It has been two weeks since my last post and we have ticked a new all-time high in the NASDAQ and had an encouraging jobs report. However, the stock market hit a wall this past week and has exhibited little direction in the last three trading sessions as evidenced by below average volume and choppy price action. Until all the major indices have hit new all-time highs, we have yet to resolve the 10%+ sell-off from early February. The market is behaving indecisively which has been a rarity over the last several years as it has been a “one-way” market to the upside with Captain Yellen at the helm of ultra-low interest rates and quantitative easing. All the same, Yellen is retired now and the baton has been handed off to our new Caesar – Jerome Powell.
Will the new Fed Chair be master & commander or a substitute teacher left to endure the market’s suffrage of approval or denuniciation? We get to find out on Wednesday when the Fed releases its first rate decision under Fed Chair Powell. I doubt Wednesday will be as dramatic as Caesar’s career (just ask Brutus) but maybe there is an underlying anxiety which is why the market exhibited such low volume and weak price action this week. Indecisiveness? Uncertainty? Fear? New guy stink? Who knows. Nothing much is likely to change except a gradual move higher in interest rates. It was a bazaar week if you watch the tape like I do so next week should yield some answers and I do expect equities to move higher as the fundamentals of the economy look to be fine. The technicals, however, are more of a coin-flip so just be prepared to pivot either way on stocks next week.
The most important thing to watch next week: bond yields after the Fed announcement. If the 10Yr Treasury stays under 3.05% then there shouldn’t be a disruption in the stock markets. Not to fear, Fed Chair Powell is unlikely to surprise the market on Wednesday and pull a Munson (from the movie Kingpin: someone who reaches the pinnacle of their success and then does something that causes them to lose it all). So, let’s wait for the market to tell us what to do and then act accordingly.
Because I know you like charts, here is the S&P 500 ETF. Just read the words if you don’t understand all the squiggly lines.
Chart of the Fortnight!
We’ve come a long way, baby!
Economic & Central Banking Snippets
- US industrial production roared back to life in February, rising by the most in four months amid strong output gains in manufacturing and oil and gas sectors. Industrial production — a measure of output at factories, mines and utilities — jumped 1.1% last month according to the Federal Reserve. The reading comes as Fed officials continue to deliberate on the appropriate pace of interest rate increases for 2018. A muted inflation reading and a weaker-than-expected retail sales report this week have prompted the market to dial back expectations that the central bank would step up the number of hikes from three to four this year.
- Durable goods orders fell by the most in six months in January as demand for defence capital goods and transportation equipment slumped. Orders for durable goods, or items intended to last at least three years like cars and certain home appliances, dropped 3.7% last month. That’s the biggest decline in six months and was far worse than the 2% per cent decline economists had forecast. Even with the transportation orders — a volatile element — stripped out, orders were down 0.3%.
- Gross domestic product (GDP) grew by an annualized 2.5% in the final three months of last year, in line with economists’ forecasts, according to a second reading from the Bureau of Economic Analysis. That is lower than the initial reading of 2.6% issued in January and growth of 3.2% recorded in Q3. The downward revision reflected a “downturn in private inventory investment”, the report said, however consumer spending remained unchanged at 3.8%. (FT)
- Data released on Wednesday showed the Indian economy grew at an annual rate of 7.2% in the third quarter of the last financial year, continuing its recent comeback from last year’s sharp slowdown. This data shows a reversal of five consecutive quarters of slowing growth in the wake of Narendra Modi’s demonetisation experiment.
- A forward-looking indicator of US home sales unexpectedly fell in January to its lowest level in more than three years as supply levels remain “woefully low” and mortgage rates rise. Pending home sales, or signed contracts for homes where transactions have not yet closed, fell 4.7% in January, the National Association of Realtors said on Wednesday — its steepest one-month decline since May 2010. (FT)
- The three biggest US automakers reported a fall in US new vehicle sales in February, while some big automakers reported a modest decline in price incentives last month. General Motors saw February new vehicle sales down 6.9%; Ford sales also fell 6.9%; Fiat Chrysler reported sales down 1%. US sales slipped last year to 17.2m from 17.55 in 2016, the first annual decline since the financial crisis.
- The unemployment rate in Japan fell to the lowest level in nearly a quarter-century in January as the ratio of open jobs to applicants remained at the highest level since the early 1970s, highlighting an enduring shortage of workers at Japanese companies. Japan’s jobless rate dipped to 2.4% in the first month of the year, down from 2.8% in January and pushing well below a median forecast of 2.7% from economists polled by Reuters. That took unemployment in Japan to the lowest level since April 1993.
- The price for the battery metal cobalt has hit its highest level since 2008, prompted by rising demand from electric cars and the prospect of higher taxes in the Democratic Republic of Congo. Cobalt has quadrupled in price over the past two years as carmakers from Tesla to Volkswagen are looking to secure long-term supplies of cobalt for use in their rechargeable batteries. Last year, VW put out a tender looking for five years’ supply of the metal. Around 10 kilogrammes of cobalt is used in an electric car battery — over 1,000 times the amount used in an iPhone — according to BMO Capital Markets. (FT)
- General Electric Co. (GE) didn’t pay a cash bonus last year to its top executives at corporate headquarters, which it said was the first time in the company’s 125-year history. GE to restate earnings for past two years General Electric is planning next month to announce significant restatements of its 2016 and 2017 earnings, including a 15 per cent reduction in its adjusted earnings for last year, as it adopts a new accounting standard for recognising revenue from long-term contracts. (WSJ/FT)
- iHeartMedia, the company behind the biggest U.S. radio broadcaster, filed for bankruptcy protection after reaching an agreement in principle with investors over a balance-sheet restructuring. The chapter 11 filing came after months of talks with shareholders. iHeartMedia said the in-principle agreement was with holders of more than $10 billion of its outstanding debt and its financial sponsors.
- Germany’s top administrative court has ruled that the country’s cities have the right to ban diesel cars, in a move that could have far-reaching consequences for the owners of 12m vehicles in Europe’s largest market. The ruling is a significant victory for environmental groups that say diesel bans are the only effective way to tackle the persistent problem of air pollution in German cities. Diesel cars accounted for 45% of new registrations in January 2017. That share has since fallen to 33 per cent.
- The Securities and Exchange Commission has issued scores of subpoenas and information requests to technology companies and advisers involved in the red-hot market for digital tokens, according to people familiar with the matter. The sweeping probe significantly ratchets up the regulatory pressure on the multi-billion-dollar U.S. market for raising funds in cryptocurrencies. It follows a series of warning shots from the top U.S. securities regulator suggesting that many token sales, or initial coin offerings, may be violating securities laws. The ongoing wave of subpoenas includes demands for information about the structure for sales and pre-sales of the ICOs, which aren’t bound by the same rigorous rules that govern public offerings, according to the people familiar with the matter. Companies use coin offerings to raise money for everything from file-sharing technology to pet passports. (WSJ)
I try and make these posts interesting because it is finance, after-all. Hope you enjoyed it and thanks for reading! By the way, volatile markets are what I consider to be my specialty so call me if you need to talk about your portfolio or want to inquire on what I can do for you and preserving your hard earned capital. Good luck out there!
-Paul J. McCarthy, III
President – Kisco Capital