So Bad it’s Good…

361 Capital Market Commentary | June 10, 2019

That is where the state of our markets sit currently. The worse the data gets, the more likely the Fed is to lower interest rates. For risk appetites and the stock market, last week’s dismal string of data was like being handed a gigantic banana split. ISM Manufacturing, ADP Employment, DoE Inventories and Friday’s Nonfarm Payroll data were like extra chocolate syrup, whipped cream and bonus maraschino cherries. Fed rate cuts are coming. No longer a matter of if, but when and how much. As of Friday, it looked like the bets were being placed for 100 basis points of cuts over the next 18 months. As a result of the shift in easing expectations, the U.S. stock market jumped 4% and the number of stocks hitting 52-week highs hit its highest level in two years.

Of course, not all is perfect for risk seeking investors. The markets are still being led by the defensive sectors like Utilities, REITs, Staples, Telecom and Non-Bank Financials. A big buyer of risk would like to see the Cyclical and Bank stocks lead this market back to its highs. Also, the yield curve is still inverted in several areas. And, Oil entered a bear market for a spell last week, while Gold is attempting to breakout to new recent highs. The FAANG stocks are also continuing to watch this market rather than lead it.

So while many may be excited that the Fed will likely come to the rescue, I think more would like to see the market hit new highs on expanding sales and profit growth. Luckily for U.S. consumers, the POTUS backed down on his threat of tariffs on Mexican goods. Now if we could see the same action from him on China in two weeks when he meets with Xi at the G-20 summit. Enjoy the dessert.


The economic misses are beginning to pile up, led by big misses in the jobs series of data…

 

US: Nonfarm payrolls
(@GregDaco)

The ADP Employment miss was not even close…

 

ADP Change: Largest Miss Since December 2008

The Fed Banks are rolling back their GDP growth forecasts as a result…

 

@LizAnnSonders: Both @AtlantaFed & @NewYorkFed GDP forecasting models for 2Q19 moving lower (especially NY’s Nowcast, which has dropped to 1%)

Atlanta Fed GDPNow Forecast

Even the right leaning Wall Street Journal Editorial Board is sending the POTUS a warning…

 

President Trump understandably talks up the job creation on his watch, so he should heed Friday’s Labor report that showed a sharp pullback in hiring. The labor-market warning reinforces other evidence that the uncertainty caused by scattershot tariffs is now hurting employment as well as investment.

Employers added a mere 75,000 jobs last month, but even these paltry gains were erased by the Labor Department’s downward revisions for April and March. Job growth has averaged 164,000 this year compared to 223,000 in 2018 and 217,000 during Barack Obama’s second term. The jobs trend this year is going in the wrong direction…

Tariffs have already slammed farm exports and income, but the effects of trade uncertainty are rippling out. Farm equipment and chemical manufacturers have reported lower orders. Businesses are delaying investment decisions. Global trade flows are slowing, and commodity prices are down.

The 10-year Treasury is hovering a little over 2% as investors mark down their expectations for global growth. The stock market on Friday rallied as investors bet that the Federal Reserve will cut interest rates to counter trade uncertainty. But as we learned in the Obama years, monetary policy alone can’t overcome bad fiscal, trade or regulatory policy. The May jobs report is a flashing yellow light that Mr. Trump needs to settle his trade wars and get back to promoting growth.

(WSJ)

Wall Street also moved quickly to adjust their forecasts given the poor job figures…

 

The slowdown was fairly broad-based, and we see no reason to downplay the weakness

The markets on Friday moved to a 0.25% cut at the July, September and December FOMC meetings…

 

Futures fed funds effective
(@BullandBaird)

Barclays moved a big, early cut in July…

 

@TayTayLLP: People are losing their damn minds! 50bp cut in July?? what!?

Revised forecast for Federal Reserve policy: We now expect a 50bp rate cut in July

J.P. Morgan sees the data and plunging interest rates and is advising clients to increase their hedges…

 

@business: Treasuries are telegraphing loud and clear their growth fears, and JPMorgan is telling investors in stocks and credit to listen

Market Mismatch - Yield inversion signals recession risk while stocks hover near record highs

Mortgage rates have now returned to their 2017 lows…

 

Average interest rates for US fixed-rate mortgages fall for a sixth straight week

Which is not a bad thing for the 5% of the U.S. who could refinance today and save $268 each month…

 

Drop in bond yields has meant a similar drop in mortgage rates
(Axios)

Maybe the low rates will help renters shift to buying in order to avoid this inflation series…

 

@TihoBrkan: Multi-family real estate across the US states, especially Texas and Florida, have benefited so much from rising rents, lower cost of capital (Fed rates) and the compression of cap rates. Can it continue?

Rent as % of Disposable Income for Renter Households

Speaking of housing, if you need any more evidence that Denver’s real estate market is habanero hot…

 

Don’t declare it a buyer’s market just yet. A Denver row home contaminated with meth is under contract for $500,000.

The row home in the Five Points neighborhood came with the following description on the real estate website Zillow:

“Investor special. Home has been designated as contaminated with methamphetamine. Cash only deal. Do not enter the property without the proper hazmat protection.”

(DenverPost)

Denver Meth House Sold

The best 60 minutes of research that you could invest for your clients and firm this month…

 

Stan Druckenmiller spoke at The Economic Club of New York last week. It is a must watch for any investor or fiduciary.

Stan Druckenmiller at the Economic Club

(YouTube)

“Do not underestimate the power of the Fed”…

 

Apologies to Yoda, but holy lightsaber Luke. Look at what happened with 52-week highs last week. This is an unusual market.

SP 500 vs % of SP 500 Stocks at 52-Wk Highs
(@Callum_Thomas)

For the week, U.S. stocks ripped higher, while the U.S. Dollar got burned….

 

Stocks 6-7-2019
(6/7/2019)

Take note once again at how cheap Value stocks have become versus Growth stocks…

 

If the global economy could ever get its growth on and set fire to the earnings and multiples of Cyclical stocks, maybe money will reallocate away from Growth and Defensive shares.

Fwd P/E Spread - Value vs Market

(MarketWatch)

Across the sectors, everything ended up in the green last week…

 

Sectors 6-7-2019
(6/7/2019)

Where today’s capital goes to die: Apparel Retail Stocks…

 

Clothing store's stock fell last month, nearly all by double-digit percentages

Japanese real estate (along with tourism) looking to benefit from Chinese hostilities with the U.S…

 

Chinese interest in Japanese property surged at the beginning of the year as the intensifying trade war and Beijing’s tighter capital controls combined to cool demand for U.S. real estate.

According to Juwai.com, China’s top international real estate website, Chinese inquiries regarding Japan rose 13 times on the year in the first three months of 2019. Interest in U.S. properties, on the other hand, dropped 27.5% in the first three months of this year.

Property investment is still the main driver of increased inquiries, but residential buyers are also on the rise as Japan eases immigration rules for Chinese tourists and executives, Juwai.com said. The company, based in Shanghai and Hong Kong, deals mainly with families and individual investors in China.

(NikkeiAsianReview)

Chinese buyer inquiries about Japanese properties


Wettest 12 months ended May 31 on record…

 

Great news if you work in the pest control or water pump industries.

Statewide precipitation ranks from NOAA show states that had record wettest 12 month period

If you want to know why the CEO of Hilton doesn’t have clean towels or pillowcases…

 

@NickatFP: Dude, at least lie.

Hilton CEO tipping

Finally, even The Onion gets the current state of our markets…

 

Market rallies after fed chief shows off huge wad of cash

(TheOnion)

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