The Markets Were Bifurcated Again

Markets again were bifurcated. The NASDAQ was flat, but the Dow advanced about 0.40% as oil and the industrials — aka the value shares and Boeing –
outperformed on either better than expected earnings or further gains in crude.

Commenting about crude, oil is now at the highest level in about eight weeks as total stock piles tumbled to the lowest levels since January 2016. Inventories at the largest storage point – Cushing – fell to the lowest levels since November 2015.

Overall inventories fell about 2.5x more than expected. At the pace of the last four weeks, inventories will fall to the 5 year average of 400 million barrels in about eight or nine weeks.

US production also declined for the first time since the first week of June.

Commenting about earnings, the industrials are exceeding expectations and there is a nascent trend of funds gravitating from the largest capitalized technology growth stocks to value/industrial shares. Will oil shares be next? Earnings season for the crude producers commence next week and profits are expected to increase by double digits.

Regarding the conclusion of yesterday’s two-day Fed meeting, in my view no new ground was broken. The Committee stated “near term risks to the economic outlook appear roughly balanced,” that they are monitoring inflation developments “closely” and will begin running off their $4.5 trillion balance sheet “relatively soon,” perhaps as soon as September. The Fed also reiterated their intent to increase the overnight rate by December.

Late yesterday another “must own” stock missed estimates. As noted many times, a vast preponderance of monies gravitated to five companies in 2017. These companies are the largest capitalized companies in the world, each at one time up over 30% since the beginning of the year.

I believe Oaktree Capital Group’s chairman Howard Marks placed the valuations of these five companies into the proper perspective stating these values represent at least 30 years of current earnings, thus valuations are not sustainable.

Last night the foreign markets were up. London was up 0.03%, Paris was up 0.12% and Frankfurt down 0.43%. China was up 0.06%, Japan was up 0.15% and Hang Sang was up 0.71%.