March 7, 2018

Stocks opened lower today. The Dow is currently down 170 pts and the SPX is down .47%. The dip is not surprising considering Gary Cohn’s resignation as the president’s chief economic advisor yesterday. Most of America couldn’t care less, but the investor class is clearly worried. At the moment, most sectors are trading lower led by energy, industrials and consumer discretionary. REITs and telecoms are trading modestly higher. By the way, year-to-date if you’ve not invested in consumer discretionary, financials and info tech sectors, you likely haven’t made money. Despite the return of volatility, cyclical sectors are performing well. Today, the VIX Index is up slightly to trade around 18.5. Commodities are mostly lower with WTI crude oil down around $62.10/barrel. Oil has traded in the range of $59-$66 this year. Bonds are mostly unchanged. The 5-year and 10-year Treasury yields are holding at 2.64% and 2.87%, respectively.

Jim Paulsen of the Leuthold Group says stock and bond markets will “struggle” this year. “It’s a year of readjusting values” (i.e. bond yields and stock P/E ratios). He acknowledges that the economy is good and earnings are going to grow, but it will take some time to grow into valuations. There are some signs that the economic cycle and bull market are growing old. Consumer & investor confidence is very high; profit margins are close to record highs; the unemployment rate is very low, suggesting a growing shortage of labor; contracting financial liquidity. But other factors suggest more runway for the bull market. He says we haven’t yet had a full capital spending cycle, or lending cycle, or major housing cycle. These positive trends are not yet played out.  

The CEO of Saudi Aramco indicated that rising US oil production this year won’t lead to global oversupply. He expects global oil demand to rise by 1.4 million to 1.7 million barrels per day. At the same time, there is a natural decline in output from existing oilfields around the world. So there is a need for 4-5 million barrels per day of increased oil supply. Coincidentally, that’s about equal to the expected additional production from US shale this year.

The Chevron (CVX) CEO was interviewed on CNBC yesterday. His message; business is strong. Oil demand is growing, especially in emerging markets. Chevron’s breakeven price of oil is about $50/barrel, compared with the current price of roughly $62/barrel. He emphasized management’s goal to generate strong cashflow. He predicts the company will achieve $14bil in cashflow this year and the dividend is about $8bil. So that leaves $6bil in cash that will go to priorities 2, 3, and 4. Those are, in order: reinvest in the business, improve the balance sheet, and buy back shares.  

According to the Bureau of Labor Statistics, unit labor costs in the US accelerated in the fourth quarter of 2017, rising 1.7% from year-ago levels. This index is a really handy way to assess the level of wage growth relative to the level of business output. We’ve all been conditioned to fear rising wages and inflation, but this report confirmed a very healthy pick-up in labor costs from pretty low levels. Other reports seem to corroborate rising wages, but at a very moderate pace. 
 


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