The Sea Door…

August 7, 2017

Sea Door


I suspect that this will be the view of many readers for the week. It is a good time to take a break. Second quarter earnings are in the books, Congress and the White House are out until September and the Fed is sizing up waders and fishing poles for that annual break to Jackson Hole on the 24th of August. As we glide into the end of summer, we can go knowing that Q2 earnings were better, but stocks had a more difficult time navigating the numbers. The U.S. economy continues to show signs of slowing, but not as bad as the U.S. Dollar is fearing, so shift some of that blame to Washington uncertainty. The International stock markets still looks like the easier bet from both a momentum and valuation perspective. Energy stocks are so unloved that if the sector was a football team, they wouldn’t even be able to get a matchup on Thursday night. Meanwhile the rest of the U.S. stock market just keeps grinding sideways to slightly higher. When Congress returns on September 5th, they will be taking on the Debt Ceiling and Tax Reform. Hopefully they can at least tackle the former or else the market could decide to grind in a different direction. Have a great break everyone.

Friday jobs data shows that the economy continues to bounce around 200,000 jobs created monthly…

Jobs data chart


Further detail showed a Goldilocks job report with growth and with low inflation…

In terms of job growth, the July jobs report soundly beat expectations, showing the addition of 209,000 nonfarm payrolls ( consensus 181,000). However, in terms of wage growth, investors received another unimpressive reading as the report showed an increase of just 0.3% in average hourly earnings ( consensus +0.3%). In other words, it was another ‘Goldilocks’ report.

Investors have rallied around these ‘Goldilocks’ reports in the past as they’re not hot enough to raise rate-hike concerns that are typically present amid a pick up in economic activity and not cold enough to give investors a reason to question the state of future economic growth.

Rate-hike expectations did shift up a tad following the July jobs report with the fed funds futures market assigning an implied probability of 50.4% to a December rate hike, up from 46.8% on Thursday.

U.S. Treasuries sold off in a curve-steepening trade following the release, leaving the 10-yr yield (2.26%) and the 2-yr yield (1.35%) higher by four basis points and one basis point, respectively. Meanwhile, the U.S. Dollar Index (93.35, +0.65) rallied 0.7% to eke out a modest victory for the week (+0.3%).

In the equity market, the heavily-weighted financial sector (+0.7%) outperformed from start to finish, settling the session at the top of the leaderboard.


Will this new stronger employment data point help turn the U.S. Dollar higher? We will all be watching very closely…

US Dollar Chart


Two thirds of the U.S. Economy is tied to services, so last week’s downturn in the ISM Non-Manufacturing Index is worth watching…

ISM Manufacturing vs. GDP

(WSJ/Daily Shot)

The miss of the services ISM data, as well as July auto sales, kept the Economic Surprise Indexes in check during the week…

Bloomberg Economic Surprise Index


While GDP may have a current headwind, given the ongoing ISM manufacturing data, there should be few worries on the horizon for negative GDP growth…

ISM Manufacturing vs. GDP

The chart above is one of my enduring favorites. It shows that the ISM manufacturing index does a pretty good job of tracking the growth rate of the economy. What’s especially nice is that the index comes out with a relatively short lag of just a week or two, whereas we usually have to wait months to get a read on the economy. What it’s saying now is that GDP growth in the current (third) quarter is likely to be in the range of 2-4% annualized. That won’t necessarily mean that the underlying pace of growth is picking up though; it’s more likely that some faster reported growth in the current quarter which will make up for the relatively weak growth of recent quarters. Such is the volatile nature of GDP stats.

(Scott Granis Blogspot)

Can valuations hold to these higher levels if U.S. growth continues to slow?

S&P Index, Forward Earnings and Valuation


Meanwhile, the international economies continue to improve nicely off of a low base. Here is Italy…

HIS Markit Italy Chart

(WSJ/Daily Shot)

Even the broken Italian banking sector is showing rapid improvement as credit improves and loan growth estimates rise with their economy…

Unicredit bank chart

(WSJ/Daily Shot)

Another big and former broken Euro economy, Spain, remains on the mend as evidenced by its bond spread versus Germany…

Spain-Germany 10-year government bond spread chart

(WSJ/Daily Shot)

Two comments from this week’s earnings calls also point to improving European strength…

Europe’s economy is strong

“our economists are reasonably positive on the next 12 to 18 months’ economic outlook. And may I say in particular, in Europe, you have seen the Q2 figures and provided that there is not any extraordinary event, I would say, the economy should carry on doing pretty well on the back of a high level of confidence with more clarity on the political side, et cetera.” —SocGen CEO Frederic Oudea (Bank)

Could Europe see inflation?

“In terms of raw materials, they’re biting us in Europe. No doubt about it. We have the same story there. It takes us a while to recover via pricing, but we’re starting to get pricing in Europe as well.” —Ecolab CEO Doug Baker (Business Services)

(Avondale AM)

Eurozone GDP growth > U.S. GDP growth…

Jeroen Blokland Tweet


As for EM, well this chart says it all…

EM Chart


Confirming signs of EM strength would be the current surge in Chinese commodity prices..

@YuanTalks: The rally in industrial #commodity #futures continues in #China. #Steel rebar limit up, #IronOre surging over 6%

Surge in Chinese commodity prices chart


Second quarter sales surprises are surging…

This has been helped by the falling U.S. Dollar, as well as better-than-expected unit volumes and pricing…

Factset Chart Positive Sales Surprises


The biggest earnings report of them all hit last week and it didn’t disappoint…

The technology giant posted quarterly diluted earnings per share of $1.67 on revenues of $45.4 billion. Thomson Reuters consensus estimates were $1.57 per share and $44.89 billion in revenues. Perhaps the most important metric in the report, iPhone sales, totaled 41.03 million in the quarter, up from 40.4 million in the same period last year. Sequentially, unit sales dropped by 19% from 50.76 million, and iPhone revenues dropped by 25% to $24.85 billion.

For the fourth quarter of 2017, Apple said it expects to post revenues in a range of $49 to $52 billion with a gross margin of between 37.5% and 38%. Consensus estimates for the September quarter are $1.81 per share in earnings and revenues of $49.21 billion. If one feat can be claimed here, Apple now holds a whopping $262 billion in liquidity (cash and short-term to long-term securities). Apple’s international sales are still more than 50% of its operation now.


For the week, Financials, Europe and Bonds led while Biotech and Energy were the worst performers…

alsabogal tweet


Speaking of Energy…the drillers continue to get drilled…

S&P Oil and Gas E&P Chart

(WSJ/Daily Shot)

Which has coincided with the closure of one of the most high profile hedge funds in the sector…

Andrew Hall, a legendary trader who made billions betting on oil’s rise, is shutting down his hedge fund after he misjudged the impact of a boom in U.S. production that upended the market.

Mr. Hall, who gained wide notice for fighting over a $100 million payout from his former employer Citigroup Inc. during the depths of the financial crisis, confirmed Thursday that he is closing the main fund at the firm he founded, Astenbeck Capital Management LLC.

The decision to close the fund follows years of investor defections and marks the latest reckoning for a Wall Street trader who struck out on his own.

Mr. Hall, 66 years old, is known for making big, long-term bets on rising oil prices, a strategy that worked well when commodities were soaring but has fared poorly as prices deteriorated in the past three years. His bullish stance on oil ran headlong into the shale revolution, which in the past decade defied predictions that the world would soon run out of easily accessible crude.


Did you think Oprah was only good at picking books?

Weight Watchers International Inc. soared the most in five months after adding subscribers for another quarter, the latest sign that its Oprah Winfrey-fueled marketing and updated diet program are resonating with customers.

The shares gained as much as 27 percent after second-quarter results handily beat estimates and the New York-based company delivered a rosy forecast. The jump marks the biggest intraday gain since March and extends an eye-popping rally for a stock that previously slumped for five straight years. The shares have now more than tripled in 2017.


@ivanhoff: Oprah owns 10% of $WTW acquired at $6.79. It’s trading at 42 today.

WTW Chart

Just when they said active management was dead, stock pickers have now beat their benchmarks for the fifth straight month…

Pair-wise correlation of stocks in the S&P 500

(Business Insider)

Something to think about for that next vacation break, with or without the kids…

According to the industry website—which is like TripAdvisor for seafarers—Disney Cruise Line gets higher average ratings from passengers without children than from those with them. (The company is immensely popular with both demographics.)

On the cusp of its 20th year of sailing, Disney Cruise Line has been around long enough to have megafans—even if kids who grew up sailing with the company have yet to get their first job out of college. So why do grown-ups have such a soft spot for Disney Cruise Line? “Quality. The quality is there, the food, the cleanliness,” said John. “The crew,” added Joanne, 53. “They are so friendly.”


Finally, some feel good charts to review while you are sitting in the sand and looking out over that big ocean…

The world as 100 people chart


And Lastly…
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