March 29, 2017

Stocks opened mixed today (Dow -48 pts; SPX flat; Nasdaq +.2%). We’re in no-man’s-land until earnings season starts in a couple of weeks. Energy stocks are bouncing back (+1%) after taking a beating so far this year. Retailers, gold miners and biotechs are up nicely, but most everything else is lower in early trading. The VIX Index is back down under 12 and VIX April futures are down to 12.8. The dollar is up a bit and yet most commodities are higher. WTI crude oil is up over $49/barrel. Remember, early this year oil prices corrected 12% and are just now beginning to move back up toward $50. Bonds are mostly higher in price, lower in yield. The 5- and 10-year Treasury yields are down to 1.94% and 2.39%, respectively. 

Blackrock (BLK), one of the world’s largest asset management firms, has fired some employees in its active-equity group and is moving gradually toward quantitative (or machine-run) equity strategies. According to Bloomberg, the firm will move about $6bil of the $200bil run by traditional stock pickers to lower-cost quant funds. Clients in recent years have flocked to cheaper, passively-managed stock funds. Blackrock owns one of  the largest exchange-traded fund (ETF) families called iShares, and it is in the middle of a price war with Vanguard, SPDR, Fidelity and Schwab ETF funds. We often hear about “price compression” in the investment management industry, but this is really just a plain old price war just like we’re used to seeing in the retail or airline industries. A number of large brokers & asset managers are competing aggressively to attract investors’ assets. Blackrock’s head of active equity said, “We can more efficiently deliver alpha at a better cost with automated processes.” This statement seems dubious in light of the fact that quant funds utterly failed in teeth of the Great Recession in 2008 and are contributing to “flash crashes” like we saw in 2010 and 2015. 

Pending home sales (i.e. contracts signed) fell 2.4% in February from year-ago levels. But economists expected a larger decline. Apparently, a very mild winter helped maintain traction in the housing market. Pending sales have been trending steadily lower for the last two years.  And as I mentioned yesterday, lower affordability levels and lower for-sale inventories are restraining home sale volumes. 

The Citigroup Economic Surprise Index—a gauge of unexpected momentum in the economy—has risen to levels not seen since the beginning of 2014. So despite doubt regarding President Trump’s policy agenda, the US economy is improving.
 


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