July 7, 2016

Stocks opened higher this morning but quickly faded (Dow flat; SPX +.1%). Semiconductors, banks and airlines are rebounding. And despite a slightly stronger dollar the materials sector is up over 1%. The VIX Index is down 3% to trade around 14.5, but VIX August futures are still well ahead of the spot price at 17.5. So we can expect more volatility. WTI crude oil is up 1.2% to $48/barrel, and this is likely dragging stocks upward. The market is apparently shrugging off rumors that China’s strategic petroleum reserve is full. We’ve been watching interest rates fall to historic lows in recent days, but today yields ticked up a bit. The 5- and 10-year Treasury yields are trading at .99% and 1.42%, respectively. 

The Financial Times reports the US now has higher oil reserves than either Saudi Arabia or Russia. A new study found an estimated 264 billion barrels in the US. Analysts are beginning to predict lower oil prices through the rest of the year, mostly because oil spiked from $26/barrel to over $50/barrel in the span of several months. Yes, US oil production has fallen from 8.9 million barrels/day vs. the peak of 9.7 million a year ago. But the globe is still somewhat oversupplied and oil demand isn’t terribly strong. CNBC is reporting the bit about China as a “rumor”; who knows whether that’s truth or market manipulation. 

Weekly filings for new unemployment insurance claims continue to hover around 4-decade lows. In fact, weekly claims have been below 300,000 for some 70 weeks and that hasn’t happened since the early 1970s. In addition, we learned today (Challenger Job Cuts report) that planned layoffs are down 14% y/y. So the jobs market remains very firm. 

PepsiCo (PEP) reported better than expected second quarter earnings. The year-over-year growth rates aren’t terribly impressive—sales fell 3% and earnings rose 2%. North America beverages revenue rose only 1% but sales in the Frito-Lay snacks division were up 3%. The stock is trading up 2% this morning—and at a 22 forward multiple. That’s the highest P/E ratio in at least 10 years and it comes at a time when earnings & revenue growth are paltry at best. By any reasonable metric the stock is completely overvalued. But the market doesn’t care about value; it cares about the dividend and perceived safety. Falling bond yields have pushed investors increasingly into “safe” dividend stocks like utilities and consumer staples. 

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