Reasons for the Recent Rally in Equity Markets.

   Schwaben Blog

October 23, 2015

Weekly Statistics:

Today Week Ago Year Ago
23-Oct-15 16-Oct-15 23-Oct-14
S&P TSX 13,953 13,838 14,227
S&P 500 2,075 2,033 1,950
DJIA 17,647 17,216 16,677
OIL $44.33 $47.17 $80.39
USD vs CAD 0.7657 0.7757 0.9012
Gold $1,164 $1,177 $1,233

The consecutive announcements by the European Central Bank (ECB) and the People’s Bank of China (PBOC) on Thursday and Friday respectively drove equity indices higher. The ECB signaled that it would expand its $1.28 Trillion quantitative easing program in December and cut its deposit rate if the slowdown in emerging economies threatens the eurozone’s economic recovery. Furthermore, the Chinese central bank dropped their benchmark interest rates by 25 bps. Many analysts are viewing this cut in interest rate as a measure by Chinese leaders to spur the country’s economic growth to their target of 7 percent. The reduction in interest rates is planned to stimulate the growth of the Chinese economy and stimulate global equity markets. Unexpected smaller declines in profits in US equities also drive the recovery in equity indices from a few months ago. 77 percent of the 173 companies that have reported their earnings for Q3 2015 have reported above expectations. On September 30, the estimated earnings decline for the S&P 500 for Q3 2015 was -5.1 percent. As of today, the earnings decline has been revised to -3.8 percent. Upside earnings surprises by companies in the Information Technology, Consumer Discretionary, and Telecom Services sectors accounted for most of the decrease in the earnings decline for the index. Microsoft, McDonald’s, Amazon, AT&T, GM as well as other Blue Chip equities had a positive impact in their respective sectors. Energy and Materials are the largest contributors to the earning declines across all sectors.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading Economics

Is S&P 500 Ready to Touch Previous Highs?

   Schwaben Blog

October 16, 2015

Weekly Statistics:

Today Week Ago Year Ago
16-Oct-15 09-Oct-15 16-Oct-14
S&P TSX 13,838 13,964 14,227
S&P 500 2,033 2,015 1,862
DJIA 17,216 17,084 16,117
OIL $47.17 $49.49 $79.84
USD vs CAD 0.7757 0.7725 0.9012
Gold $1,177 $1,156 $1,244

The earnings season for the S&P 500 kicked off last week with Alcoa reporting well below analysts’ estimates. On September 30, the estimated earnings decline for the S&P 500 for Q3 2015 was -5.1 percent. As of today, the earnings decline has been revised to -4.6 percent. This can be attributed to the positive earnings surprises released by many companies. Of the 58 companies that have already reported their Q3 earnings, around 81 percent have reported above the mean estimate. At the sector level, the Information Technology (100%), Health Care (100%), and Energy (100%) sectors have the highest percentages of the companies reporting earnings above estimates, while the Materials (33%) sector has the lowest percentage of companies reporting above estimates. These positive surprises combined with the release of the FOMC’s meeting minutes, which showed the strength of the US economy, have led to a rally of more than 4 percent across the major indices of the US. Equities are rebounding from their worst quarter in four years, while investor sentiment oscillates between ripple effects of a slowdown in Chinese economy, and optimism that the Federal Reserve won’t raise interest rates until policy makers are satisfied that overseas turbulence won’t derail the US growth. The S&P 500 has rallied around 8.5 percent from the low during August selloff and is only 5 percent away from it’s all time high of 2,135 but with tax-loss harvesting around the corner, investors should be careful and should not consider every dip in the markets as a smart buying opportunity.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading Economics

Will the S&P 500 Miss the Earnings Estimate Again?

   Schwaben Blog

October 09, 2015

Weekly Statistics:

Today Week Ago Year Ago
09-Oct-15 02-Oct-15 09-Oct-14
S&P TSX 13,964 13,340 15,086
S&P 500 2,015 1,951 1,906
DJIA 17,084 16,472 16,544
OIL $49.49 $45.63  $83.58
USD vs CAD 0.7725 0.7507 0.9062
Gold $1,156 $1,137  $1,225

The minutes from FOMC’s September meeting were recently released and they clearly indicated that the members of Federal Reserve were more inclined towards raising the interest rates but did not do so because of fears of global slowdown. According to the minutes of the meeting, “ Participants anticipated that recent global developments would likely put further downward pressure on inflation in the near term; compared with their previous forecasts, more now saw the risks to inflation as tilted to the downside”. Although this led to sharp correction in the equity indices but the overall sentiment since the last meeting has greatly improved. Investors seem to have discounted the probability of a rate hike in October or probably even in December and a rally of around 4 percent (week-over-week) followed across the major indices of the US and Canada, but it does not mean that the outlook is certainly positive for equities. Earnings drive stock prices and with valuations at historical highs, it will take decent to strong earnings for this bull market to continue. According to FactSet, for Q3 2015, the average estimate for earnings decline is -5.5 percent for S&P 500. If the index reports a decline in earnings for Q3, it will mark the first back-to-back quarters of earnings decline since 2009. Only 5 percent of the S&P 500 companies have reported their earnings till now and many heavyweights like Intel, Johnson and Johnson, Kinder Morgan, JP Morgan etc. are reporting next week. Of the companies that have already reported their earnings, consumer driven companies like Nike, Costco have delivered strong results but industrials like Alcoa have disappointed the investors.  Slowing Chinese economy and a strong dollar could again be made the scapegoats and many companies have already cited a stronger dollar to have a negative impact on their Q3 earnings.

The US Economy Slowing Down?

   Schwaben Blog

October 02, 2015

Weekly Statistics:

Today Week Ago Year Ago
02-Oct-15 25-Sep-15 02-Oct-14
S&P TSX 13,340 13,380 15,026
S&P 500 1,951 1,931 1,965
DJIA 16,472 16,315 16,945
OIL $45.63 $45.58  $89.37
USD vs CAD 0.7507 0.7507 0.9051
Gold $1,137 $1,146  $1,226

With only two weeks left for the October FOMC meeting, it certainly doesn’t look like a rate hike is on the Fed’s agenda. The disappointing unemployment report for the US economy justifies the Fed’s decision to not to raise the interest rates during their last meeting. In September, the US economy added a seasonally adjusted 142,00 jobs compared with analysts’ expectation for a gain of 200,000 jobs. This is the second month of disappointing unemployment numbers, after the US economy added only 136,000 jobs in august compared with analysts’ expectation of 173,000. A significant correction in oil prices during last one year has led to mounting losses/ bankruptcies for many energy companies and they have cut 120,000 positions since December 2014. The longer the oil prices stay low, the deeper the losses for energy companies, and therefore more layoffs. These layoffs could be one of the reason for disappointing unemployment numbers since last two months. After deciding to keep interest rates steady during the last meeting in September, the Federal reserve chairperson, Janet Yellen, commented that most members on Federal Open Market Committee (FOMC) still expect a rate increase in 2015, but I believe that a rate hike in the first quarter of 2016 would be more prosperous for the US economy. The poor unemployment numbers in the last two months could also mean the economy did not grow at a decent pace in the third quarter. At a time when global economies were slowing down, the US economy grew at 3.9 percent in the second quarter and a dismal performance in the third quarter   would cast serious doubts over the strength of the economy.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading EconomicsUS Jobless Sep 2015

The US Dollar and The Interest Rates

   Schwaben Blog

September 25, 2015

Weekly Statistics:

Today Week Ago Year Ago
25-Sep-15 18-Sep-15 25-Sep-14
S&P TSX 13,380 13,646 15,026
S&P 500 1,931 1,958 1,965
DJIA 16,315 16,385 16,945
OIL $45.58 $44.92  $89.37
USD vs CAD 0.7507 0.7604 0.9051
Gold $1,146 $1,138  $1,226

After deciding to keep interest rates steady during the last meeting, the Federal reserve chairperson, Janet Yellen, commented yesterday that most members on Federal Open Market Committee (FOMC) still expect a rate increase in 2015. She also said that “Prospects for the US economy generally appear solid”. Her comments are supported by this morning’s report from the Commerce department, which states that the US economy grew at an annual rate of 3.9 percent compared to the previous forecast of 3.7 percent. A significant correction in oil prices could also be partially responsible for this stellar growth. This boosted the confidence of investors after the last FOMC meeting gave them some jitters about the growth of the US economy. Most of the major economic indicators are pointing towards a healthy and growing economy, and raising interest rates by 25bps would not prove catastrophic. Although there could  be a short-term correction in equity markets, a hike in interest rates would  signal that the US economy is strong enough to absorb a rate hike after almost a decade, however this does not alleviate the concern of falling inflation especially with a rise in interest rates. A stronger dollar could also  lower inflation as it suppresses import prices. The US dollar index, which measures the performance of US dollar against a basket of six currencies, has significantly appreciated on a year-over-year basis and is almost at the highest level for a decade resulting in disinflation for US consumers.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading Economics

A Rate Hike This Year?

   Schwaben Blog

 

September 18, 2015

 

Weekly Statistics:

  Today Week Ago Year Ago
  18-Sep-15 11-Sep-15 18-Sep-14
       
S&P TSX 13,646 13,478 15,265
S&P 500 1,958 1,961  2,011
DJIA 16,385 16,431 17,265
OIL $44.92 $44.79  $89.75
USD vs CAD 0.7604 0.7544 0.9051
Gold $1,138 $1,106  $1,232

 

The latest Federal Open Market Committee (FOMC) meeting concluded on September 16 and during the meeting the committee voted 9-to-1  for keeping the interest rates steady. The Federal Reserve chairwoman said that the Fed considered hiking interest rates on Thursday but because of the increased uncertainties abroad and the slightly softer expected path for inflation, the committee judged that it is appropriate to wait for more evidence. Although the US economy is growing at an impressive rate but due to significant correction in oil prices and appreciation of dollar, the inflation is much lower than the Fed’s target rate of 2 percent. Even the core inflation rate, which strips out the volatile items like energy, is still below 2 percent at 1.8 percent. There are two more FOMC meetings scheduled for this year in October and December. As there is no press briefing planned for the October meeting, so analysts and economists are pointing towards a rate hike in December. According to CME FedWatch tool, the probability of a rate hike in October is only 16% whereas in December the probability is 42 percent. The major indices in US and Canada are already down more than 7 percent this year and a rate hike at this time will only make the losses worse. I would still believe that a rate hike this year does not look imminent and the Fed should wait for inflation to settle around their target, otherwise the US economy may run into deflation.united-states-inflation-cpi

Interest Rates- Will They or Will They Not?

   Schwaben Blog

September 11, 2015

Weekly Statistics:

Today Week Ago Year Ago
11-Sep-15 04-Sep-15 11-Sep-14
S&P TSX 13,478 13,478 15,534
S&P 500 1,961 1,921  1,997
DJIA 16,431 16,102 17,049
OIL $44.79 $45.37  $91.55
USD vs CAD 0.7544 0.7564 0.9137
Gold $1,106 $1,122  $1,281

The Federal Open Market Committee (FOMC) is meeting  on September 15-16 to decide the course of interest rates for the US economy but after the recent turbulence in Chinese economy, devaluation of Yuan, and extreme volatility in equity markets, the chances of an interest rate hike by the Federal Reserve are minimal. According to the CME FedWatch tool, there is a 24 percent probability of a rate hike in September and 38 percent probability in October. The former Dallas Fed president, Richard Fisher is one of the few economists who are calling out the Fed to raise the interest rates before it’s “too late”. According to him, the Dallas Fed’s measure of inflation, the trimmed mean rate, has been running steadily at 1.6 percent over the last year and if Fed were to focus on this measure then they would have little problems raising interest rates. But the overall inflation rate is still well below Fed’s target rate of 2 percent and even if we look at the core inflation rate, which strips out the volatile items like energy, it is still below 2 percent at 1.8 percent.

It  is also worth mentioning that 2015 is the third year in the presidential cycle and historically third year has been very good for markets. Since 1940, the Dow Jones Industrial Average (DJIA) has risen in 100 percent of the third years and gained an average of 22.3 percent. So far, the year-till-date return for DJIA is around -8% and if interest rates are hiked in the next meeting then equity markets are almost certain to suffer more losses, at least in the short term. We believe that the decision to hike interest rates is becoming more political than data driven. According to some un-named sources, Janet Yellen met President Obama 45 times over the last year. This clearly shows that the President is actively monitoring the Fed’s decision making progress and will not rush into raising interest rates like Japan did in early 2000s, which led the Japanese economy into a deflationary environment.

US unemployment at record low – where is inflation ?

Schwaben small S    Schwaben Blog

 

May 24, 2015

 

Weekly Statistics:

 

Today

Week Ago

Year Ago

 

24-July-15

17-July-15

24-July-14

       
S&P TSX

15,108

14,385

14,534

S&P 500

2,122

2,076

 1,885

DJIA

18,272

17,752

16,511

OIL

$59.45

$52.13

 $92.78

USD vs CAD

0.8318

0.7888

0.9072

Gold

$1,225

$1,160

 $1,296

 

The number of Americans filing new claims for unemployment benefits fell last week to the lowest level in 41 years, pointing towards a strengthening US job market. Initial claims for unemployment benefits dropped 26,000 to 255,000 (seasonally adjusted) for the week ended July 18. Initial jobless claims have an importance in financial markets because unlike continued claims data which measures the number of persons claiming unemployment benefits, initial jobless claims measures new and emerging unemployment. As it is evident from the chart below, the data could be volatile but the latest numbers are at historic lows. The four-week moving average of claims, considered a better measure of labor market trends as it excludes the week-to-week volatility , fell 4,000 last week to 278,500. A number below 300,000 is usually considered a threshold associated with strengthening labor market and the jobless claims have stayed below 300,000 for 17 straight weeks. Persistently low layoffs and greater employment gains will help wage gains and likely support consumer spending. At this point the Federal Reserve is still assessing the health of the US economy before deciding when to raise the interest rates. Unemployment numbers and jobless claims play a key factors in the Fed’s decision making process. The Federal Reserve may raise the interest rates in September should employment continue to strengthen and there are signs of wage gains.  This could possibly bring a small correction in equity prices over the short term.

united-states-jobless-claims July 24 2015

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading Economics

Is the Canadian Housing Market and Household Debt on the road to a train wreck ?

Schwaben small S    Schwaben Blog

 

July 17, 2015

 

Weekly Statistics:

Today

Week Ago Year Ago
17-July-15 10-July-15

17-July-14

S&P TSX

14,385

14,385

15,204

S&P 500

2,076

2,076

 1,958

DJIA

17,752

17,752

16,976

OIL

$52.13

$52.13

 $94.36

USD vs CAD

0.7888

0.7888

0.9315

Gold

$1,160

$1,160

 $1,320

 

In not surprising  that the Bank of Canada recently cut its benchmark interest rates by 25 basis points to 0.5 percent from 0.75 percent. This is the lowest level since 2009 when interest rates were at 0.25 percent. The reduction in interest rates also sent the Canadian dollar down to 77.40 cents (US), its lowest level since March 2009, and continued its drop today to another record low since 2009 to 76.97 cents US. Canada’s major banks also followed the central bank and lowered their prime lending rates but only by 15 basis points to 2.7 percent from 2.85 percent. This is the second time this year that the banks have taken a cautious approach to their lending rates after the central bank has slashed the interest rates. Overall, the banks have lowered their prime rates by a total of 30 basis points as compared to Bank of Canada’s reduction of 50 basis points. The lower interest rates have led to a surge in house prices and according to Bank of Canada’s estimates, housing market could be overvalued by as much as 30 percent. Apart from the housing market, consumers’ debt is rising at a record pace while the income is growing

Fig. 1

Cdn Consumer Debt Jul 2015

at much slower pace. Due to low interest rates, consumers are taking on other forms of debts as well in the form of personal lines of credit, credit card loans among other types of debt. Fig 1. The surge in house prices combined with an alarming level of household debt for Canadians has prompted the big banks to lower their prime rates by 20 bps less than the central bank’s reduction of 50 points. In fact in 2007 Canadian versus US household debt to income was about the same. Since then Canadian Household debt to income has risen to 150% from 130% whereas US it has declined to 100% from the same level according to Deutsche Bank Fig. 2. The disparity creates an additional risk premium that adds pressure to the Canadian dollar decline.

Fig. 2

Cdn HH Debt Jul 2015

The collapse in oil prices and subsequent reduction in the investments in the oil patch has created one of the highest trade gaps for Canada and the economy likely contracted by 0.6 percent and 0.5 percent in the first two quarters of 2015 – technically a recession. The recent victory by NDP in Alberta has further prevented the investments in oil sands by creating an uncertainty about the corporate tax structure for the province. In order to close or reduce that gap, the country needs to ramp up its non energy exports. It hasn’t happened so far yet and in a desperate measure to increase Canadian exports, Governor Stephen Poloz is trying to push the loonie lower in order to increase the competitiveness of Canadian exports.  At a time when the Federal Reserve in the US is hinting towards a rate hike, this move by Bank of Canada shows that a growing US economy and a cheaper Canadian dollar could be the way to increase the Canadian exports and reduce the trade gap.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading Economics

Is North American growth slowing or is it just a temporary dip ?

Schwaben small S    Schwaben Blog

 

July 10, 2015

 

Weekly Statistics:

 

 

Today

Week Ago Year Ago
  10-July-15 03-July-15

10-July-14

       
S&P TSX

14,385

14,593

15,114

S&P 500

2,076

2,069

 1,964

DJIA

17,752

17,683

16,915

OIL

$52.13

$52.78

 $95.77

USD vs CAD

0.7888

0.7905

0.9315

Gold

$1,160

$1,169

 $1,342

 

The International Monetary Fund (IMF) has cut its growth projection for the Canadian Economy. According to the IMF’s forecast, Canada’s real GDP will grow at 1.5 percent this year, down sharply from their previous forecast of 2.2 percent in April. In addition to Canada, it also slashed its forecast for the growth of the US economy for 2015 to 2.5 percent from 3.1 percent.  It is no surprise that the collapse in the oil prices is one of the main reasons for this setback but the IMF also pointed to some one-time factors like harsh winter and US port closures for the poor growth in North America. Due to the slump in oil prices, Canada’s international trade numbers for May showed a near-record trade deficit of $3.3 Billion. Exports of energy products are down 35 percent for the year to date compared with the same period a year ago. Although poor economic indicators have led economists to conclude that Canada’s GDP will likely contract again in second quarter, which means technically the Country is in recession, other economic indicators, specifically unemployment rate and housing starts are showing signs of strength. In the recently released unemployment report, Canada shed 6400 jobs but unemployment rate has been steady at 6.8 percent for the last five months. Although a rising trade deficit, because of energy exports and collapse in oil prices, Canada is still able to maintain its unemployment rate, which means that non-energy related industries are creating  jobs and are growing sufficiently to offset other job losses. A rate cut from Stephen Poloz, Governor of Bank of Canada, during his next announcement on July 15 could bring the interest rates down to 0.5 percent from 0.75 percent. This will be the second rate cut after a surprise rate cut in January. At a time when the housing market is already overpriced, a rate cut could cause house prices climb further out of reach for many Canadians.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading Economics