Equities and the Economy
Good morning and happy National Coast Guard Day. On their first day of trading in August U.S. stocks got whacked with the Dow losing 92 points, 0.52%, the S&P 500 off 6, 0.28%, to 2,098 and the Nasdaq fell 13, 0.35%, to 5,115. The biggest losing sector on the day was once again energy which fell 2.5%following oil prices lower. Energy wasn’t the only thing that dragged the Dow down yesterday. Apple, which just about every portfolio manager has in his or hers portfolio, lost 2.4% yesterday. The stock has lost 10% in 10 days touching its lowest level since Jan/Feb 2015. That’s material my friends! The stock is feeling the pressure because of the economic slowdown in China.
Stocks were in clear retread and then the Institute of Supply Management’s closely watched manufacturing survey of July, along with a similar report from Markit, came in weaker than forecasts at 52.7 pushing equities even lower. Economists’ were forecasting the index to be 53.7. Also, July’s number was below June’s 53.5. Now on the positive side the Commerce Department reported yesterday that construction spending rose 0.1% in June to an annualized pace of $1.06 trillion. This was the fastest pace in 7 years but taking some shine off the number, economists were expecting better, something closer to a 0.6% increase.
You can see the angst in the markets because investors are shedding risk and buying Treasuries. The 10 year yield fell to 2.15%, its lowest level since early June 2015. Lower yields result from more bond purchases.
The Athens stock exchange opened yesterday in Greece for the first time in 5 weeks. It was a bloodbath! The main index closed down 16.2 % with bank shares trading at the daily limit of down 30%. However, global markets were largely unaffected which can be interrupted that investors outside of Greece have by now largely cut off ties with the country.
This morning, like yesterday morning, U.S. equities are trading on either side of yesterday’s settles. Let’s hope we don’t see as Yogi Berra would say “Déjà vu all over again.” Overnight Asian stocks closed mixed although the ever volatile Chinese Shanghai closed up 3.69%. European markets are weighing on U.S. equities being they’re all trading in the red currently.
I’m going to leave you with something that is a concern to me. I don’t have the numbers yet but there’s been a material net flow of capital out of the U.S. equity markets. What’s been holding up prices of late has been companies buying back their own stock (yesterday AIG, the largest commercial insurer in the U.S. and Canada, announced its buying back $5 billion in stock). Companies have been buying their own stock because debt is so cheap, i.e. interest rates are so low. So what happens when the Fed raises interest rates? One would have to think buy backs would decrease which means less buying in the stock market. So the question is “Where does the buying come in to replace this reduced amount of buy backs?” I don’t have the answer but I don’t like the logical conclusion. Remember, a bull market must be fed. For a bear market you only need the buying to stop. You don’t necessarily need selling.
Oil prices continue to get bludgeoned with WTI falling $1.95, 4.1%, yesterday closing at $45.17. Brent lost a whopping $2.69, 5.2%, settling at $49.52. WTI closed at its lowest level since March 19th. It was worse for Brent. It closed at its lowest level since January 29th. Oil’s demise has been based upon a confluence of factors including a strong US dollar, a weaker Chinese economy and the prospect of rising supply if sanctions against Iran are lifted. Regarding the last point, the Iranian oil minister on Sunday stated that once sanctions are lifted the country could boost output by 500,000 bpd within a week and by one million barrels per day within a month. This is on top of a recent report showing OPEC production in July was the highest monthly level since recording keeping began in 1997. This all was very tasty food to the bears. Remember now that prior to the sanctions Iran was the second largest OPEC producer, therefore, if sanctions are reduced or eliminated it will have a lot of market share to recapture, and Saudi Arabia is not going to go down without a fight.
This morning the U.S. dollar is a bit weaker taking some selling pressure off all commodities including WTI which is correcting a bit being up 90¢.
The September contract finally found a bid yesterday closing up 3.2¢ at $2.748. The weather forecast for the Midwest and Northeast shifted a bit warmer yesterday which brought in some buyers. Additionally, the south is and will continue to experience above normal temperatures and with North America historically at its warmest time of the year natty burns will be huge in the electric generation sector. If the weather got hot in the upper Midwest and northeast natty would trade $3.00 in a heartbeat. But such is not the case looking at the forecast with pretty much normal temperatures forecast for the next couple of weeks in those regions (although it is and will continue to be blazing hot here in Texas!). This morning natty is up 6.0¢ on stronger cash prices.
Yesterday the Obama Administration issued a new rule mandating the first ever federal limits on power plant carbon emissions. The rule would require a 32% cut in power plant carbon dioxide emissions by 2030 from 2005 levels which is an increase from the 30% target proposed last year. States would have to put in place compliance plans by 2018 and meet their first targets by 2022. The final rule calls for the nation to get 28% of its electricity from renewable sources by 2030. In 2014 13% of U.S. electricity came from renewables.
The obvious big loser in this was the coal companies. Example, yesterday morning Alpha Natural Resources filed Chapter 11 bankruptcy. Alpha is one of the largest U.S. coal producers. A steep drop in coal prices, which have hit an 11 year low, has the company and its peers bleeding cash and choking on debt. This is the 4th coal company in the last few months that has filed Chapter 11.
We all know how frustrating our printers can be. They run out of ink at the worst possible time, or worse, nag us about running low on ink when there’s plenty left. Epson hopes to rid us of this problem by creating a printer that doesn’t utilize ink cartridges. The five new EcoTank series printers look like normal models only they have containers on their sides that hold gobs and gobs of ink. How much ink? According to Epson, years’ worth. As we all know, most manufacturers lose money on the initial sale of the printer but make up the difference with the expensive cost of ink replacements. Epson’s new model will have a larger upfront cost for the machine itself, around $500, but you won’t have the hassle of buying cartridge refills. I’m in!
Have a good day.