The market has had a nice run these past few weeks with a slow and steady move higher. The markets are digesting earnings as 84 of 500 S&P companies have reported aggregate EPS growth of +11.8% verses 2016. The earnings reports will get heavier over the next two weeks and the market will be looking for how companies guide on their earnings for the remainder of 2017. See chart below for the S&P 500 (I’ll have more charts next week):
I am more interested in how stock prices react to earnings, however. Last week, the banks released good earnings across the board but their stocks sold off in response. Not what you would expect unless the market was telling you they were fully priced or have few growth prospects in the near future. Banks benefit when the economy expands where they fund the growth through loans and gain interest income. Are bank stocks telling us that maybe that isn’t in the cards? No evidence of a slowdown in the economy but I want to see bank stocks start moving higher if we are to get good economic growth over the next 12-18 months.
We are also in record territory when it comes to market volatility. Friday’s volatility index closed at 9.36 which is the second lowest closing compared to 9.31 in 1993. I mention this because it is telling us that the market is complacent and overly optimistic that nothing bad will happen. Below is a chart from Elliott Wave International that measures optimism verses 2007:
Economic & Central Banking Snippets
- U.S. housing starts rebounded 8.3% in June to a four-month high of 1.215 million units annualized after having pulled back 12.9% in the prior three months. Single-family starts gained 6.3% to 849,000 and multi-family 13.3% to 366,000. Single-family housing starts have been running way too low, as inventories of home available for sale have fallen to what the National Association of Realtors called “astoundingly low” levels during the spring selling season. Labor shortages, land shortages, regulatory bottlenecks, and, recently, rising lumber costs with the Canadian lumber tariffs have restrained new construction. (FT)
- China GDP was reported at 6.9% growth for Q2 which makes the economy on track for its first year-on-year acceleration since 2010. But risks from rising debt still loom large. Vigilance against mounting financial risks has become the top policy priority for Mr. Xi, who wants to ensure economic and social stability. (FT)
- Bubble Alert: Canadian home sales fell 6.7% in June from the prior month, according to the Canadian Real Estate Association. That makes it the biggest monthly drop since June 2010 and the third straight month of decline recorded. Canadian real estate has reached a manic state after years of rocketing higher so watch out for weaker prices over the next 1-2 years.
- Next week’s reports will be highlighted by Q2 GDP (est. 2.9%) and the FOMC meeting on Wednesday.
Politics! Politics! Politics!
- A leaked memo from France’s envoy to the EU, Jeremy Browne, has detailed Paris’s plot for an outcome detrimental to London. “France sees Britain and the City of London as adversaries, not partners,” he wrote. (FT)
- China blacklists Winnie the Pooh – the cartoon bear has apparently become too politically sensitive to be mentioned on Chinese social media, including Sina Weibo and WeChat. While no official explanation was given, observers suggested the crackdown was related to previous comparisons of President Xi Jinping with the portly bear that went viral. (FT)
- Senate GOP leaders gave up their effort to repeal and replace the Affordable Care Act, after the defections of two more Republican senators left the party short of the votes needed to pass.
- US and China talk trade The US ramped up talks with China on its trade deficit and steel imports. The intensified deliberations are part of the “Comprehensive Economic Dialogue” between Donald Trump’s team and their Chinese counterparts. Wednesday’s talks were “quite tough” one insider said, especially after the US was criticized for being outplayed by Beijing earlier this year. (FT)
Market Snippets
- A $2 billion private-equity fund managed by EnerVest Ltd that borrowed heavily to buy oil and gas wells before energy prices plunged is now worth essentially nothing. The losses are wiping out investments by major pensions, endowments and charitable foundations. The firm raised and started investing money in 2013, when oil was trading at more than double the current price of about $45 a barrel and added $1.3B of borrowed money to boost its buying power. At least one investor, the Orange County Employees Retirement System, already has marked its investment down to zero, according to a pension document. Though private-equity investments regularly flop, industry consultants and fund investors say this situation could mark the first time that a fund larger than $1 billion has lost essentially all of its value. EnerVest’s collapse shows how debt taken on during the drilling boom continues to haunt energy investors three years after a glut of fuel sent prices spiraling down. (WSJ)
- A measure of loan delinquencies in bonds backed by US commercial mortgages rose the most since July 2011 last month, according to Fitch Ratings. Loan delinquencies increased 22 basis points to 3.72% in June from 3.5% in May, as $1.24B of underlying debt turned sour. Fitch noted that most of the new delinquencies stemmed from maturity defaults, meaning bonds had not been paid off within their expected maturity but may still recoup losses through slower repayment. (Fitch, FT)
- Disney is building an immersive Star Wars hotel as part of a flurry of investments announced Saturday by the company. Theme parks are Disney’s second-largest division after TV. It’s been investing heavily in the business on the premise that park attractions can’t easily be “replicated” or made obsolete by new technology.
- Planet Plastic: More than 9B tons of plastic has been produced since 1950, and the vast majority of it is still around according to a new US study. It’s as heavy as 25,000 Empire State Buildings in New York, or 1B elephants, and there’s more than a tonne for every human on earth. (WaPo, BBC)
- Foreign buyers picked up a record $153B in U.S. residential property from April 2016 to March of this year, a 49% increase from the previous 12-month period, according to a study of 6,000 real estate agents.
- Partners at Goldman Sachs (GS) now own less than 5% of the company, the lowest level since the bank’s IPO 18 years ago.
International Snippets
- Morgan Stanley has become the latest global bank to pick Frankfurt for its new EU trading headquarters after Brexit. The US headquartered bank will move 200 jobs to Frankfurt and another 100 to other EU cities. (Bloomberg)
- Turkey’s new school curriculum drops the theory of evolution and adds the concept of jihad as patriotic in spirit. In addition, about $11B worth of corporate assets — from small baklava chains to large publicly traded conglomerates — have been grabbed by the government, a systematic taking with few precedents in modern economic history. The move has fueled fears that populist President Erdogan is subverting the republic’s secular foundations. Keep in mind that Turkey is the 13th largest economy at a GDP of $2T. (Independent, FT)
- S&P Global Ratings has upgraded its outlook on Greece’s sovereign credit rating to positive from stable as Athens’ left-wing government prepares to tap the bond markets for the first time since 2014 in the coming weeks. The ratings agency, which affirmed its B- rating on Greek government debt said recovering economic growth, alongside fiscal reforms and further debt relief should allow the country to reduce its debt-to-GDP ratio and debt servicing costs through 2020.