Back and Forth We Go

361 Capital Market Commentary | July 29th, 2019

Central Bank rate cuts versus falling earnings outlooks. A lower discount rate on equity valuations versus declining earnings. Stocks up one day and down the next. Welcome to our next round of financial market yo-yo.

So, this will possibly be the biggest week of the year for market data. We have four Central Bank meetings (U.S., U.K., Japan and Brazil). The next round of U.S. and China trade talks. Monthly jobs data on Friday, which could help or hinder the next Fed rate action. And also the final peak week of the Q2 earnings season. So summer vacation is over if you have any skin in the game.

The U.S. will cut rates by 25 basis points on Wednesday. Any more would be a surprise puppet show. Question is: one and done? Or, will the FOMC set the stage for more cuts? The Fed will probably need evidence of more economic weakness to cut rates further. Hopefully they will shed some light on what they do foresee, and what current data points they are looking at most closely.

For investors in stocks, it seems like many still have one foot on the gas and one on the brake. One group of stocks will be best performing one day, only to reverse course and get kicked in the seat the next day. And while stocks have tended to move lower on their missed earnings outlooks, they can spike higher at a moment’s notice on a comment or hint of Central Bank rate movement. As company guidance continues to pull forward-earnings estimates lower, you can see how stocks are mostly moving to the beat of future lower interest rates. Bad news remains good news. Sit back, clench the bucket seat and try and enjoy the ride. There will be many hairpin turns ahead.

Of course, the European Central Bank and the markets are going to continue to take European interest rates lower…


“In manufacturing, the business climate indicator is in freefall,” said Clemens Fuest, president of the Ifo Institute, a highly regarded research group. “No improvement is expected in the short term, as businesses are looking ahead to the next six months with more pessimism.”

Recommended European Central Bank ECB faces key decision over launch of fresh stimulus Jörg Krämer, chief economist at Germany’s Commerzbank, said that “there is far and wide nothing to be seen of the second half recovery hoped” after a challenging first half of the year for the country’s economy. “Germany is in a grey area between a marked growth slowdown and a recession,” he said.


Tough times for German's factor sector



@jsblokland: BREAKING! #Switzerland’s #yieldcurve is now negative for all maturities, hence anywhere between 3 months and 50 years.

CHF Switzerland Sovereign Curve

Incredible two…


@RobinWigg: Good job everyone.

25% of all bonds in the world trade at negative interest rates

J.P. Morgan thinks the 10-year U.S. Treasury yield could be headed toward zero…


Quite simply, the money is pouring into the US bond market from overseas. As the volume of negative-yielding debt grows across Europe and Japan, investors are seeking a safe haven that has a positive return. US investors have neither embraced the decline nor pushed back against it. As trade tensions escalate, the probability of recession rises. There is also the very real risk that inflation expectations have become unanchored and central banks are gradually becoming powerless. New York Fed president John Williams captured this risk nicely this month by saying that “investors are increasingly viewing these low inflation readings not as an aberration, but rather a new normal”.

While there has already been a dramatic decline in US yields, an accelerated move lower is potentially in the offing. If, as expected, the Fed begins a rate-cutting cycle at the end of this month, money will be shaken out of money-market funds into bond funds in an effort to lock up a higher yield. A second vast pool would come from a return to balance sheet expansion: the Fed is expected to end its balance sheet run-off in September just as the European Central Bank returns to quantitative easing. A third pool of money could come from de-risking. An escalation in the trade war has surely raised the probability of recession. From current levels, the combination of central bank action and de-risking would accelerate the journey of US bond yields toward zero. This is not healthy for savers who rely on a fixed income or for insurance companies and pension funds that have returns targets to meet.


RenMac has a simple reason why Treasuries at 2% are not expensive…


And why the U.S. dollar is going higher (against the POTUS wishes).

Why would anyone own Italian debt at 1.49% when U.S. Tsy is +2.00%??? They wouldn’t, but the central banks that support them have to. It’s another reason we’re still dollar bulls and there’s still a bid to bonds at these levels in the U.S.


US Dollar Index - Cash Settle

Earnings guidance is the worst in a decade…


Stocks in the S&P 500 just rose for the sixth time in eight weeks, jumping another 1.7% and finishing at a record. They did so during a period in which weakening company outlooks led analysts to cut earnings estimates for the rest of the year. By one measure, guidance for the third quarter has been some of the worst in a decade.

The obvious offset to the dimming profit picture is Jerome Powell’s Federal Reserve, whose newfound dovishness has driven a $6 trillion rally in American equities during 2019. Investors preparing to celebrate a rate cut when Powell & Co. meet next week might ask themselves if profit growth is one of the things crying out for stimulus…

Among 35 companies that have revised guidance for the third quarter, 60% have slashed it, a rate that ranks with the worst since 2011, data compiled by Bloomberg show. At this point, only one company has issued a higher profit outlook for the third quarter — Netflix Inc., which still suffered its worst post-report reaction in three years in the wake of disappointing subscriber numbers.


Of Companies revising 3Q guidance, 60% has been to the downside

This week will determine if Q3 earnings growth becomes negative…


@EarningsScout: S&P 500 EPS estimates are falling on an absolute basis.

2019 SP 500 EPS growth estimates are falling

Tariffs are slowing earnings growth, employee wage growth and raising customers prices…


Caterpillar expects tariffs to cost 250 million

One spot of earnings daylight… Chubb sees a firming insurance pricing market.


“We benefited from an improved pricing and underwriting environment, flight to quality from commercial insurance buyers, and our various global growth initiatives. Pricing continued to tighten in the quarter while spreading to more classes and segments of business, particularly in the U.S. and London wholesale market. We’re also seeing early signs that market-firming conditions are spreading to more territories around the world”.

The last VERY BIG earnings reporting week of this Q2 season…


Most Anticipated Earnings Releases July 29 2019

Speaking of earnings, guess which factor performs best after the first Fed rate cut?


Which factor performs best after the first Fed rate cut?

With the end of the bulk of earnings, share repos are about to return…


But an interesting observation here by Goldman as companies are now returning more cash to shareholders than they are generating.

S&P 500 share repurchases have continued to surge during 2019. High frequency data from the Goldman Sachs repurchase desk indicate buyback executions have risen 26% year/year through mid-July. Although S&P 500 repurchase authorizations have declined by 20% vs. the year-ago period, companies retain capacity to repurchase stock under multi-year authorizations. We estimate S&P 500 buybacks will climb by 13% to a new all-time high of $940 billion this year.

However, for the first time in the post-crisis period, companies are returning more cash to shareholders than they are generating in free cash flow. During 2017, non-Financial S&P 500 firms returned 82% of free cash flow to shareholders in the form of buybacks (net of equity issuance) and dividends compared to 104% during the 12 months ending 1Q 2019. Net buybacks and dividends surged by 30% during the past 12 months while free cash flow (FCF) increased by a comparably modest 10%. Growth in FCF was not constrained by a surge in capital expenditures; S&P 500 cash flow from operations (CFO) also rose by 10% during this period.

(Goldman Sachs)

For the week, the U.S. equity markets did well as the markets look forward to many Central Bank actions…


Equity Market 7-26-2019

A risk-on week among the sectors as Semis and Communications lead…


Keep an eye on the banks and financials which have quietly moved higher on little earnings fanfare. Energy continues to underperform.

Sectors 7-26-2019

Keep an eye on the natural gas energy space…


If prices keep falling, their bonds and stocks might flare up like several of the wells that you are driving by this summer.

Some of the country’s largest natural gas producers are tearing up their drilling plans, relenting to prices for the fuel that have fallen to their lowest summer level in two decades.

Natural gas prices typically move higher in the heat of the summer, as demand from electricity plants surges to power air conditioners. This month’s heat wave in the Eastern U.S. has generated record consumption at power plants, yet natural gas prices have continued to slide due to bountiful supplies.


Natural gas futures

Energy stocks remain a graveyard for long investing portfolios…


XLE Energy SPY Ratio


With interest rates falling and dividends ticking higher, income-producing stocks will be a good hunting ground for fixed income investors…


@bespokeinvest: Nearly half of S&P 500 components have a higher yield than the 10-year, and 25 yield more than 5%.

Dividend Yield of SP500 Components

Europe’s #1 airline flies an all Boeing 737 fleet…


And the never-reserved Chairman is a bit unhappy with Seattle.

“I am concerned that the MAX return to service keeps slipping,” O’Leary told a conference call with analysts.

While its current estimate is for the company to take 30 aircraft for summer 2020, that could fall to as few as 20, “which would significantly truncate our growth rate,” O’Leary told analysts on a conference call.

“It could move to 10 and it could move to zero if Boeing don’t get their shit together pretty quickly with the regulator,” he added.



Housing supply in the Hamptons hits a 13-year high…


There were 2,557 homes on the market at the end of the second quarter, an 84% jump from a year earlier and the largest supply in data going back to 2006, according to a report Thursday by appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. Sales fell for a sixth consecutive period to 498, the fewest for a second quarter since 2011.


Inventory reaches a record after increasing for six straight quarters

And now it is Newport Beach’s turn…


High prices are hitting the Southern California housing market hard, reversing the sales gains over the past few months.

Sales fell 6.9% in June compared with May and were down 8% annually, according to CoreLogic. That is the slowest June pace since 2014. Historically, sales usually gain an average 5.8% from May to June.

Sales have been falling on a year-over-year basis for 11 straight months, but the drops had been shrinking in April and May. Mortgage rates also fell more than 50 basis points over the past three months, making the decline in sales even more surprising.


Agree 100%…


These are the only three checkout methods that matter anymore unless you are buying caffeine.

Express Checkout Methods

If you know anyone who has had a mortgage or a credit card over the last 10 years…


The L.A. Times would like to remind you to collect your free $125. Or as Aditya would tell you, that is 3 weeks of burrito lunches at Chipotle.

If you were affected by the Equifax breach, you qualify for either $125 or up to 10 years of free credit monitoring. If you were the victim of fraud or identity theft, you could receive up to $20,000 in compensation.

The reason those amounts are bigger than the $4.75 figure I cited earlier is because Equifax is figuring most people won’t take the time to submit a claim. You should prove them wrong.

Go to You’ll be asked to enter your last name and the last six digits of your Social Security number. You can also contact the Settlement Administrator at (833) 759-2982.


Best idea floating around college football right now…


It checks all the right boxes, except for maybe the beer vendors.

This newest idea? At first blush, it sounds nuts. Starting games at 9 a.m. local time on the west coast? Will the concession stands have to stock eggs Benedict? (You can make your own west coast/avocado toast joke here if you’d like, but I’m avoiding the low-hanging — or toast-spreading — fruit today because I like this idea.)

But think about it a little more, and it makes sense. Breakfast At The Rose Bowl or Omelettes At Autzen might help deliver the Pac-12 what its leaders and coaches desire. For years, the people in the league have told us that an East Coast Bias has hampered the Pac-12’s ability to make the Playoff and compete for Heisman trophies. Some of the league’s best games take place when most of the east coast is asleep. Many of the others take place when most of the country is otherwise engaged watching the best ACC, Big Ten, Big 12 and SEC games. So the executives at the Pac-12 and Fox had an idea. Why not try to goose the ratings of Fox’s new pregame show and own the noon eastern/9 a.m. Pacific window by placing some of the Pac-12’s best games there?


Best thing on the internet this weekend = Lewis Wake…


I will never be able to watch Singin’ in the Rain again without hearing LP’s Mike and Chester in the background.

Lewis Wake

Finally, just another retired man in jeans who is making life better for many…


Jon Stewart

Catch up on past Weekly Research Briefings >