November 22, 2017

Stocks opened mixed this morning (Dow -51 pts; SPX -.09%). Gold miners, retailers, transports, and biotechs are all trading higher. On the other hand, semiconductors, banks, real estate and utilities are in the red. So there’s no risk-on or risk-off pattern. The VIX Index is going nowhere, still trading under 10. Asia was up overnight. In fact, the Nikkei is now up over 23% for the year and the Hang Seng is up 35%. The UK government just cut its economic growth forecast to 1.5% from the previous 2.0% forecast, but for some reason I’m not seeing much of a market reaction. The dollar is weaker against a basket of foreign currencies, and commodities are predictably trading higher. Gold, copper, iron ore and oil are all in the green. WTI crude oil is up 1.7% to about $57.80/barrel. Bonds are firming a bit after a two-week selloff. The 5-year Treasury yield is back down to 2.07% and the 10-year yield edged down to 2.34%. 

CNBC reports Amazon (AMZN) is close to making a deal with Cerner (CERN) that would allow it push into the healthcare sector. Cerner is a healthcare technology company with software products that help collect and manage patient and treatment outcome data for doctor offices, health systems, and medical device makers. Amazon’s web services unit sees huge opportunity in healthcare and wants to push all that data into the cloud.  

Deere (DE) reported better than expected third quarter results and the stock is up 3.9% this morning. Revenue growth of 26% y/y was the highest in years. At long last, there are signs the market for agricultural machinery is recovering. Despite continued weakness in crop prices—especially soy beans and corn—farmer capital spending is beginning to pick up. Management raise 2018 earnings guidance, saying it expects demand for large machinery to increase by 5-10%. 

Today’s durable goods report suggests corporate capital spending continues to accelerate. New orders for capital goods (excluding defense equipment & aircraft) rose 9.3% in October from year-ago levels. That’s the highest growth rate since May 2012. In addition, the Census Bureau upwardly revised its September data to show stronger order volume. Remember, orders are a leading indicator for shipments of equipment, and the shipments are a direct input to the gross domestic product (GDP) calculation. So this is good news for economic growth. 

Bloomberg reports hedge funds are increasingly betting on further stock market gains, and they’re borrowing more money to invest. The report is based on data from Goldman Sachs, a popular service provider to the hedge fund industry. As a group, hedge funds now have the  highest “long” exposure to the stock market since 2015. And “short” bets (that stocks will fall) are now at their lowest level since 2012. Leverage (borrowing) is now at its “highest levels since the bull market began in 2009.” Bloomberg says this is a clear sign that professional money managers are willing to accept higher risk because they think the market will continue rising. The use of leverage magnifies investment returns, whether to the upside or downside. 

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