Slow Motion Train Wrecks

Investors have a light week ahead as we close trading for the first quarter of 2017. On the domestic front, we have GDP Final Release and Consumer Confidence.

GDP Final Release:  On Thursday (3/30) we get our third and final release of US GDP for the 4th quarter. The first release is the most impactful. The first and second releases both came in at 1.9%. However, if a line item were to surprise in the Preliminary or Final, the markets can react accordingly. If we get better than expected information with this reading on the consumer, we can expect to see equities go higher. If the consumer comes in weaker than expected, expect equities to fall.

The Death of Retail: Last Wednesday (3/22) Sears announced in its annual 10K report that its future viability is not a guarantee. After years of losses and declining sales, investors should not be surprised as retail shifts away from brick and mortar to online stores. Investors will monitor the developments as other retail names could drag lower if Sears’ issues aren’t resolved. If suppliers publicly come out that they are asking for better payment terms or reducing shipments, the end may be near. Commercial REIT’s will also be watching the developments closely as a vacancy for a non-payment tenant or a default (the closing of Sears stores or other retail shops) will see that sector trade lower. 

The Fed Talk Continues: This week, we have 6 FOMC members scheduled to give speeches across the country. After the first rate hike of 2017, investors will be listening to clues to see when the Fed may be tightening its $4 trillion balance sheet. The balance sheet normalization would be done independently of their forecast to increase interest rates this year. However, the balance sheet tightening would push the price of Treasuries lower as they unwind their massive position, pushing rates higher.

Consumer Confidence: On Tuesday (3/28) Consumer Confidence is released. This figure has increased significantly since Donald Trump became President. Investors will be looking to see if this figure stays elevated, even though it hasn’t translated to any outsized gains in consumer spending or business investment. Any chink in the armor and stocks could fall with a weak reading.

This Makes No Sense: The latest economic indicators from the housing sector have seen Existing Home Sales lower, Pending Home Sales lower, affordability (since rates have been spiking) lower. But last Thursday (3/23) New Home Sales spiked to 7 month highs. Quite strange. This Wednesday (3/29) Pending Homes Sales for February is announced.  The previous month’s reading was lower. However, should we see another outcome 3 Sigma from the estimates (like last week’s new home sales), investors could see significant gains in the housing sector.    

 

 

This latest blog is brought to you by the Metropolitan Transit Authority (MTA). “3rd World Countries Infrastructure got nothin on us.” Last week the MTA celebrated their latest rate increases to help pay for their retirees 2nd home in Florida, which recently saw their mortgages increase with the Fed rate hike, by having a NJ Transit train “bump” an Amtrak Train. This closed Penn Station for the entire day, leaving NJ Transit and Long Island Railroad commuters royally screwed for the upteenth time this year.

 

My Big Fat Greek Tragedy

"The problem with socialism is that you eventually run out of other people's money" - Margaret Thatcher

 

Intro: Investors have a light week ahead highlighted by Retail Sales, PPI, and Michigan Sentiment. Investors will also continue to track the recent bond selloff

 Greece: Last Friday (6/5), Greece skipped a debt payment to the IMF. However, they legally have until the end of the month to make the payment and are planning to bundle with other payments to the IMF. As investors remain weary on Greece , Should Greece fail to pay its debt obligation, expect global markets to trade lower and heightened volatility in the currency markets

 Retail Sales: On Thursday (6/11), Retail Sales are released. Should the figure come in better than expected, it would continue to signal an improving economy to the FED, indicating that the average US consumer can absorb an interest rate hike 

Import Prices: On Thursday (6/11), import prices are released. Should import prices increase for the month, investors will point to rising energy costs

Bond Yields: Last week, we witnessed a major selloff in bonds across the world following comments by Mario Draghi, stating that markets should get used to volatility. Yields on 10-year German Bonds jumped to 0.99% and 10-year US Treasury yields hit highs for the year. Analysts are blaming a lack of liquidity for the bond selloff. Should we continue to see volatility in global bond markets, investors believe that it could spill into the equity markets

U.S. Treasury Yields: After the stronger than expected jobs report, we witnessed U.S. Treasury yields jump as investors believe that a June rate hike to occur in 2015 is potentially still in the cards. Investors will be monitoring U.S. Treasurys as we are now one week away from the June FOMC Meeting

Oil Rigs: Last week, the number of rigs drilling for oil in U.S. oilfields fell by 4 lowering the total to 642. This is the 26th consecutive week of declines. On the news, oil jumped 5% for the day. Traders will watch to see the if Baker Hughes weekly oil rig count lowers again, which could put upward pressure on the price of oil. Down 894 oil rigs for the year.

MONDAY (6/8)

  • Japan GDP
  • China Trade Balance
  • G7 Meetings
  • Canada Building Permits

 

TUESDAY (6/9)

  • 10:00 AM ET – Wholesale Inventories - Apr
  • 10:00 AM ET – JOLTS Job Openings - Apr
  • National Australia Bank Business Confidence
  • China CPI & PPI

 

WEDNESDAY (6/10)

  • 10:30AM ET – Crude Oil Inventories
  • 2:00 PM ET – Treasury Budget - May
  • Reserve Bank of Australia Governor Glenn Stevens Speaks
  • Bank of England Governor Mark Carney Speaks
  • Great Britain Manufacturing Production

 

THURSDAY (6/11)

  • 8:30 AM ET - Weekly Jobless Claims
  • 8:30 AM ET - Retail Sales - May -
  • 8:30 AM ET - Import/Export Prices - May
  • 10:00 AM ET - Business Inventories - Apr
  • Reserve Bank of New Zealand Rate Statement
  • Australia Unemployment Rate
  • China Industrials Production
  • Bank of Canada Governor Stephen Poloz Speaks

 

FRIDAY (6/12)

  • 8:30 AM ET - PPI - May
  • 8:30 AM ET – Michigan Sentiment - Jun

 

 

I wanted to add a little bit on Greece as we continue to see Greece kick the can down the road but it seems the can kicking may stop fairly soon. This past Friday, the Greeks didn't make their scheduled payment to the IMF and will bundle the payment with other payments due at the end of the month. This play is completely legal but shows the desperation by the Greeks as the situation is dire but Greece has few options.

From my CFA studying, we learned that for a government to get itself out of a recession, the administration has to do 3 steps.

1. Cut taxes

2. Increase government spending

3. Depreciate the currency

 

Greece has the capability of the first two, but because of their inclusion in the European monetary union, they have no control of depreciating their currency. If they were to bring back the Drachma, they could devalue that currency but at this juncture they are unable to do that.

The Germans and the rest of the EU have the Greek economy on life support with their previous bailouts but unfortunately won't pull the plug and kick them out of the currency. On the flip side, the Greeks do not want to give up their pensions owed to their workers and continue to expect handouts amid a continued dysfunctional tax collecting mechanism                             

But just like the US, Greek politicians made promises they obviously couldn't keep and are long gone from the political sphere and just pushed the problem on to somebody else. Well it's now been passed on enough and in which they've screwed the pooch (the Greek population) to keep receiving money for doing nothing. And you can't blame Europe for not wanting to support the Greeks way of life, and create an environment that doesn't support innovation.

So we will see in the next few weeks the outcome of the negotiations, but we all expect another band aid on a massive wound solving nothing. This will be in the form of temporary extensions which obviously solve nothing but kick the can, but the can kicking may be over as the Greeks are broke. In the words of Margaret Thatcher, ”The problem with socialism is that you eventually run out of other people's money"