August 17, 2017

The Dow (-73 pts) and S&P 500 (-.7%) opened lower today after some disappointing earnings announcements and economic reports. Semiconductors (-1.1%), transports (-1%), banks (-.8%) and retailers (-.7%) are faring the worst. All eleven sectors are in the red. European markets are poised to close down about .5% and most of Asia was down overnight. The dollar is slightly stronger today and most commodities are slightly weaker. The exceptions are gold (now up 11% on the year) and oil (trading around $47.05/barrel). The bond market is mostly unchanged. The 5- and 10-year Treasury yields are hovering around 1.78% and 2.20%, respectively. 

US industrial production rose .2% in July from prior month levels; economists were expecting a .4% gain. Production includes manufacturing, mining and utilities output. Manufacturing actually declined a bit due to a 3.6% dip in automobile production. Excluding autos, however, manufacturing output rose .2%. That’s not great, but it’s not terrible either. Both utilities and mining saw strong gains in output during the month. OK, with the headline stuff out of the way, let’s look at what matters. Beginning in mid-2014 with oil prices plunging and the dollar surging, manufacturing fell off from about 4% y/y growth to a decline of 3% by the end of 2015. Since then, however, production has been recovering and came back to 2% y/y growth in April. And in July it improved slightly to 2.19%. So it’s not nearly as negative as the headlines would suggest. 

Cisco Systems (CSCO) reported second quarter results that narrowly exceeded Wall Street forecasts even though revenue & earnings fell from year-ago levels. The company is in the middle of a transition from selling primarily hardware to offering more subscription-based software and services. Cisco is making steady progress, but the transition is putting some pressure on sales growth & profit margins. Management’s current quarter guidance was weak, predicting a year-over-year revenue decline of 5%. Wall Street was projecting -2%. The stock is down 3.5% today. 

The US Index of Leading Indicators (LEI), which tries to predict changes in the economy’s momentum, decelerated a bit in July. Compared with year-ago levels, LEI is up 3.9%, but that’s a bit less than June’s 4.1% growth. Much like industrial production, LEI fell off in 2015 & early 2016, but is now recovering.  

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