Enough of this Heatwave…

361 Capital Market Commentary | July 22nd, 2019

How about a refreshing waterfall instead? This of course reminds me of the large volume of corporate earnings, economic data and central bank activity that we have coming at us over the next two weeks. The first week of earnings did not disappoint. There were some hits (Microsoft and IBM) and some misses (CSX and Netflix). Top lines came in pretty much as expected while bottom lines did better. But investors were paying attention to forward guidance and what they heard was not inspiring. Too much uncertainty and lack of clarity. For the week, stocks tended to react poorly to company news while responding well to central bank and Fed speaker comments. But as a whole, it was a miss for U.S. stocks with only the Staples and Materials sectors posting gains.

Economic data was also in abundance last week. While housing data continued to underwhelm in the face of low mortgage rates and high consumer confidence, both the Philly Fed and U.S. Retail Sales outperformed expectations. Good news for any hawks that might be hiding at the Fed. But it was mostly the Fed doves who hit the speaking circuit last week to layout their case for lowering the Funds rate at next week’s Fed meeting. Most forceful was John Williams whose comments on Thursday sparked a jump in the odds of a 50bp cut next week to above 70%. Those comments were backed off a bit on Friday but not before several large firms moved their own bets into the 1/2% cut camp. I still think that the Fed should save 50bp cuts for something special but we shall find out the answer on the 31st.

So get refreshed, fill your canteen and tighten your shoes. We have a busy hike ahead. And thanks again to everyone who joined the webcast last week. I hope you found it helpful.

It sure looks like the investing world was listening to every Fed participant interview last week…


@bespokeinvest: With the Fed now in its blackout period, market expectations for a 50 bps cut are down to just under 25%.

Rate Cut Probabilities: July 2019 Meeting

Quite the move in expectations on Thursday when Williams released that cage of doves…


The debate sprang into view this week after John Williams, president of the Federal Reserve Bank of New York, said central banks should “move more quickly to add monetary stimulus” than they otherwise might. The comments, which the Fed later said weren’t intended to apply to the current debate, fueled a rally in U.S. stock indexes and a spike in derivatives that measure traders’ expectations for Fed rate moves. President Trump said Friday he agreed with the remarks.

The market on Thursday was pricing in as high as a 71% chance of the Fed lowering its federal funds rate by 0.5 percentage point after its July 30-31 meeting, according to CME Group. That was the highest odds this year. The bet is raising the eyebrows of many investors, given the broad consensus that the U.S. economy is generally healthy and officials’ typical preference for moving deliberately in cutting rates.


Meanwhile, the POTUS keeps the pressure turned up on the Fed…


Trump Federal Reserve Tweet

Onto last week’s economic data, that was quite a surprising bounce in the Philly Fed Index…


Hopefully not all due to air conditioning and ice manufacturing orders.

Philly Fed Manufacturing Index

Strength in the Consumer continues…


Bloomberg US Consumer Comfort Index

But Housing data should still be doing better than this…


June housing permits fell

Economic uncertainty leads to a big capex delay in Dallas…


Texas Instruments has pushed back its plans to build a $3.1 billion semiconductor plant in Richardson by two years, according to a letter sent to state officials.

In a letter to the Texas Comptroller’s office in mid-May, an attorney for Plano ISD said the Dallas-based chipmaker “must delay construction of the facility beyond what it originally estimated.” The attorney, Fred Stormer, said the company attributed the delay to “current market conditions.” The site is located within the bounds of Plano ISD, which approved a tax break for the company.

Texas Instruments now plans to begin construction in July, August or September of 2021 and start hiring new employees about a year later, according to a timeline sent with the letter. The plant will start production in early 2024.

Texas Instruments’ delay in expansion comes as its stock market performance is strong, but global demand for chips has weakened. Company executives have spoken about the slowdown in calls with investors, and analysts predicted a 10% decline in sales in the second and third quarters.


Onto earnings, as we discussed on our webcast last week, plenty of indecisiveness on the conference calls…


Some Key Items from this week...

Another week to drink from the Earnings fire hose with several mega-caps lined up…


Most Anticipated Earnings Releases July 22 2019

The big question remains if the retreat in Q2, Q3 and Q4 earnings for this year can be reversed…


SP 500 Consensus Quarterly YoY EPS Growth 2019
(WSJ/DailyShot, Yardeni)

It was a tough last week for the U.S. equity indexes…


Inside commodities, oil was in a full retreat as potential Iran negotiations ticked up. Also, gold shining brighter.

Equity Indexes 7-19-2019

Among the U.S. sectors, the Semis led while Energy followed Oil lower…


Sectors 7-19-2019

An interesting pair that reminds me of Spud Webb and Manute Bol…


Wells Fargo notes that both Low Volatility and Momentum factors are overbought.

Low Vol/Momentum Overbought vs the Market
(Wells Fargo Securities, LLC)

Value stocks have been beaten up by most every index. Now even Low Volatility stocks are racing past them…


Value and low volatility stocks have been going in opposite directions

J.P. Morgan thinks that we are getting close to a significant inflection point in Value stock underperformance…


Value companies, which have trailed their growth counterparts and the broader market seemingly forever, now fetch 14.4 times projected earnings. That’s a 33% discount to the other group, which is sometimes called “low beta,” data compiled by Bloomberg show. The gap is near the widest ever, Bloomberg data show.

“While there is a secular trend of value becoming cheaper and low-volatility stocks becoming more expensive due to secular decline in yields, the nearly vertical move the last few months is not sustainable,” JPMorgan strategists led by Kolanovic said in a research note. “The bubble of low volatility stocks versus value stocks is now more significant than any relative valuation bubble the equity market experienced in modern history.”


Value vs Market/Low Vol

We have even reached the point where Portfolio Managers have given up on Value stocks…


Net % Think Value stock will Outperform Growth stocks

Foreign investment into the U.S. is seeing a significant retreat led by the Chinese…


Growing distrust between the United States and China has slowed the once steady flow of Chinese cash into America, with Chinese investment plummeting by nearly 90 percent since President Trump took office.

The falloff, which is being felt broadly across the economy, stems from tougher regulatory scrutiny in the United States and a less hospitable climate toward Chinese investment, as well as Beijing’s tightened limits on foreign spending. It is affecting a range of industries including Silicon Valley start-ups, the Manhattan real estate market and state governments that spent years wooing Chinese investment, underscoring how the world’s two largest economies are beginning to decouple after years of increasing integration.

“The fact that the foreign direct investment has fallen so sharply is symbolic of how badly the economic relationship between the United States and China has deteriorated,” said Eswar Prasad, former head of the International Monetary Fund’s China division.


Scotland is moving toward zero emissions…


It’s no secret Scotland has a lot of wind farms, but it’s now clear just how much electricity those turbines can produce. Data from WeatherEnergy shows that Scottish wind turbines generated just over 9.8 million megawatt-hours of electricity between January and June, or enough to power roughly 4.47 million homes — nearly twice as many homes as there are in Scotland. The operators theoretically have enough excess wind energy to power a large chunk of northern England.

The Scottish government already has plans to clean up its power supply. It hopes to to feed half of its energy consumption with renewables by 2050, and wants to virtually eliminate CO2 emissions from its energy infrastructure by 2050. The new stats suggest the plan is on track and might even be cautious.


Sheep Windmill
(Melanie Stetson Freeman/The Christian Science Monitor via Getty Images)

Finally, what a great 50th Anniversary week…


Sheep Windmill

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