04/10/17

Jobs Data Disappointed…Earnings Season Commences…Are Markets Becoming Nervous Over Rising Geopolitical Tensions?

By: Kent Engelke | Capitol Securities

The March jobs data disappointed even as the jobless rate dropped to the lowest level in almost a decade. Creation of non-farm and private sector jobs greatly missed its mark and the wage gains slowed. Like most, I thought the data would contain an upside surprise given the strength of the ADP data. The LPR matched expectations of 63%.

Some are blaming March’s winter storm that dumped a lot of snow over the northeast during the reference period. Others are pointing to the return of more seasonable temperatures after an unusually warm February that may have skewed earlier data.

At this juncture, the report does little to alter monetary expectations. What about profit and growth expectations?

First quarter earnings season commences this week. According to Bloomberg, there are only 83 companies that have published profit guidance of any variety, the least at this time of year since Bloomberg began compiling the data in 1999.

The number of firms reflects a decade-long trend away from guidance and the current quarter is the sharpest on record. Guidance is down 35% from a year ago and tails an average of 150 at this time in the past five years according to Bloomberg.

The general rule of thumb is bad news gets announced early rather than later, thus suggesting nothing has significantly changed since the fourth quarter and the trend is improving.

Many times I have commented about earnings estimates, as to how they have been dumbed down, partially the result of Sarbanes Oxley. I have also opined that such an environment creates an unbalanced atmosphere, defined as all are expecting greater than expected results and if such results do not occur, volatility may increase.

Volatility, since March 1st, has been virtually nonexistent. Bloomberg further states the S & P 500 has been confined to a narrow 55 point band, the lowest realized volatility for this period since 1965.

I will argue however, the volatility within the sectors of the S & P 500 has been intense as the Trump trade has all but been unwound in favor of yesterday’s must own mega capitalized growth issues.

Changing topics, what will be the ramifications of the Syrian missile strike in response to the chemical weapons attack? If all recall, under the Obama administration, an agreement was made in 2013 that Russia would chemically disarm Syria. The global response has been what most would have expected. Will Syria continue to be a geopolitical non-event or evolve into something of significance?

It is my firsthand experience that the event that becomes significant is one that no one had remotely thought was going to occur.

Commenting upon Friday’s market activity, there was little reaction to the employment data, the Syrian reprisal or the meeting between Trump and his Chinese counterpart.

The economic calendar has several inflationary and sentiment data points as well as retail sales statistics. Moreover, equity markets are closed Friday for Good Friday. Will the data influence inflationary and growth assumptions?

Last night foreign markets were down. London was down 0.14%, Paris was down 0.55% and Frankfurt was down 0.19%. China was down 0.52%, Japan was up 0.71% and Hang Sang was down 0.02%.

The Dow should open nervously unchanged on the escalation of global tensions. The 10-year is unchanged at 2.39%.

04/7/17

JOBS DATA AT 8:30 AM

By: Kent Engelke | Capitol Securities

At 8:30 am, March’s employment data will be released. Even though last week’s weekly jobless claims is not in the reference period, claims fell to a five week low and had the largest decline since April 2015. Moreover claims are hovering at levels last experienced in the early 1970s.

As with past BLS reports, I will focus on three components; the labor participation rate (LPR), hours worked and increased average hourly earnings.

There is a disconnect between the LPR and weekly jobless claims as each are suggesting different conclusions. The LPR is around lows last experienced in the mid-1970s, thus suggesting considerable slack while jobless claims is suggesting considerable tightness. I will argue there is considerable slackness given anemic wage gains and hours worked.

With the above written, however, I believe the labor report will be the catalyst that enables a 3% growth rate, job growth in small and medium sized businesses. As noted many times, 90% of the job growth from 1996-2007 was from companies employing less than 400 people.

Analysts are expecting a 180k and 170k increase in non-farm and private sector payrolls, respectively, a 4.7% unemployment rate, a 0.2% increase in average hourly earnings, a 34.4 hour work week and a 63.0% LPR.

Today is also the conclusion of the two day meeting between President Trump and his Chinese counterpart. Will there be any headline making statements?

Commenting upon yesterday’s market action, equities ended quietly higher while Treasuries slipped on the Fed’s intention to shrink its balance sheet. Oil ended at a monthly high. At the end of trading there were headlines about possible US reprisals to North Korea and Syria. Will escalating geopolitical tensions begin to impact trading?

Last night the foreign markets were mixed. London was up 0.20%, Paris was up 0.1% and Frankfurt was down 0.29%. China was up 0.17%, Japan was up 0.36% and Hang Sang was down 0.03%.

The Dow should open flat, but this could change radically given the significance of the 8:30 am data. Futures rebounded following the US cruise missile strike on Syria. The 10-year is up 7/32 to yield 2.32%. Crude is up about 1%.

04/6/17

WILL FRIDAY’S LABOR REPORT SURPRISE ON THE UPSIDE?

By: Kent Engelke | Capitol Securities

Equities advanced led by shares of financial companies and energy. The catalyst was the ADP Private Sector Employment Survey which greatly exceeded expectations. Data points of considerable significance include job growth for good producing industries, which include manufacturers and builders, have just had their strongest two months since 2002. Job gains for medium and small sized companies rose at the greatest pace since June.

Many times I have commented the correlation between the ADP and BLS data has declined, but the large upside surprise increases the likelihood that Friday’s estimates for the BLS statistics are perhaps low.

The ISM Non-Manufacturing Index however posted a nominally disappointing statistic, easing to the lowest level in five months. This data was largely ignored focusing instead on the bullishness of the ADP statistics.

I believe that if tomorrow’s BLS data exceeds expectations by the same amount as ADP, there will be first quarter growth estimates with a “3” handle.

Yesterday was the release of the Minutes from the March 15th FOMC meeting. In my view, much had already been disseminated given initially the general lack of market reaction.

As inferred, the last 60 minutes of trading, the Dow retraced about a 150-point gain only to close lower by 40 points. The S & P 500 declined about 0.60%. According to Bloomberg, it was the largest one day reversal in 14 months.

Some are speculating the reversal was the result of Minutes stating that equity prices are “quite high,” while others suggest it was the result of Paul Ryan commenting “tax reform could take longer than health overhaul.”

Regardless of the reason, I believe yesterday’s reversal was a direct result of the massive influence that ETFs and algorithmic trading has upon the markets where according to the SEC, 90% of the volume is the result of such activity.

What I found interesting was the Commodity Futures Trading Commission (CFTC) appointed its first Chief Market Intelligence Officer who will report directly to the CFTC’s chairman.

This new position is designed to “understand, analyze and communicate current and emerging derivatives markets dynamics, developments and trends — such as the impact of new technologies and trading methodologies upon the markets to ensure market manipulation including spoofing and unbalanced trading does not occur.”

As I noted many times, about 15 months ago, an SEC commissioner stated “because of the change in trading mechanics an unbalanced playing field may have emerged, benefiting only a few.”

Generally speaking, I am against greater regulation, but in today’s new trading era, I do believe there are abuses where activity is not justified by the underlying macroeconomic or geopolitical conditions, where security analysis and macroeconomic thesis is all but disregarded for the sake of the cheapest execution.

What will happen today? President Trump will meet his Chinese counterpart today for a two day meeting. Will there be any provocative headlines? Also released today is the Challenger Job Cuts survey. This is a third tier indicator, but at times has been of some significance.

Last night the foreign markets were down. London was down 0.33%, Paris was up 0.26% and Frankfurt was down 0.15%. China was up 0.33%, Japan was down 1.40% and Hang Sang was down 0.52%.

The Dow should open quietly higher amid the Fed’s stated but well known intent of shrinking its balance sheet amid policy makers’ concerns that stocks have gotten expensive. The 10-year is off 5/32 to yield 2.36%.

04/5/17

ARE THE MARKETS AT A MAJOR INFLECTION POINT?

By: Kent Engelke | Capitol Securities

It “feels” as though all markets are at a major inflection point, a “feeling” backed up by several technical indicators. Equities are trading at their 50 day moving averages. The 10-year Treasury is hovering around its lowest yield for 2017. The “Trump Trade” has been reversed with mega capitalized growth issues outperforming most other asset classes.

In most regards, algorithmic or technology based trading is again dominating the markets for the lone exception that cross correlated trade has broken down. According to the SEC, 90% of all equity trades are executed by either algorithmic or ETF programmed trading. Ninety-five percent of all Treasuries trades are done electronically with “great influence” exerted by algorithms.

In other words, by definition there is a total lack of geopolitical and macroeconomic thought of investment decisions with all decisions made upon the numerous variables imputed into the computer based trading programs/systems.

My introductory sentence read: “it feels as though all markets are at a major inflection point.” I think the economy is on the verge of a major inflection point that may dramatically affect what sectors will outperform.

There are several major points that cannot be debated. Globalism and multi-polarity have lost considerable geopolitical backing, replaced by economic nationalism. President Trump is the antithesis of the Establishment, despised and feared by many on both sides of the proverbial aisle.

Geopolitical tensions are rising and in many regards are at Cold War heights. The Middle East has imploded.

Thirty-two years ago, when I entered the brokerage business, the Dow Jones among others was comprised of Woolworths, GM, Bethlehem Steel, US Steel, Eastman Kodak, Union Carbide, Owens Illinois, Inco, Westinghouse, Texaco and Sears. All of which for the exception of Sears, UK and US Steel, have filed for bankruptcy. The three that did not file, have flirted or are flirting with reorganization.

Wow! Talk about change and the complete rewrite of American business.

Globalism and multi-polarity became the major economic and political catalysts following the demise of the Soviet Union and the end of the Cold War in the early 1990s… a multi-polarity that facilitated the bankruptcy of almost one third of 1985 members of the Dow Jones Industrial Average.

If a tectonic change has occurred again, what members of the 2017 Dow Jones will have filed for bankruptcy by 2049? How will today’s Establishment be upended?

Commenting on yesterday’s market action, equities were flat, albeit oil did rally another 1.5% on expectations that stores will be drawn down further. The 10-year was off 8/32.

Will the markets today be impacted by the release of the March 15 FOMC Minutes? Also posted is the ADP Private Employment Survey.

Last night the foreign markets were up. London was up 0.10%, Paris was up 0.04% and Frankfurt was down 0.47%. China was up 1.48%, Japan was up 0.27% and Hang Sang was up 0.57%.

The Dow should open quietly lower ahead of several key data points, the Fed Minutes and a meeting between Trump and China’s Xi Jinping. Oil is up another 1% on inventory drawdown. The 10-year is unchanged at 2.36%.

04/4/17

MANUFACTURING SENTIMENT IS THE HIGHEST IN 20 YEARS!

By: Kent Engelke | Capitol Securities

Equities slipped on disappointing auto sales. Negative political developments, which to this point have been largely disregarded, threaten to cloud the improving domestic and global outlook.

Speaking of improving economic environment, the ISM Manufacturing Index continued to expand in March at a robust pace. The diffusion index (the headline number) matched the median forecast, but was nominally lower than February’s statistics which were the highest since August 2014. Factory employment climbed to the highest reading since June 2011 and the prices paid index increased to the highest level since May 2011.

The highest order backlog and slowest delivery times for suppliers since 2014 help explain why manufacturers are reporting that they are adding workers to assembly lines.

Perhaps of even greater significance, the ISM measure of export orders climbed to the highest point since November 2013, underscoring the manufacturing optimism from Asia to Europe.

Recent Chinese government figures showed that the factory purchasing manager index climbed to the highest point since April 2012. Euro manufacturing data was the strongest in 71 months.

It is against this backdrop why a survey of the National Association of Manufactures is showing the greatest optimism in 20 years.

This is yet another data point illustrating the disconnect between voter approval levels and sentiment ratings of the President. President Obama was elected/reelected on “Hope and Change,” but brought little “Hope” and perhaps unwelcomed or economic nonproductive change.

President Trump does not share President Obama’s approval ratings, but every sentiment indicator does suggest he is the “Hope and Change” president.

Earning season is quickly approaching. I am certain results will again exceed expectations thus suggesting this quarterly event may be losing some of its significance. The question at hand is how do earnings exceed? Such will be a determinate factor for the immediate direction of equity markets.

Wow! Life is stranger than fiction.

Last night the foreign markets were mixed. London was up 0.43%, Paris was up 0.04% and Frankfurt was down 0.07%. China was up 0.38%, Japan was down 0.91% and Hang Sang was up 0.56%.

The Dow should open quietly lower as equities have slipped to their 40 day moving average, a key technical level, awaiting more data to confirm momentum and progress of the Trump agenda. The 10-year is up 1/32 to yield 2.32%.

04/3/17

A BIG DATA WEEK

By: Kent Engelke | Capitol Securities

NY Fed President William Dudley stated that three interest hikes in 2017 is a “reasonable” projection. As we all know the Fed hiked rates once already and most are anticipating another increase by June. Dudley stated “there’s not this huge rush that we have to tighten monetary policy quickly because the economy in clearly not overheating.”

Will Dudley change his perspective in the intermediate future? A price gauge based on personal consumption expenditures excluding food and energy rose 1.75% in February from a year earlier, marking the highest level of so so-called core inflation since July 2014 according to the Commerce Department. Including all items, inflation accelerated to 2.1%, topping the Fed’s 2% target for the first time since 2012.

I reiterate my long held view the odds are over 65% that growth will exceed the 2017 consensus view of 2.5%. Contrary to the view of some, government does not create jobs. Government creates policies conducive to job creation.

Many times I have commented that since 2014 sentiment surveys indicated the biggest risk to business and job creation is government intervention and regulation. Ever since these surveys were initiated, economic concerns were regarded as the greatest concern/hindrance to job creation. I think this change was a major reason why Trump was elected.

Since the President was elected, sentiment surveys have been surging levels that were last experienced 15-18 years ago. The reason — the pledge to roll back taxes and regulations.

If Trump is even modestly successful in reducing regulations by two for every new one introduced, growth could easily exceed 3%, thus making Dudley’s pronouncements off center.

What will this week’s heavy economic calendar suggest? It may offer a clear indication of the strength of the economy. Statistics released include the ISM, durable goods orders, ISM non-manufacturing and various employment surveys with the release of the BLS data on Friday. Moreover, the Minutes from the March 15 FOMC meeting are released.

Last night the foreign markets were up. London was up 0.03%, Paris was down 0.21% and Frankfurt was up 0.23%. China was up 0.38%, Japan was up 0.39% and Hang Sang was up 0.62%.

The Dow should open quiet. The 10-year is unchanged at 2.39%.

03/30/17

WON’T GET FOOLED AGAIN?

By: Kent Engelke | Capitol Securities

I think most do not realize how different the world is today from yesterday. Globalism is on life support, the result of Brexit and Trump’s election emphasizing economic nationalism versus multipolarity.

I think the globalist environment could potentially die in the next 60 days. Depending upon which poll one utilizes, the leading candidate in both Italy and France’s national elections are anti-EU. Even if pro-establishment candidates win, the closeness suggests great discord about the current macroeconomic and geopolitical environment.

What does this have to do with markets? Everything.

Since 2008, the vast majority of funds have gravitated to ETFs… ETFs which are primarily capitalization weighted structures where the big get bigger and the small get smaller. Mega capitalized growth issues, which in itself is an oxymoronic term, have greatly outperformed most other asset classes. In my view, this outperformance is a direct result of the globalist environment that grew exponentially under the Obama and current EU administration.

I rhetorically and conjecturally ask if the pathway to outperformance was only this simple by passively investing into some index… As inferred above, passive index investing has outperformed active stock managers since 2008. Some could make the case since 2005.

Yesterday, a WSJ headline stated Blackrock, is that the world’s largest asset manager with $5.1 trillion under management is reducing their exposure to active management in favor of passive ETFs.

What I found interesting, according to the article, active managed funds at Blackrock was only $317.3 billion three years ago and today stand at $275.1 billion, a relative rounding error as compared to their total assets under management of $5.1 trillion.

What happens to the passive investment strategy if globalism does implode? As I opined above, I believe the globalist environment has directly contributed to the capitalization driven mantra, where the mega capitalized growth issues greatly outperformed.

Is this about change? If economic nationalism again becomes the primary global geopolitical and macroeconomic catalyst, yes.

On a lighter note, the Who’s Roger Daltry is supporting both Brexit and bad-mouthed Hillary Clinton. When I read the headline, the lyrics from Won’t Get Fooled Again were loudly echoing:

There’s nothing in the streets
Looks any different to me
And the slogans are replaced, by-the-bye
And the parting on the left
Is now parting on the right
And the beards have all grown longer overnight

I’ll tip my hat to the new constitution
Take a bow for the new revolution
Smile and grin at the change all around
Pick up my guitar and play
Just like yesterday
Then I’ll get on my knees and pray
We don’t get fooled again
Don’t get fooled again, no no

Yeaaah!
Meet the new boss
Same as the old boss

To remind all, Peter Townshend penned these words in 1971 in the midst of the social upheaval of that era and the new breed of politicians that all had erroneously thought had come around.

[Note: The 5/26/2006 issue of the National Review declared Won’t get Fooled Again as one of the 50 greatest conservative rock songs.]

Enough of the classic rock history lesson, equities edged insignificantly higher as data indicated crude inventories were not as great as anticipated. There was little reaction to the UK’s formal triggering of Brexit. Treasuries ended nominally lower in yield.

Last night the foreign markets were down. London was down 0.32%, Paris was down 0.11% and Frankfurt was up 0.01%. China was down 0.96%, Japan was down 0.80% and Hang Sang was down 0.37%.

The Dow should open little changed. The 10-year is flat at 2.38%.

03/29/17

CONSUMER CONFIDENCE IS NOW AT THE HIGHEST LEVEL SINCE DECEMBER 2000…WOW THIS IS HOPE AND CHANGE!

By: Kent Engelke | Capitol Securities

President Obama was elected on “Hope and Change.” He left the office with relatively high approval ratings even though “His Hope and Change” did not materialize into confidence.

Donald Trump is referred to as many things, has low approval ratings, but invokes incredibly high consumer optimism. A rough analogy is that Trump is the inverse of Obama.

Consumer Confidence surged last month, greatly exceeding all estimates, and is now at the highest level since December 2000. The “Present conditions gauge” is the greatest since August 2001 and the “measure of consumer expectations” for the next six month is at the highest since September 2000.

Wow! Talk about great expectations and “Hope and Change!!”

President Trump has uncaged the proverbial animal spirits; animal spirits that have been caged for the last eight years, the result of regulatory and tax over reach of the administrative state.

I am not dismayed by the defeat of the repeal of Obamacare. The “Establishment” has declared Trump dead 2,914 times and he has come back.

I think the Republicans will coalesce around tax and regulatory reform, for this is what the electorate — as evidenced by the confidence data — is demanding.

Against this backdrop, I believe the surprising aspect of 2017 will be growth over 3%, the first such year of annual growth of over 3% in 10 years, a record that eclipsed the previous record of 4 years from 1930-1934. Radical thought? No, if the animal spirits have been uncaged as the data suggest.

The advance in the market was led by energy and the financials, two sectors that were beaten down in recent sessions. Both sectors represent considerable value and will be a direct beneficiary if growth exceeds 3%.

Oil was also aided by a disruption in deliveries from a major Libyan pipeline; daily deliveries for the beleaguered nation are now under 550,000 versus 750,000-800,000. It is not known how long this pipeline with be off line.

What will happen today?

Last night the foreign markets were mixed. London was down 0.37%, Paris was up 0.09% and Frankfurt was up 0.46%. China was down 0.36%, Japan was up 0.08% and Hang Sang was up 0.19%.

The Dow should open little changed. The 10-year is up 4/32 to yield 2.41%.

03/28/17

WHERE TO?

By: Kent Engelke | Capitol Securities

Where to? The headlines suggest the Trump agenda might be dead. The President’s approval rating is at a record low, be it his administration or any other administration at this juncture of the term. Sentiment and optimism however are still around a decade high and appears to believe there will be tax and regulatory relief.

Change is always unsettling as most find comfort in the current environment because of familiarity even if the situation is unpleasant. The President is directly confronting the powerful administrative state, an administrative state that is supported by both sides of the proverbial aisle as well as the entrenched establishment.

It is to be expected that any losses — real or perceived — will be met with great fanfare because of the threat the Trump administration is to the established course of business.

As noted many times, in many regards, the cross correlated trade has broken down. The dollar is falling which hypothetically should be oil positive. Oil is down. Hypothetically, Treasury yields should be climbing because of the falling dollar and more dovish FOMC, but yields are around 4 month lows.

According to the WSJ, the Dow has now declined for eight consecutive days, the longest streak since August 2011 and the peak of the European debt crisis. Bespoke Investment Group further added the only other time since 1990 that there has been 8 consecutive down days for the Dow was in October 2008 and September 2001. Prior to 1990, Bespoke commented that it happened three times in the 1980s.

Bespoke stated there have been three seven consecutive day drops in the Dow in the last year.

Earning warning season has commenced. Will the lack of warnings support prices? Or conversely will such warnings hurt shares?

Perhaps the only definitive comment to make about profits is that they will exceed expectations for the gazillionth consecutive quarter, the result of regulatory over reach that in some regards has made this quarterly event questionably meaningless, except of course if one trades via algorithms that are programmed to respond to such events.

I reiterate my long held belief that growth will exceed expectations. Historically, GDP growth correlates to home values. Because of the dearth of housing inventory, coupled by the lowest home ownership in 50 years — partially the result of the lack of inventories — home values should continue to rise.

Most people measure their net worth by the value of their home, not their stock account. Typically when home values rise, so does spending and vice versa.

These rising values, coupled with increased confidence perhaps amplified by tax and regulatory reform and an increase in monetary velocity, all may be the ultimate elixir for annual growth to exceed 3% for the first time in 10 years, the longest stretch on record where growth did not exceed 3% for one year. The previous record was 1930-1934.

Last night the foreign markets were up. London was up 0.01%, Paris was up 0.09% and Frankfurt was up 0.58%. China was down 0.43%, Japan was up 1.14% and Hang Sang was up 0.63%.

The Dow should open flat. Hope is reemerging that the President will be able to enact his tax and regulatory changes, two issues that are core to the Republican-controlled Congress and to the markets. The 10-year is unchanged at a 2.38% yield.

03/27/17

WAS THE HEALTHCARE VOTE A LOT TO DO ABOUT NOTHING?

By: Kent Engelke | Capitol Securities

The outcome on the healthcare bill is known. Broad based conclusions have been drawn about the ability to legislate the Trump agenda. I may differ from consensus, but I think the markets will not be held hostage to this bill. Tax reform will quickly move to become center stage.

In my view, there is little doubt about the Republican enthusiasm for deregulation and tax reform, the center piece of Trump’s agenda and this is what should drive the markets.

Radical thought? Why have the markets not sold substantially off in the face of potential defeat?

The first quarter is rapidly coming to an end. Will the markets begin to focus upon results? As noted many times, the ultimate driver of equity and bond prices are interest rates and earnings, both of which are influenced by macroeconomic and geopolitical events.

This week’s economic calendar is comprised of preliminary estimates of first quarter GDP, trade gap, several confidence surveys and personal income/spending data.

Last night the foreign markets were down. London was down 0.66%, Paris was down 0.26% and Frankfurt was down 0.71%. China was down 0.08%, Japan was down 1.44% and Hang Sang was down 0.68%.

The Dow should open lower on concerns that Trump’s pro-growth agenda is in jeopardy given the healthcare defeat. Will US equities rebound after the market’s opening as was the case with European shares? The 10-year is up 11/32 to yield 3.26%.