August 1, 2017

Stocks opened higher this morning and the Dow Jones Industrial Average set a fresh records high. At the moment, the Dow is up 80 pts and the SPX is up .18%. Telecoms, banks and semiconductors are leading the charge. On the other hand, biotechs, transports and energy companies are trading lower. WTI crude oil is  down 3% to trade around $48.50/barrel. Copper and iron ore are also in the red. Bonds are trading higher in price after some disappointing economic data. The 5-year Treasury yield dipped to 1.81% and the 10-year yield edged down to 2.26%. 

June’s Personal Income & Spending report was uninspiring. Consumer incomes on a year-over-year basis rose 2.6%, the slowest month so far this year. Consumer spending posted a second consecutive month of .3% gains, which is just OK. But on a year-over-year basis, spending growth has decelerated to a rather tepid 3.8%. The report confirmed that inflation remains pretty low. The price index on consumer purchases grew at a 1.4% y/y rate and the “core” reading—excluding food & energy—is hovering around 1.5%. Remember, the Federal Reserve’s inflation target is around 2.0%. 

ISM’s manufacturing index decelerated to 56.3 in July from 57.8 in June. This is a closely-watched gauge of business activity in the factory sector; any reading above 50.0 indicates business are expanding. Economists were anticipating the decline because the index had spiked to very high levels. Bloomberg says the report “suggests the manufacturing sector is expanding at a desirable pace, with limited signs of weakness.” Output and hiring particularly strong.  

General Electric’s (GE) new CEO took office today. John Flannery immediately sent an email to employees calling for better execution on financial targets. He’s met with 100 shareholders over the past month who are very dissatisfied with the way the company is being run and “expect more accountability internally and externally and asked that we find a way to simplify our metrics.” GE’s earnings growth will likely fall to 5% this year vs. 14% last year and the stock has lagged its peers by a wide margin. Mr. Flannery acknowledged the need to boost growth and cashflow and will pursue more cost cuts as he tweaks the business model. 

CNBC reports that research firm CoreLogic believes home prices in four major metro areas are overheating. The firm says real estate in Miami, Denver, Houston and Washington, D.C are overvalued. Nationwide, home prices are up about 50% from the housing trough in 2011. Prices are currently rising at a year-over-year rate of about 5%. Denver prices are soaring at a nearly 9% clip. And while Houston and New York prices are both rising a little over 3%, CoreLogic says Houston’s economy isn’t strong enough to sustain that rate of price growth. By the way, the firm’s research suggests that no major US metro areas are undervalued. 

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