Monday August 15 Daily Market Primer

US stocks fell on Friday after hitting record highs the day before, although the NASDAQ rose to another high.  Accommodative monetary policy, record low bond yields, and slow but steady US economic growth continue to support stocks.   Overnight, markets had a good day in Asia, with the Shanghai up 2.4%, to a seven month high, and the UK is leading Europe with a .5% gain. The US market is opening up about .3% this morning.  Oil is back up above $45 on OPEC continues to talk up the price without really doing anything about supply.

LAST CHANGE % CHG DJIA 18576.47 -37.05 -0.20% Nasdaq 5232.89 4.5 0.09% S&P 500 2184.05 -1.74 -0.08% Russell 2000 1229.82 0.7 0.06% Global Dow 2451.78 6.44 0.26% Japan: Nikkei 225 16869.56 -50.36 -0.30% Stoxx Europe 600 346.18 0.09 0.03% UK: FTSE 100 6947.66 31.64 0.46% Australia: S&P/ASX 200 5540 9.1 0.16% China: Shanghai Composite 3125.2 74.53 2.44% Hong Kong: Hang Seng 22932.51 165.6 0.73% India: S&P BSE Sensex 28152.4 292.8 1.05% Japan: Nikkei 225 16869.56 -50.36 -0.30% Singapore: Straits Times 2867.21 -0.19 -0.01% France: CAC 40 4496.96 -3.23 -0.07% Germany: DAX 10731.89 18.46 0.17% Italy: FTSE MIB 16997.83 28.14 0.17% Spain: IBEX 35 8719.9 3.5 0.04% U.S. 3 Month 0.282 0/32 U.S. 2 Year 0.718 -1/32 U.S. 5 Year 1.125 -4/32 U.S. 10 Year 1.536 -7/32 U.S. 30 Year 2.259 -18/32 Germany 2 Year -0.617 -1/32 Germany 10 Year -0.069 -12/32 Crude Oil 45.08 0.59 1.33% Brent Crude 47.51 0.54 1.15% Natural Gas 2.65 0.024 0.91% S&P GSCI 353.7 3.23 0.92% E-mini S&P 500 2185 4.75 0.22%

Japanese Q2 economic growth came in at an anemic .2%, vs an expected number of .7%. Barron’s ran an article this weekend on Hillary vs. Donald and the anticipated effect on the stock markets, which speculates among other things that the recent run-up may be partially due to Hillary pulling ahead on the polls after the convention http://bit.ly/HillaryRising.

In case you are wondering about comparisons to 1999, the last time the market indices were at record highs, here is an excerpt from a WSJ article on the subject published last Friday:

Stark Contrast to the Last Time Stocks Notched a Trifecta

The backdrop is completely different today than it was then. GDP in the fourth quarter of 1999 was initially reported at a blistering 5.8% (the BEA now records it, adjusted for inflation, at 7.1%). Earnings for the S&P 500 companies rose 49% from the previous year. The yield on the U.S. 10-year Treasury note was 6.41%. The unemployment rate was 4%. The state of the nation, as President Bill Clinton would crow in January 2000 from the floor of the House of Representatives, was “the strongest it has ever been.”

Today, GDP is barely creeping along at a 1% rate for the past three quarters. Corporate profit growth has contracted for five straight quarters. The yield on the 10-year is 1.56%. The unemployment rate, currently at 4.9%, is about the only thing relatively close to its 1999 level.

Stocks, of course, are higher now than they were in 1999. On a valuation measure, though, they are cheaper. PEs during the dot-com boom of course hit all time highs. In December 1999, the S&P 500’s “forward PE was around 31, its trailing PE was 29.

Today the trailing is at 21, and the forward is 18.5. That may not be “bubble” territory, but it is historically high, “and quickly approaching the one standard deviation line,” Gluskin Sheff economist David Rosenberg wrote. “This market is de facto pricing in a 25% earnings bounce (based on historical average multiples) in the coming year which history tells us is about a 1-in-10 event.”

We are not in the heady days of 1999. The market’s gains today are more a result of financial repression and engineering than irrational exuberance. There is enough of a difference between now and 1999 that investors shouldn’t be thinking about a re-run, and that’s a good thing considering what happened back then. Yet it’s hard to look at the valuation question and wonder just what investors can realistically expect over the next months and years, and whether that’s enough to justify stocks at these prices.

Here’s the news:

Oil's looking slick

Oil climbed above $45 a barrel in New York for the first time in three weeks thanks to speculation that crude producers will revive discussions to stabilize the market. The gains follow on from crude's best performance since April last week after the Saudi Arabian energy minister's "verbal intervention" signalling willingness to discuss taking action at next month's informal OPEC talks in Algiers. West Texas Intermediate for September delivery rose as much as 64 cents to $45.13 a barrel on the New York Mercantile Exchange, the highest since July 21. Money managers increased wagers on rising crude prices by the most sin since January as futures rebounded from a three-month low. 

China stocks, bonds diverge

The rally in commodities and the grind-lower in benchmark government bond yields has prompted a rally in emerging market assets with Chinese equity markets in particular cheering thanks to expectations that an exchange link between Hong Kong and Shenzhen will go live in the coming months. The Shanghai Composite Index gained 2.4 percent, marking a seven-month high. The jump in Chinese stocks comes despite weaker-than-expected data released on Friday concerning factory output, retail sales and investment, that fueled worries over a slowdown in Asia's largest economy. These concerns saw the yield on 10-year government debt fall to a decade low, while the yuan in trading today declined to its lowest level against the dollar in a week.

Brexit by the numbers

The U.K. is due to publish inflation data tomorrow which will offer the first hard look as to the impact of the Brexit vote on price stability and the Bank of England's flexibility to unleash stimulus. Sterling's decline could see a rise in the consumer prices index, which is forecast to hit 0.5 percent in July — the same rate of expansion as June — and thereby challenge the BOE's bid to aid the economy while respecting its 2 percent inflation target. Homes in the U.K.'s capital are staying on the market for five days more than in May, the month before Britons voted to leave the European Union, according to a report from Rightmove Plc, and millennials are losing out as pension-fund liabilities balloon to a record 1 trillion pounds ($1.3 trillion).

Japan's slowdown

Japan’s economy grew less than forecast in the three months through the end of June as business spending contracted for a second-straight quarter and exporters struggled with the resurgent yen. GDP expanded by an annualized 0.2 percent in the second quarter — less than the median estimate of economists for a 0.7 percent increase. After the data release, the Topix index slipped 0.5 percent as of 5:06 a.m. ET and the yen strengthened from 101.18 to 100.93 against the U.S. dollar. The plus side of the yen's rise and Japan's ongoing deflation: people can afford more ramen. Meanwhile, the International Monetary Fund is urging the country to pursue a pretty radical plan to boost wages and increase prices. 

Coming up...

It could prove to be a quiet summer week for markets but we're expecting a relatively busy few days for statistics. Away from the U.K., we'll be receiving a bevy of economic data points this week starting in the U.S., with the NAHB Housing Market Index on Monday, followed by the Consumer Price Index, housing starts, and industrial production on Tuesday. We'll also get a further peek into the health of the U.S. consumer following Friday's disappointing retail sales report when Wal-Mart Stores Inc., Home Depot Inc., and Target Corp. release second-quarter results. In Asia, Japan is due to publish trade figures and China will publish property prices for July.

Open Files
Democrats are expecting more leaks from hackers. Two websites created in recent months now serve as portals for leaking sensitive and at times embarrassing information about the Democratic Party and its supporters. Computer experts and Democrats in Congress believe both websites—the Guccifer 2.0 WordPress page and DCLeaks.com—have ties to Russian intelligence services and that the sites are using hacked information to try to influence the November elections. We report that U.S. officials are now debating whether to publicly accuse the Russian government of conducting the attacks. Meanwhile, Vice President Joe Biden is set to make his debut campaign appearance with Hillary Clinton on Monday in Scranton, Pa., while Donald Trump, trailing Mrs. Clinton in the polls, continues to step up his attacks on news organizations.

Low-Fiber Diet
Google’s high-speed internet business is slowing down. The company is rethinking its plan after initial rollouts proved more expensive and time consuming than anticipated, a contrast to the fanfare that greeted its launch six years ago. Alphabet’s internet provider, Google Fiber, has spent hundreds of millions of dollars digging up streets and laying fiber-optic cables in a handful of cities to offer web connections roughly 30 times faster than the U.S. average. Now it is hoping to use wireless technology to connect homes, rather than cables, in about a dozen new metro areas, including Los Angeles, Chicago and Dallas. As a result Alphabet has suspended projects in San Jose, Calif., and Portland, Ore. The company is also trying to cut costs and accelerate its expansion elsewhere by leasing existing fiber or asking cities or power companies to build the networks instead of building its own.

Driving Up Costs
Auto makers flocked to Mexico for the low-cost labor. Now, they’re bidding it up. Toyota, BMW, Ford and several other auto makers have committed to spend a combined $15.8 billion to build new assembly plants or expand existing factories, on top of the more than a dozen plants already in operation and billions more being spent by auto-parts suppliers to keep pace. The competition for employees—both finding and retaining them—is nudging up labor costs. Retention and retraining programs are becoming the norm as are bonuses for employees who agree to stay in place, especially those with valued skills. The pressure isn’t yet so severe that it is undermining the rationale for moving production to Mexico. But it is an unexpected shock, threatening both profitability and production quality.

Summer of Flops
Global box-office receipts are up slightly from a record-setting 2015. Yet Hollywood is having one of its glummest summers in a long time. So far, this year has included roughly the same number of hits as 2015, but many more flops and moderate disappointments. Searching for the next blockbuster hit that could stand out in a saturated media landscape, studios have packed this year’s release calendar with sequels, reboots and superhero adaptations. Many of the movies that fell short of studios’ big expectations cost more than $100 million and some close to $200 million. The unimpressive performance of so many movies could result in write-downs and losses for the big studios, but also heftier profits for those that produce the few breakthrough successes.

IMF urges China to curb credit growth

China must take "decisive action" to deal with growing threats to its economy, particularly soaring credit growth, the International Monetary Fund said in a report. The vulnerabilities of China's economy are "rising on a dangerous trajectory," the IMF said.  South China Morning Post (Hong Kong)/The Associated Press

Brexit reportedly might not begin until late 2019

Britain might not withdraw from the EU until toward the end of 2019 because the UK government ministries that will handle the negotiations are still recruiting staff, the Sunday Times reported without identifying its sources. International Trade Secretary Liam Fox has hired fewer than 100 trade policy experts of the 1,000 he needs, and Brexit minister David Davis has hired less than 100 of 250 staff members he needs to help him with EU negotiations.

Bloomberg (14 Aug.), 

REIT reportedly close to $4B takeover of rival

MAA, a real estate investment trust specializing in multifamily properties, is close to acquiring Post Properties for $4 billion, people familiar with the matter said. If the deal closes, the combined entity will have 105,000 units in 317 properties, making it the biggest apartment REIT in the US when measured by units. The Wall Street Journal (tiered subscription model) (14 Aug.) 

Japan's GDP grew at annual rate of 0.2% in Q2

Japan's economy came almost to standstill in the second quarter, declining to an annualized 0.2% growth, the Cabinet Office said. The figure is short of a 0.7% median market forecast.

Reuters (15 Aug.) 

The Bank of Japan's unstoppable rise to Shareholder No. 1.

Three decades on Wall Street and reflections on the attributes of great investors.

There's a lot to like in a market as hated as the S&P 500.

What’s so significant about statistical significance?

The economic explanation for Donald Trump's rise, debunked.

At Least 3 Dead, 7,000 Rescued in Louisiana Flooding

Governor Declares State of Emergency in Milwaukee After Shooting, Unrest

Economic Slump Sends Big Ships to Scrap Heap

Can Target Fix Its Grocery Business?

Bond Funds Turn to Emerging Markets

In Bangladesh Cyberheist, Strange Requests, Odd Misspellings and Little Scrutiny by Fed

Friday's retail sales report came in weaker than expected and took a bit of the wind out of the bulls' sails. The market-implied odds of an interest rate hike at the Federal Reserve's September meeting fell from 22 percent to 16 percent, and at the moment, the market only sees a 42.3 percent chance of a hike this year. If there's one thing to watch from this week's U.S. economic data, it's core CPI. That's expected to rise 2.3 percent from a year ago, which would be the same pace as the previous month. If there's any sign of further acceleration that may put investors and the Fed on notice. On that note, West Texas Intermediate crude oil, as noted by Calculated Risk, has recently recovered to the point where it's higher than it was a year ago. Given that oil (and gas) has been a major drag on headline CPI, watch for this change to start showing up in the data.

 Source: Bloomberg, WSJ, CFAI Fin. Newsbrief, SCMP, Reuters