August 15, 2016

The major stock market averages rallied this morning to hit fresh intra-day highs. The Dow and SPX are currently up 85 pts & .4%, respectively. Materials, industrials and tech sectors are leading the charge. Utilities, telecoms and consumer staples sectors are in the red in early trading. In terms of industry groups, semiconductors, biotechs and transports are up at least 1% at the moment. This dollar is a bit weaker and oil is higher (WTI crude at $45.50/barrel). The Bloomberg Commodity Index is surging 1.2%. By the way, the dollar is still down for the year, and that is good news after a roughly 20% surge in 2014 & 2015. Most of Europe is poised to close modestly higher and most of Asia was higher overnight. Bonds are selling off a bit. The 5- and 10-year Treasury yields are currently at 1.12% and 1.54%, respectively. Yields have rebounded somewhat from Brexit lows and are holding steady without much volatility. 

According to Bloomberg, asset management company Blackrock (BLK) is slashing its exposure to long-term US Treasury bonds. It has apparently become more expensive for Japanese and European investors to use Treasuries as a currency hedge, and Blackrock’s CIO says that will slow global demand for US debt. In fact, rising hedging costs have rendered 10-year Treasury yields negative for Japanese buyers. This is a big deal.   

Venture capitalist Roger McNamee summarized his view on stocks this morning: “Politically the market is in a very awkward situation” that is not market-friendly. And while he’s glad to see stocks moving higher, he thinks a good deal of the current rally is due to central bank intervention. And he is beginning to question stock market valuation. Indeed, the S&P 500 Index is trading at a forward P/E multiple of about 17.6, which is close to the high for the post-Great Recession recovery. 

We heard from Jim Paulsen again on Friday. In a CNBC interview, he said, “Globally, to me there seems to be more evidence of economies bouncing northward…” All major central banks are stimulating and this could result in a “synchronized global bounce.” Citigroup Economic surprise indices are mostly moving higher around the world. And here in the US, earnings are about to turn up and the current market rally is predicting that. So there is a reason for optimism. He also addressed the problem with very weak labor productivity growth. He said wages and productivity usually move closely together. But in this recovery, productivity is always growing slower than average and wages are consistently growing faster than average. He concludes that productivity is measured incorrectly and is “misstated.” Are US corporations really paying more and more for less and less productive employees? Probably not. If we find out that we haven’t been measuring productivity correctly, that would help “explain why profits have done so well, why auto sales are at record levels, why we’ve returned to full employment…”

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