August 5, 2016

Stocks gapped up at the open (Dow +160 pts; SPX +.8%). The cyclical sectors are leading the way: consumer discretion, industrials, financials and tech are all up over 1% at the moment. Utilities and telecoms are down. The dollar is stronger and commodities are falling. WTI crude oil is off 1% to $41.30/barrel. Bonds are selling off a bit with yields moving higher. The 5- and 10-year Treasury yields are up to 1.11% and 1.56%, respectively. 

Earnings reports keep coming. Sprouts (SFM) says the competitive environment for natural/organic groceries is intensifying. Profit margin pressure is building both because wages are rising and because prices are falling. Habit Burger (HABT) complained about the weaker consumer. Restaurant sales stalled in March, especially within the fast casual segment. Here also, competition is intensifying. Kraft Heinz (KHC) corroborated weak revenue growth in food processing. Priceline (PCLN) reported a much better than expected quarter with 12% revenue growth. Travel bookings were strong although the travel market remains volatile. China and Spain were called out for strength. EOG Resources (EOG) surprised investors by saying its oil production levels are rising and it is completing more wells than expected. But capital spending guidance didn’t go up. The company has been cutting costs and selling assets but it looks like they’re planning to go back on the offensive. The stock is up 4.8% this morning. 

Today’s award for overstatement goes to an equity strategist for Citi Global who says the S&P 500 appears to be “unstoppable.” The rally will continue and while stocks appear to be over-valued using traditional metrics, it looks relatively cheap using less traditional metrics like free cashflow yield and payout yield (i.e. dividends + stock buybacks). He notes it has been tempting to underweight US stocks with all the volatility and upcoming election, but that’s been a “painful trade.” 

Today’s award for understatement goes to CNBC’s Steve Liesman: “The jobs report took Wall Street by surprise.” The US economy created 255,000 new jobs for the month of July vs. about 180,000 expected. This is the second consecutive month of strong job growth. In addition, May and June payrolls were revised upward. Hiring was broadbased from government to hospitality to manufacturing & even retail. Average hourly earnings held steady at 2.6% y/y, and I have to point out that wages have been accelerating for the past year-and-a-half. And we’ve heard a number of companies recently say that wages are beginning to cut into profit margins. So this is a very encouraging report but since the market soared on the news I have to assume that investors don’t believe it will encourage the Fed to raise rates. 

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