April 12, 2016

The major stock market averages are struggling to hold a gain. The Dow and SPX are currently up 37 pts & .5%, respectively. The energy sector is leading with an early gain of 1.5%; banks and transports are also faring well. Biotechs, most retailers and semiconductor stocks are lower. The dollar is a bit stronger on the day but oil continues to climb. WTI crude oil is now trading at $41/barrel and Brent crude is back over $43.50/barrel (a 2016 high). We are hearing a rumor that the Saudis and Russians reiterated the desire to freeze oil production levels at a meeting in Doha. Most other commodities (copper, iron ore) are also higher. Bonds are selling off a bit as yields bounce off of support. The 5- and 10-year Treasury yields are currently at 1.20% and 1.76%, respectively.

Speaking of the dollar, Bloomberg reports hedge funds are abandoning their long-dollar bets. “Large speculators cut net bullish positions on the greenback to the lowest in almost two years last week.” And recent trades of currency options suggest a less than 1 in 4 chance that the dollar will strengthen against the Euro this year. In other words, it is unlikely that dollar strength will cut further into corporate earnings in 2016. That’s a big deal, especially coupled with rising oil prices.

Alcoa (AA) reported first quarter earnings per share that exceeded Wall Street analysts’ expectations; unfortunately, sales came up a short. The company announced more layoffs, and cost-cutting was the only thing that allowed the earnings beat. Weak aluminum prices are an issue. In addition, the aerospace business is slowing a bit. If you’re looking to extrapolate results to judge global economic growth, the read-through isn’t very positive. But I’m not sure you can do that. Alcoa is sort of a serial under-performer. The last time this company posted anything close to decent sales growth was 2011. The stock is down 5% this morning. With aerospace and autos having been pretty strong over the last few years, I’m not sure why Alcoa hasn’t been able to benefit much.

US import prices fell 6.2% y/y in March, and prior month price declines were downwardly revised to a -6.5% decline. Believe it or not, the trend is getting better. Last fall, import prices were plunging 10-11% y/y. Of course, rising oil and a weaker dollar are partly driving the improvement. Petroleum import prices rose 6.5% in March from prior month levels. Non-petroleum import prices were down 2.7% y/y in March. Excluding oil & the dollar, global economic growth is still not all that strong. 


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