May 9, 2016

Stocks opened higher but immediately turned south. The Dow and SPX are currently down 37 pts & flat, respectively. Healthcare is the bright spot, up 1% in early trading. Materials stocks are underperforming this morning (sector down 1%) as commodity prices fade. Copper & iron ore are down 2-4% after a report that China imported 21% less copper in March than the prior month. We also saw a report of rising iron ore inventories at Chinese ports. WTI crude oil is back down under $44/barrel today. Saudi Arabia’s king appointed a new central bank chief as well as a new oil minister. This seems to confirm Saudi’s intent to begin diversifying the economy away from oil revenue. The kingdom plans to sell sovereign bonds to raise money for the effort. The new oil minister today pledged to maintain the country’s strategy of protecting market share in spite of low oil prices (no surprise). Bond prices are higher as yields dip. That’s the trend we’ve seen over the last week. The 5- and 10-year Treasury yields are back down to 1.2% and 1.76%, respectively.

China trade data were released.  Imports fell 11% y/y in April, suggesting continued slowing in demand. Imports have been falling for something like 18 straight months. Separately, a Communist Party newspaper (Peoples’ Daily) warned of the rising debt load in China and said deleveraging needs to take priority over short-term economic growth concerns. The full-page interview of an unnamed “authoritative person” reveals that high leverage is the “original sin” that spawns trouble in bank credit, foreign-exchange markets, stock & bond markets, and real estate. Perhaps the words authoritative and authoritarian can be interchanged, so that we may expect a more measured approach from China’s government toward economic stimulus going forward.   

I’d like to highlight a couple of charts. First, the American Assn. of Individual Investors (AAII) Bullish Sentiment Index has plunged to 22 from about 37 two months ago. Remember, this index tracks the percentage of surveyed investors who have an optimistic view of the stock market over the next six months. Readings around 20 are considered fairly bearish. The lowest reading of the year (17.9) came on the week of January 14 when the stock market was in the middle of a correction. Second, Citigroup’s US Economic Surprise Index has fallen from zero to -36 in the last two months. After some encouraging improvement in late February and early March, the index now suggests economic data is softening again.  Recently, we’ve seen disappointing retail sales and jobs data.

About 440 of the S&P 500 Index companies have reported first quarter earnings. About 54% of those beat Wall Street sales forecasts and roughly 75% beat earnings forecasts. Those are perfectly acceptable numbers. The trouble is growth: aggregate sales growth is a disappointing -2.4% y/y and earnings growth is tracking to -9%. Wall Street analysts don’t expect those figures to flip positive until the third quarter of 2016. The good news is that the first quarter should be the trough in terms of growth.  


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