No Fireworks for Stocks

It’s been two weeks since my last update and you all didn’t miss much except a few volatile sessions in stocks. No fireworks like we got on the fourth of July, see for yourself in the chart below of the S&P 500 ETF:

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


The one notable movement we got was in the yield curve as I have been predicting these past several months. Typically, bond yields and stocks go in the same direction but on a lagging basis. Below is a chart of the yield of the 10 Year treasury which made a decisive reversal these past two weeks:

10 Year Treasury
10 Year Treasury


The saga in Washington DC continues but I wouldn’t be surprised to see any legislative moves until the Fall. Nothing clear about the details on new legislation but a lack of action by Washington will be taken as a clear negative as we close in on 2018.

The economic data has been decent and we are now entering earnings season where business leaders can share what they are seeing with their customer base and their expectations for earnings for the second half of 2017. By the way, a new change of address for Kisco Capital and the McCarthy family as Westchester is our new home and yes it’s in Mt. Kisco.


Economic & Central Banking Snippets

  • US Federal Reserve policymakers are ready to start the unwinding of quantitative easing within months. Minutes of their June rate-setting meeting on Wednesday showed a number of officials warning that allowing unemployment to fall too low could lead to the US economy overheating or the emergence of financial stability risks. Also, they advocated a series of further rate increases.
  • Durable goods orders, which are seen as a proxy for business investment, fell for a second-straight month in May, as demand for computers, communications equipment and transportation slid. Orders for durable goods, or items intended to last at least three years like cars and certain home appliances, dropped 1.1% in May according to the Commerce Department. (FT)
  • Construction spending was flat in May overall and excluding volatile home improvements after small net downward revisions to ex improvements spending in April (-0.9% v. -1.1%) and March (0.2% v. 0.5%). (MS)
  • Q1 GDP growth was unexpectedly revised up slightly to 1.4% from 1.2%. The main surprise in Q1 was a larger than expected upward revision to consumption to 1.1% from 0.6%. (MS)
  • 222,000 jobs were added last month. Wall Street economists had expected employment gains of only 175,000. The unemployment rate was 4.4 % and the average hourly wage grew by 2.5% percent from a year earlier. The labor-force participation rate also inched up to 62.8%. (WSJ)
  • The Bank of Canada may be preparing to raise its benchmark rate after almost a decade. Hawkish comments from policymakers, including bank governor Stephen Poloz, six months of unbroken economic growth and solid data on consumer spending, retail sales and jobs, have left a majority of investors predicting a July rate rise. (FT)


Politics! Politics! Politics!

  • Technology for ballistic and cruise missiles is advancing in countries from North Korea and Iran to Russia and China, increasing potential threats to the U.S. even if they don’t carry nuclear warheads, according to a new Pentagon report.
  • The US has raised the specter of military action to deal with North Korea, as it warns that the path to a diplomatic solution is narrowing. There were signs that US allies South Korea and Japan were joining the more confrontational American stance. (FT, NYT)


Municipality Madness – Illinois

We are starting to see some pressure in the municipal bond market as spreads over Treasuries have been rising in Illinois, New Jersey, Connecticut and Pennsylvania. A state has never defaulted on its debt but we have seen the territory of Puerto Rico go into restructuring (bankruptcy) via a newly passed piece of legislation by Congress. Does this open the gateway for some indebted states to walk away from their debt obligations? Not yet, but all it takes is a recession to get Congress to enact new legislation to help the states. Will this be the next sector to get bailout relief from Congress? Only the Swamp Thing knows.

As the state of Illinois edges near becoming the first U.S. state to ever be rated junk bond status, the Democrat-controlled legislature of the bankrupt state of Illinois has just voted to slam its citizens with a hefty 32% hike in state income taxes. Thursday’s vote permanently increases the state’s personal income tax rate from 3.75% to 4.95%. It also raises the burden on businesses, raising the rate from 5.9% to 7%. It all amounts to a 32% increase for the average Illinoisan and a $5 billion tax hike overall.

States of the Nation

The new tax hike is all the more concerning as Illinois already has the highest property taxes in the nation, a fact that often forces retirees out of their homes to flee to other states. Not to mention the bill passed with NO budget reforms OR cuts in spending. This is how Puerto Rico ended up in trouble so unless there is a major change to political leadership, Illinois will have issues servicing its municipal debt in the next 1-2 years (my opinion).


Market Snippets

  • Avis Budget Group Inc. announced a partnership with Google’s autonomous car business, Waymo. Under the agreement, Avis will service and store 600 of Waymo’s self-driving cars. The arrangement solves a key problem faced by companies working to incorporate autonomous cars into ride-hailing services. “With members of the public using our growing fleet of self-driving cars, our vehicles need standard maintenance and cleaning so they’re ready for our riders at any time of the day or night,” Waymo CEO John Krafcik said in a press release.(WSJ)
  • Bitcoin rival, Ethereum (Ether), recently plunged despite efforts to shore up confidence by announcing a credit for customers who lost money during its flash crash. The crypto-currency briefly plunged from above $300 to 10 cents on Coinbase’s GDAX exchange. The exchange said it would credit customers who “experienced a margin call or stop loss order” on GDAX during the flash crash. The chart posted here shows an eerie resemblance between Ether’s price chart and the great Tulip mania of the 1600s. How far will it go? (WSJ)

Ethereum vs. Dutch tulip mania


  • Apple has acquired SensoMotoric Instruments that is focused on making eye-tracking technology. Its technology has been used in a wide range of medical applications as well as market research by providing analysis on what a customer or user is paying most attention to in a store or on a screen.
  • True Religion, an upmarket jeans maker, filed on Wednesday for bankruptcy protection, underlining the woes in the US retailing sector. The 15-year old company clinched a deal in which the “substantial majority” of its term loan lenders as well as its private-equity backer, TowerBrook Capital Partners, agreed to reduce its debt by $350mm and convert it into the bulk of the restructured company’s equity.

Retail has highest expected 1-year default rate


International Snippets

  • Takata Corp. filed for bankruptcy protection in Japan and the U.S. and said it would sell most of its operations to a rival, capping the steep decline of an 84-year-old Japanese company nearly nine years after it began a global recall of rupture-prone automotive air bags
  • Brussels has hit Google with a €2.42B antitrust fine for abusing its dominance in search, a decision with potentially far-reaching implications for both the tech sector and already strained transatlantic relations. The European Commission ended its seven-year competition investigation on Tuesday, concluding that the company abused its near-monopoly in online search to “give illegal advantage” to its own shopping service. (FT)

G20 states with deficit


  • Samsung plans to create 954 new US jobs by investing upwards of $380m in a new home appliances factory in South Carolina, making it the latest global tech company after Softbank, Apple and Intel to tout job creation plans as the Trump administration ramps up its “America First” agenda.
  • Volvo announced that every model from 2019 onwards would have an electric motor going all electric and head-on with Tesla. (FT)

Paul McCarthy

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