July 14, 2016

The major stock market averages opened higher yet again (Dow +135 pts; SPX .55%). Financials are leading the way—for a change—after JP Morgan’s earnings announcement. The KBW Bank Index is up 1.9% in early trading. The transports are also up over 1%. That group, by the way, has been outperforming the SPX for most of 2016 and that’s a good sign for the health of the stock market. The dollar is down a bit this morning (and -3% year-to-date) and commodities are mostly higher. WTI crude oil is trading up toward $45.40/barrel. Gold is taking a breather after having surged 25% this year. Bonds are selling off as yields head higher. The 5-year Treasury yield is back up to 1.09% and the 10-year is up to 1.53%. It looks like it wants to move up past 1.6% in the near term. 

JP Morgan (JPM) beat both revenue and earnings expectations in the second quarter on back of 16% y/y loan growth. Consumer demand for credit is strong and management says the US consumer is in good shape. Revenue rose 4% y/y, the highest since Q1 2015. The bank has done a good job controlling costs (net-interest expense fell 6%). Aside of traditional banking, securities trading and investment banking posted positive growth. The company’s CFO said this about the Brexit vote: it is a “political and economic challenge that will take time to resolve, but not a financial crisis, and the impact on global growth and the US economy should be small.” The stock is up 2.6% in this morning. 

Blackrock (BLK) reported second quarter earnings in line with Wall Street forecasts. Revenue fell a little short, declining 3% y/y. Investment management fees fell as investors pulled money out of equity funds and dumped it into fixed income & money market funds. Despite this, the company managed to increase its assets under management 4% from the prior quarter to $4.9 trillion. Attracting assets is the key to this stock, and this is why it’s not getting punished for missing revenue forecasts. Larry Fink, CEO, said he believes the Brexit vote will weaken global economic growth. And he noted the asset management business is challenging. “Political and macroeconomic uncertainty, historically low yields and elevated market volatility are leading clients to pause, as evidenced by more than $55 trillion in bank deposits in the US, China and Japan alone.”

The Producer Price Index—a measure of wholesale inflation—rose .3% y/y in June. That seems pathetically low, but it represents the fastest rate of wholesale price growth since the beginning of 2015. Economists like to strip out food & energy, which tend to be volatile month-to-month. The resulting “Core” Producer Price Index is running at 1.3% y/y, which is also the highest since early 2015. Of course, rising oil prices and a modest weakening of the dollar are driving price growth in the economy. But this report also revealed acceleration in prices for services. My takeaway: inflation is clearly rising, but not at an alarming rate and certainly not at a level which would force the Federal Reserve to begin hiking rates again. 

CNBC ran an article about a technical research piece published by JP Morgan, which posits cyclical stocks must take over market leadership if this rally is to continue. In other words, utilities and telecoms cannot continue to outperform financials, industrials and technology. "In our view, that new dynamic needs to develop into a lasting trend for the breakout rally to extend through the next layer of resistance at 2,169-2,183.”

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