French Election Results on Tap

A pretty quiet week in terms of price action as the indices remain in a divergent situation as the small cap index (Russell 2000) is confirming lower prices are coming (see Chart Time!). The French election results will dominate the news cycle on Monday but I don’t expect any surprises so its likely markets shrug off the news and continue to edge higher.

The saga of Puerto Rico will get a lot more interesting as the island is filing its version of bankruptcy. Not a surprise but the phrase from the boxer Mike Tyson comes to mind, “….everyone has a plan until they get punched in the face.” How the municipal bond market takes a $70B bankruptcy on the chin will become apparent in the coming weeks as the value of this debt is what Puerto Rico can pay which I doubt is better than 50% of par value.

Short term bullish vibe

I included this chart from Elliott Wave International which shows the DOW and the increasing number of stocks making 52-week lows. Striking that fewer and fewer stocks are keeping indices at these levels but that tells you that we are likely still in a corrective mode which began in early March. Let’s see what happens this week.


Economic & Central Banking Snippets

  • The Federal Reserve said it believes the recent slowdown in US growth is likely to prove temporary as it stayed on course for a further increases in short-term interest rates. However, the Fed kept the federal funds rate unchanged following its latest two-day meeting. Expect another 0.25% increase in their June meeting.
  • The Institute for Supply Management (ISM) said the reading for its manufacturing index came in at 54.8 for April. That’s below the 57.2 recorded in March and much weaker than the 56.5 the market had forecast. Still, any number above 50 signals expansion and the April figure marks the 8th straight month that the gauge has come in above 50. Growth remained broadly based by industry, with 16 of 18 manufacturing sectors reporting growth in April – the best three-month run since 2005. However, new orders growth is waning which may be a sign that growth in US manufacturing could be peaking. (MS)
  • Construction Spending: Weaker than expected in March but prior months were revised upwards (February & January) which indicates stronger Q1 GDP growth. Construction spending fell 0.2% overall in March and 0.6% excluding volatile home improvements spending. The impact of the unusually warm February and then much colder March is apparent in that swing. (MS) As you can see from the chart below, we have now exceeded the bubble highs in 2006. Nervous?

Construction spending


  • Housing Prices: Home prices appreciated year-over-year for the 58th consecutive month in February! The appreciation also accelerated for the 8th month in a row after decelerating from February through June of last year. According to Case-Shiller, home prices are appreciating at their fastest annual pace since July 2014 and now sit 2.1% through prior bubble-era peaks. Looks like low-interest have successfully reflated the real estate markets.
  • NFP: Private payrolls increased +211,000 for April which is a +4bps sequential acceleration to +1.56% YoY. The combination of accelerating employment and the rise in average weekly hours makes for another notable acceleration in aggregate hours worked. Hourly Earnings were +0.3% MoM but declined slightly Y/Y (+2.5%). (HedgEye)
  • The chart below is from HedgEye analytics. As you can see we have had stagnant payroll growth since 2011 which showed a peak in Q1 2015. Historically, from the peak to the following recession has ranged from 20 to 30 months since 1990. Currently, we are 26 months past the peak so we need something to spark payroll growth or we may see a contraction in the economy in the coming year.

Nonfarm payroll growth


Politics! Politics! Politics!

  • Mexico is urging Donald Trump to reuse agreements reached under the aborted Trans-Pacific Partnership to create a manufacturing powerhouse between the US, Mexico and Canada to compete with low-cost producers in China. “A package is already in your pocket,” Ildefonso Guajardo, Mexico’s economy minister, said. (FT)
  • Le Pen plays down anti-euro message Far right French presidential candidate Marine Le Pen has indicated her flagship policy of leaving the euro is no longer a priority, an attempt to broaden her mainstream appeal ahead of the election this weekend. Election results will be available Sunday evening. Markets are largely pricing on a Macron victory. (FT, Guardian)
  • Despite limited investor appetite, Treasury Secretary Steven Mnuchin has indicated a strong likelihood the government will pursue the sale of ultralong bonds. Treasuries maturing in 50 years or more could let the Trump administration realize conflicting objectives of improving infrastructure and lowering taxes.


Chart Time!

S&P 500 (SPY)
S&P 500 (SPY)


Dow Jones (DIA)
Dow Jones (DIA)




Russell 2000 - Small Caps (IWM ETF)
Russell 2000 – Small Caps (IWM ETF)


10 Year Treasury Yields - TNX
10 Year Treasury Yields – TNX


Market Snippets

  • Apple has asked California regulators to make changes in the state’s proposed policies on self-driving cars, the latest sign the company is pursuing driverless car technology, according to a Reuters report.
  • Boards of companies listed on the S&P 500 index have authorized $146B in share buybacks this year, marking the lowest pace in five years as directors worry about “extremely high valuations,” according to research by Goldman Sachs. The figure represents a decline of 15% from the comparable period last year.

Buyback authorizations


  • Twitter shares climbed to their highest levels in nearly three months amid news that the company is teaming up with Bloomberg to create a round-the-clock video streaming news service. The CEO, Jack Dorsey, bought more than 500,000 shares of the company last week.
  • The world has seen 793 mergers and acquisitions this year, down 20% compared with the same period last year and the lowest level since 1998, according to Dealogic. The value of deals, however, has reached $479.8 billion, up 13.9% compared with last year.
  • Kraft Heinz, the packaged-food company behind brands like Jell-O and Heinz ketchup, reported sales fell 3 per cent in the first quarter, as snack food industry strives to adjust to more health-conscious consumers. The company’s shares slid 3.2 per cent in extended trading after it reported adjusted earnings of 84 cents a share, falling short of analysts’ estimates of 86 cents a share. Sales slipped to $6.36bn, down from $6.57bn a year ago in the first three months of the year. Wall Street analysts had forecast sales of $6.45bn. Organic net sales fell 2.7 percent versus the year-ago period, much steeper than the 0.7 per cent drop the market had forecast. The company said the results reflected sluggish demand in North America – with sales in the US, its biggest market, down 3.5 per cent to $4.6bn while those in Canada dropped 12.2 per cent to $443m.
  • US car sales from some of the industry’s largest producers declined faster than expected in April, underscoring fears over the speed of cooling in the market and the broader economic outlook for the US. Five of the six biggest companies — General Motors, Ford, Fiat Chrysler Automobiles, Honda and Nissan — all reported sales falling faster than forecast, the result of one fewer selling days in the month compared with last year, but also the reduced use of sales incentives and weakening demand. Only Toyota posted monthly sales that were better than expected but they too were down. US car sales are expected to fall this year after rising to a record of 17.55m in 2016, up from 17.5m in 2015.

U.S. car sales


  • Apple’s next iPhone will be key to its future in China. Sales in what was once the company’s biggest growth market have now fallen for five straight quarters. Stiff competition with local handset makers and a weaker yuan have both hurt. While app-store sales are promising, a real turnaround hinges on the success of its much-anticipated, 10th-anniversary smartphone. (Reuters)


Puerto Rico (NYT)

  • Puerto Rico’s leadership moved on Wednesday to place the island’s debt crisis into federal bankruptcy court, making it the largest United States government entity to seek court refuge from its creditors in American history. On an island that has already been experiencing an exodus of its professionals and well-educated citizens, the move toward bankruptcy is widely perceived as another sign that Puerto Rico has lost all control of its future. The island has been in a painful recession since 2006, and previous governments dug it deeper into debt by borrowing to pay operating expenses.
  • Puerto Rico petitioned for relief under Title III of a new federal law for insolvent territorial governments, called Promesa. It contains some bankruptcy provisions and has never been used before, so there is no road
    map to follow. The governor’s petition on Wednesday was promptly approved by the federal board that now oversees Puerto Rico’s financial affairs. Under the Promesa law, the next step will be for the Chief Justice of the Supreme Court, John G. Roberts Jr., to designate a bankruptcy judge to handle the case.
  • The move sends Puerto Rico into uncharted territory. America’s recent spate of municipal bankruptcies has involved various state and federal laws, but Puerto Rico is not a state, so none of that hard-won precedent will apply. The outcome of its case could help determine where and how the deep financial troubles of certain states, such as Illinois, are resolved.
  • Puerto Rico has roughly $70 billion of bond debt and $50B of unfunded pension obligations to restructure. When Detroit went bankrupt in 2013, it set the previous record, with about $18 billion of bond debt and retirement obligations so this is a huge event for the $3T municipal debt markets.


International Snippets

  • Turkey’s crackdown grows as President Erdogan expanded his crackdown on dissent and free expression over the weekend, bringing the total number of people purged from the public and private sector to 140,000, and banning Wikipedia. (NYT, FT)
  • Fisheries at the brink of overfishing is depleting oceans around the world — 90% of fisheries are fully exploited or facing collapse — and China’s growing wealth, deep-sea fishing fleet and appetite for seafood are exacerbating the problem. (NYT)
  • Brussels is rushing out proposals to impose EU control on the City of London’s lucrative euro-clearing market, forcing UK operators to either relocate or be policed by European authorities. In a provocative regulatory salvo fired as Brexit talks begin, the European Commission is preparing to issue legislative proposals in June that would heavily restrict London’s ability to host one of its flagship financial businesses. The powerplay by the commission will be a setback for London, which fought hard for six years to fend off French-led attempts to relocate euro clearing to the single currency area.
  • Alitalia has filed a request with the Italian government to enter administration proceedings (bankruptcy), in a process that will lead to the sale or liquidation of Italy’s flag carrier.
  • Greece has wrapped up a deal with creditors on details of reforms that must be enacted before the country can receive the next disbursement from its €86B bailout program.
  • Moody’s has cut its rating on Ericsson’s debt to junk status due to the Swedish telecoms equipment maker’s deteriorating outlook. The credit rating agency has trimmed the company’s long-term rating to below investment grade (Ba1).
  • Canada has been flagged by a global banking body for “vulnerabilities” tied to credit, property prices, and the prospect of rising interest rates. In a quarterly review, the Bank for International Settlements (BIS), said Canada is showing early warning indicators for financial crises and domestic banking risks. The BIS indicated that Canada had one of the highest credit-to-GDP ratios among developed nations. That report said the country’s “unusually” elevated level posed a threat to the country’s banking system. China’s credit to GDP gap remains higher at 26.3% but Canada’s 17.4% figure is up from last fall and well above the closely watched BIS threshold of 10%.

Potential risks in Canada

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.