Wednesday, January 16, 2019

Higher markets after China adds financial stimulus to spur growth

Dow gained 141 (with selling in the last hour), advancers over decliners 3-2 & NAZ added only 10 (finishing well below session AM highs).  The MLP index inched higher in the 247s & the REIT index rose 3+ to the 342.  Junk bond funds were mixed & Treasuries slid lower.  Oil crawled higher in the 52s & gold was up 4 to 1293.

AMJ (Alerian MLP Index tracking fund)

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China's central bank pumped a net 560B yuan ($83B) into its banking system — a record amount of money injected in one day — in a sign that the economy may be facing enormous stress.  The yield on the 10-year Chinese government bond fell below 3.1%, its lowest in more than 2 years.  Yields fall when bond prices rise & a decline in yields typically signals expectations of a slowdown in economic growth.  “At present, it is the peak of the tax period, and the total liquidity of the banking system is declining rather quickly,” the People's Bank of China said in a statement.  Liquidity, the ease by which assets can be turned into cash, is particularly important for companies needing to pay taxes while maintaining regular operations.  For more than a year, many Chinese businesses have already been struggling with sluggish economic growth, increased financing difficulties & greater obligations to provide benefits for employees.  The Chinese New Year holiday, when most companies shut down for at least a week, is also less than 3 weeks away.  The central bank's record cash injection of 560B yuan into the banking system came thru “reverse repurchase agreements,” or buying short-term bonds from some commercial lenders so banks have more cash on hand.  Sales of the bonds are called “repurchase agreements” & both measures comprise the central bank's “open market operations.”

China just injected a record amount of money to stimulate its economy

The downturn in mortgage interest rates that began in Nov finally has homebuilders feeling better.  Builder sentiment rose 2 points to 58 in Jan on a monthly index from the National Association of Home Builders (NAHB).  This came after 2 months of sharp drops in sentiment to the lowest level in more than 2 years.  The index stood at 72 last Jan.  Anything above 50 is considered positive.  “The gradual decline in mortgage rates in recent weeks helped to sustain builder sentiment,” said NAHB Chairman Randy Noel.  “Low unemployment, solid job growth and favorable demographics should support housing demand in the coming months.”  Of the index's 3 components, current sales conditions rose 2 points to 63, sales expectations over the next 6 months increased 3 points to 64 & buyer traffic thru new home models rose 1 point to 44.  Buyer traffic is the only component in negative territory.  Some of the nation’s largest public homebuilders reported weak quarterly earnings last week, indicating a slowdown in sales. They indicated that high prices had sidelined buyers, especially as mortgage rates rose in the early fall.  Now that rates are lower, builders could see renewed demand.  Builders, however, are not lowering prices significantly. There remains a tight supply of homes for sale at the entry level because builders are unable to profit as much on lower-priced homes.  “Builders need to continue to manage rising construction costs to keep home prices affordable, particularly for young buyers at the entry-level of the market,” said NAHB chief economist Robert Dietz.  “Lower interest rates that peaked around 5 percent in mid-November and have since fallen to just below 4.5 percent will help the housing market continue to grow at a modest clip as we enter the new year.”

Homebuilder sentiment turns higher in January after mortgage rates drop

Bank of America (BAC) reported Q4 EPS of 70¢ on revenue of $22.7B.  The forecast called for EPS of 63¢ on revenue of $22.4B.  Earnings were helped by the corp tax cut passed in late 2017.  In the same qtr a year ago, BAC took a large one-time charge related to the tax overhaul, reporting adjusted EPS of 20¢ on revenue of $20.4B.  Rising interest rates also helped as the bank was able to charge higher rates on loans & didn't pay out more to depositors.  Q3 EPS came in at 66¢ on revenue of $22.8B.  The stock rose 1.90.
If you would like to learn more about BAC, click on this link:

Bank of America 4Q earnings rise sharply

UnitedHealth Group (UNH), a Dow stock, beat estimates for Q4, helped by growth in services business as well as its mainstay health insurance plans.  The largest health insurer reporting $46.2B in sales in its insurance business, an 11.1% rise from a year earlier.  Revenue from Optum, which includes a pharmacy benefits management business, grew 13% to $27.56B, benefiting from growth in care delivery, behavioral health & health financial services.  It's 2018 medical care ratio, percentage of premiums paid out for medical services, improved to 81.6% from 82.1% last year.  The health insurer also affirmed its 2019 profit forecast.  EPS fell $3.10 in the qtr.  Excluding items, EPS was $3.28 & total revenue rose 12 % to $58.4B.  The forecast called for EPS of $3.21 on revenue of $58B.  The stock advanced 4.59.
If you would like to learn more about UNH, click on this link:

UnitedHealth profit beats on strength in Optum, insurance units

Stocks had another good day.  The Dow is up almost 2½K since the Christmas eve low.  That's eye popping considering there has been a lack of good news.  Indeed, much of the recent news has been soggy.  China trade talks are going nowhere & the gov shutdown is looking like it could last weeks, if not months.  But optimists are ignoring the negatives, hoping earnings will justify higher prices for stocks.  Maybe, maybe not.  In the meantime most of macro economic news is dreary.

Dow Jones Industrials

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