June 29, 2017

Stocks opened lower this morning (Dow -234 pts; SPX -.7%). The Nasdaq is down 1.5% in early trading. Clearly, then, the tech sector is the worst-performing. Semiconductors are down 2.5% at the moment. So this is the follow-through from tech’s initial drop back on 6/9. The technology sector is now down 4.6% from its high back on 6/8. Meanwhile, energy and financials are sharply higher (+1%) on a continued rebound in oil prices and the positive results from the Fed’s CCAR stress test. It’s really tempting to assert that we’re seeing a sector rotation as institutional investors shift to sectors that have lagged. By the way, European markets are poised to close down about 1.5% even though Asia was mostly in the green overnight. 

The dollar is weaker today and most commodities are trading higher. WTI crude oil is back up to $45.00/barrel. That’s a two-week high. Longer-term, it’s hard to expect oil to push much higher than it is now. For all the fretting over what OPEC will do with its production freeze agreement, OPEC is quickly losing control over the oil market. Economist Mohamed El-Erian had this to say via Bloomberg: “Cost-cutting innovations in shale [by US producers] are weakening [OPEC’s] grasp of energy market dynamics. Their prospects increasingly depend less on what they can do on the supply side and more on what they can hope for on the demand side.”

Bonds are selling off for the third consecutive day. The 5-year Treasury yield is back up to 1.86% (highest since 5/15) and the 10-year yield shot up to 2.27% (highest since 5/23). The proximate cause of the yield jump is today’s GDP revision. The Bureau of Economic Analysis now says first quarter 2017 gross domestic product (GDP) rose 1.4%. Remember, the initial reading published back on 4/28/17 was just .7%. So subsequent data revisions have doubled the nation’s total output. Why the mistake? First, they under-estimated consumer spending growth, which was revised up to 1.1% from a very weak .3%. Second, both residential and business investment were under-estimated and ended up adding .5 and 1.2 percentage points, respectively to the GDP equation. Data reliability issues aside, it seems clear that the first quarter wasn’t quite as weak as we all thought. And by the way, the stock market hasn’t been paying any attention to GDP, whereas clearly the bond market has been. 

The banks are all up 1-3% today. For the first time since the Great Recession, the Federal Reserve passed off on all banks’ capital utilization plans. And they were all given permission to raise dividends and accelerate stock buy-backs. Bloomberg says the Fed just “unlocked the treasure chest.” A host of banks—Wells Fargo, Morgan Stanley, Citigroup, Bank of America, JP Morgan—immediately raised their dividend payouts. By the way, famed analyst Dick Bove said in a CNBC interview that bank balance sheets are in “phenomenally good shape,” and they are experiencing historically low loan losses.  

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