All-Time New Highs…

July 25, 2016

All-Time New Highs…

Great for your portfolio but bad for your ice cream cone. Demand for equities remained last week as corporate earnings continued to beat expectations and economic data points stayed positive. While the Citigroup economic surprise index continues to ramp, inflation expectations and forward rate bets remain tempered. While it feels like a real Goldilocks environment for risk right now, there is a FOMC meeting this week and while expectations are nil for any interest rate hike, all eyes will be watching the forward guidance. We will still be busy digesting the biggest week of corporate earnings releases while also keeping an ear open for Bank of Japan’s actions and any resolution out of Italy regarding their banking problems. As long as the credit markets remain stable and a new threat does not emerge, I still think the stock markets are in good shape. Remember that we just had a massive amount of buying interest launch it higher over the past four weeks. It would take some strong negative conviction to get all of those new buyers to quickly reverse course and go on a sizable selling spree. So enjoy the recent gains in your equity portfolio and buy an extra scoop to enjoy before the triple digit temps melt it away.

(Advisor Perspectives)

Early results for EPS beats and Guidance raises look very good. Let’s see if it can hold this high level for the next two weeks of peak earnings releases…


Stocks really do follow earnings this year…

Good news for those active managers and strategies who can accurately estimate earnings.

(SocieteGenerale)

Here are the charts of the top performing S&P 500 companies after their earnings releases…

Notice the follow through moves in most every stock except Alcoa.

Some notable earnings comments that I came across this week…

Schlumberger CEO sounded much improved this quarter…

“The effects of the cuts that we have seen in E&P spending are now clearly visible in falling oil production, and with demand remaining strong, we are heading more rapidly towards an increasing negative gap between global supply and demand for oil. This will require significant capability and capacity to reverse, and without pricing recovery the service industry will be challenged to deliver. As we have navigated this downturn, we have made a series of moves that position us well for the inevitable market recovery.”

 

Ditto for Halliburton…

“North America revenue declined 15% sequentially, significantly outperforming the average US rig count, which was down 23%. After falling 78% from the November 2014 peak, the US rig count reached a landing point during the second quarter, as we predicted during our last earnings call. Since reaching the bottom, the rig count has improved by 26 over the last several weeks, reflecting operator confidence in stabilizing commodity prices.

“We believe the North America market has turned. We expect to see a modest uptick in rig count during the second half of the year. With our growth in market share during the downturn, we believe we are best-positioned to benefit from any recovery, including a modest one. Internationally, we are maintaining our service footprint, managing costs and continuing to gain market share.”

 

Another important energy industry comment from Idex Corp…

“Recently, we have seen signs that our North American industrial markets are stabilizing, and within our Energy platform large projects that had been delayed for several quarters shipped late in the second quarter.”

 

And United Rentals has strong ties to the oil patch…

@TraceyRyniec: United Rentals: May and June saw the first month-over-month sequential rate increases in 16 months. $URI

 

The energy improvement is even flowing thru to the banks…

“this quarter we had no material energy charge-offs, in fact we have nice recovery on one of our credits. So we feel like we’ve got…the energy issue behind us. ”

(US Bank CRO, P. W. Parker)

 

Significant pricing improvement in the steel industry…

“2016 has certainly provided a changing landscape to the domestic flat roll market. Several positive macro shifts have resulted in significantly improved flat roll product pricing…supply side drivers have led to much improved market dynamics. Our flat roll steel mills operated at full capacity during the second quarter, supported by the automotive and construction sectors.”

(Steel Dynamics CEO, Mark Millett)

 

Even J&J is seeing a unit volume pickup thru the hospitals as the improved economy drives traffic…

“we are seeing a pick up in terms of hospital admissions and surgical procedures. I think hospital admissions are up around 3%. We think the procedures are probably up around 3.5%…if we look at the core growth rate in the medical hospital device area, we’re encouraged by some of the recent trends that we’re seeing.”

(Johnson and Johnson CEO, Alex Gorsky)

(h/t AvondaleAM)

 

And Domino’s Pizza follows a +12.8% comp with a +9.7%? Cowabunga!

(JPMorgan)

Now for a highly controversial and fought over name…

Chipotle didn’t do anything spectacular in their earnings release or call, but take note of the stock reaction on 4m shares of volume. Likely some big investors waiting on the sidelines for the release to hit before they got involved.

(@sssvenky)

Take a look at what areas of the market are beating the S&P 500 for all time frames in 2016…

This is an interesting list of ETFs. Very ‘Risk-On’ with the exception of Utes and REITs. Having flashbacks to 2003 and humming 50 Cent.

(Price as of 7/22/16)

The big U.S. economic kick on the week was the Markit Mfg PMI…

(MarkitEconomics)

Jon Hilsenrath at The Wall Street Journal keeping you on your toes about the upcoming FOMC meeting…

Federal Reserve officials are looking more confidently toward an interest-rate increase before the end of the year, possibly as soon as September, as financial markets have stabilized after Britain’s vote to leave the European Union and the economy shows signs of picking up.

Policy makers at the central bank are almost certain to leave rates unchanged when they meet July 26-27, according to their public comments and interviews with officials.

But the message in their post meeting policy statement could be that the economy is on a more solid footing than it seemed to be when officials last gathered in June, setting the stage for raising interest rates if economic data hold up in the months ahead.

(WSJ)

But as the economic data picks up, inflation expectations remain low…

@markets: Bond traders see inflation going one way, and the economy going the other

(Bloomberg)

But the U.S. Dollar is waking up. Could the currency be reacting ahead of the fixed income markets?

(@beckhiu)

If you are worried about interest rate increases, Goldman Sachs would like you to cut and tape this chart to the bottom of your monitor…

(Goldman Sachs)

Good work to line up the Portfolio Manager cash levels with the market. Remember that it is only a survey so not unusual to see it time near term bottoms in equities…

‏@TihoBrkan: Despite what some are saying, ML’s Fund Manager Cash Balance survey works perfectly fine as a contrarian indicator

On the other hand, new record surges in inflows will drive prices…

@LadyFOHF: Record inflows to EM debt funds | BAML

A move in Emerging Market Bond and Credit values should flow through to Equity prices. So here is a good chart to remind you which major asset class has done terribly in the past five years…

(Pension Partners)

Quickly on the U.K., some wonder if the U.K. can have a recession while no other country does…

@AlasdairPal: Attention Brexiteers: awful PMI data effectively suggesting we’re heading for a recession

For the rest of Europe, the credit markets are surging. Must be a combination of Central Bank buying as well as natural buyers being comfortable with economic conditions…


Back to the U.S., it sounds like perfect corn weather in the Midwest. Maybe even the best crop ever?

Check your agriculture exposures. Farmer incomes will be under pressure (tough for fertilizer and equipment stocks) but good for buyers of grain (meat processors).

I still know what your kids are doing this summer…

(World Economic Forum)

And Pokemon Go will be great for Apple (and Google)…

Today, Pokemon GO is available in 35 countries, including most of Europe and Canada. Pokémon Go launches in Japan, the original home of Pokémon, this week. Pokémon reaches 127mm people in Japan, plus 320mm in the US plus 430mm in Europe and Canada (our estimate). In the US, penetrations after 10 days are 21mm out of a total US population of 320mm, or 6%. Assuming 20% penetration at maturity with revenue to APPL of $0.05/person/day suggests extra revenue to APPL from Pokémon Go of $3B over the next 12-24 months, depending on consumer adoption timing. At a 1.8x revenue multiple, this translates into market cap upside potential of $5.5B, or $1.00/share of added value.

(Barron’s)

 

Finally, Uber = Pokemon Go…

@mariachong: Uber is a 3-D PokemonGO where you find creatures, catch them, then release them in new locations, all while earning points called “money.”

And Lastly…

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