June 7, 2018

The major stock market averages opened mixed this morning (Dow +122 pts; SPX flat; Nasdaq -.3%). Energy and telecom sectors spiked more than 1% in early trading. Retailers  and banks are also in the green. Tech, on the other hand, is lagging after revelations that Facebook (FB) shared user data with Chinese firms. And to be fair, the tech sector has already had a year’s worth of returns, up 13% so far in 2018. The VIX Index is trading up toward 12.3 and VIX July futures are up around 14.2. The dollar is weaker again today against a basket of foreign currencies, especially the Euro. And not surprisingly, most commodities are a bit higher. WTI crude oil is back up to $65.75/barrel. Copper is also up over 1% today, and 8% so far this month. We know copper tends to correlate with China’s economy, so that’s good news. Bonds are little changed today. The 5-year Treasury yield is hovering around 2.81% and the 10-year note yield is holding right around 2.97%. 

Jamie Dimon and Warren Buffett agreed to a joint interview on CNBC this morning. Mr. Buffett said, “there’s no question” that the US economy is very strong. “I mean, if we’re in the sixth inning, we have our sluggers coming to bat right now.” Mr. Dimon added, “If you look at how the table’s set, consumers are in very good shape.” They implied the economy could be strong for years, but of course, we know that Buffett is very long-term when it comes to investing. He is known to view stock market corrections and even bear markets as nothing but speedbumps. 

The investing environment overseas is getting more complicated. The European Central Bank (ECB) will meet this week to discuss its monetary policy plans. Bloomberg notes the Euro is rallying partly because traders are beginning to speculate that the ECB may discuss putting an end to quantitative easing (that is, bond-buying aimed at keeping interest rates low). And so monetary tightening could come at a time when credit risk (and political risk) in Italy is rising. That could cause additional volatility in European bond and stock markets. Add to that the upcoming G-7 Leader’s Summit in Canada later this week, which will certainly address threatened trade tariffs. And finally, we note big currency moves in Turkey, Argentina and Brazil suggest some economic deterioration among emerging markets. 

Bloomberg reports Bank of America (BAC) is intentionally reducing risk in its lending and investment banking operations. That is, management seems to be more selective when it comes to riskier deals and business lines. The bank is participating in fewer new equity & bond deals overseas. It is pulling back on leveraged loans in the US, and actually selling some riskier margin loans. Of course, having been burned badly in the last recession, management is more cautious and the new mantra is “responsible growth.” But according to Bloomberg, management is “concerned the credit cycle might soon turn.” That’s a big deal, and investors will be watching the banks for signs of deteriorating credit. So far, we really haven’t seen any. 

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