Try to have a good weekend.

Dow Jones Industrials

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