Drifting Into Year-End
….Stocks flat Oil falls back. Copper hits 4-year high. Cobalt even better. Holiday shopping season was big. Amazon rules. Apple slows. Consumer confidence still high. Case Shiller shows home sales higher. NAR shows pending sales still strong.
Financial Review by Sinclair Noe for 12-27-2017
DOW + 28 = 24,774
SPX + 2 = 2682
NAS + 3 = 6939
RUT – 0.29 = 1543
10 Y – .05 = 2.41%
OIL – .42 = 59.55
GOLD + 4.20 = 1288.20
Stocks went nowhere in thin trading. Expect continued light volume for the remainder of the week. Ten-year Treasury yields posted a fourth day of declines, while the dollar traded near month lows. The yield curve is getting one final flattening push before calling it a year. The spread between the yields on 2-year and 10-year Treasuries narrowed to just 50 basis points today, close to the decade low reached on Dec. 6. The culprits behind this final flattening push appear to be money managers who need to tidy up their portfolios before 2017 finishes, with month-end duration extensions and quarter-end rebalancing both supportive of long-end Treasury buying. For investors who want a mix of stocks and bonds, this quarter’s combination of a 6.4 percent rally in the S&P 500 Index and a slight decline for Treasuries means that equities now make up a greater share of their portfolio and some adjustment toward fixed income may be necessary.
After hitting $60 a barrel, crude oil slipped. Yesterday, we heard reports of a pipeline explosion in Libya and that pushed oil prices to a 2-1/2 year high. Libya lost around 90,000 barrels per day of crude oil supplies. Repair of the pipeline could take about one week but will not have a major impact on exports. Oil markets have tightened significantly over the past year thanks to voluntary supply restraint led the OPEC and Russia. Data from the U.S. Energy Information Administration (EIA) shows that following rampant oversupply in 2015, global oil markets gradually came into balance by 2016 and started to show a slight supply deficit this year.
While domestic and foreign economies hum along, fueling overall growth in the domestic stock market, related trends are likely to push up prices of commodities and materials. Demand for commodities is increasing globally. Just about every economy in the world, depressed for years longer than ours after our woes from the 2008 financial crisis hit their shores, is now accelerating in what economists are calling synchronized growth because they seem to be rising in lockstep. Analysts expect demand to rise for energy commodities, base metals and timber – the building blocks of industry, manufacturing and construction. In turn, this would drive up earnings and stock prices of materials companies, which extract raw materials through mining, forestry and energy exploration. The bellwether for commodities is copper – highly-versatile copper is used in manufacturing, industrial processes, electronic products and plumbing. Copper is so reliably foretelling of the overall commodities market that the traders have dubbed it Dr. Copper. And today copper prices high a 4-year high – posting 9 straight sessions of gains – the longest winning streak since 2004. Copper is now up about 22% for the year.
Still, you could do better in metals. Cobalt is up 120% for the year. The silvery-blue metal, which is mined as a by-product of copper and nickel, is a crucial element in the lithium-ion batteries that power everything from electric cars to Apple products. The market for cobalt has increased from about $4 billion last year to about $8 billion. Traders and automakers are betting that consumers will increasingly switch to electric vehicles as several countries around the world try to drastically cut down carbon emissions by banning gas and diesel cars. By 2026, demand for lithium-ion batteries is forecast to grow by six or seven times the current amount,
The holiday shopping season was big, and much of it was on-line. And a whole bunch of those on-line purchases are being returned. United Parcel Service is on track to return a record number of packages this holiday shipping season. Both UPS and FedEx have benefited from booming delivery volumes over the past few years, but also have had to invest billions of dollars to upgrade and expand their networks to cope. UPS said it handled more than 1 million returns to retailers daily in December, a pace expected to last into early January. It said returns would likely peak at 1.4 million on Jan. 3, which would be a fifth consecutive annual record, up 8 percent from this year. UPS probably delivered about 750 million packages over the holiday season, an increase of 40 million. FedEx said it experienced another record-breaking peak shipping season, but declined to provide specifics. But we do know that about 15% of all on-line purchases are returned. The returns follow what could be the strongest holiday shopping season on record for both brick-and-mortar and online retailers, once stores publish sales data. Mastercard says U.S. shoppers spent over $800 billion during the season, more than ever before. The report said holiday sales in stores and online between Nov 1 and Dec 24 rose 4.9 percent, the fastest year-on-year pace of increase since 2011. And that means shoppers were spending more at traditional brick and mortar retailers as well. Shares in J.C. Penney rose 7.6 percent, while Kohl’s shares were up 5.8 percent, Macy’s rose 5.1 percent and Nordstrom increased 2.8 percent.
E-commerce sales increased about 18% year-over-year, according to GBH estimates. Amazon Prime membership have increased to about 88 million accounts, with subscribers spending 22% more this holiday season versus last. This shopping season was ruled buy Amazon, which picked up between 45% and 50% of all on-line US sales. Alexa was the hottest gift on Amazon this holiday season. The Echo Dot, which stars Amazon’s cheerful virtual assistant, was the best-selling item on all of Amazon during the 2017 winter shopping period. If we are conservative and estimate that Amazon sold 20 million of its best seller, the Echo Dot, at the holiday sale price of $29.99, that would equal around $600 million in sales. The number may be even higher give that other Echo devices, like the Show and Spot, cost upwards of $200 and $100, respectively. And while the devices can do many things, they excel at making on-line shopping even easier, and they default to Amazon.com.
For many people, a new phone was on the holiday wish list, and Apple has been counting on a redesigned 10th anniversary iPhone to boost shipments, but it now looks like a very high price point and a lack of exciting innovations will result in slower than expected sales. Apple is said to have trimmed its first-quarter sales forecast to 30 million units from 50 million. Analysts now estimated shipments will drop to 25 million units in the first quarter of 2018 from 30 million units in the fourth quarter. Of course, holding onto an older phone might be an exercise in frustration. iPhone owners aren’t happy with Apple, and they’re letting the company know with lawsuits. Five iPhone users filed a lawsuit in New York yesterday and are seeking class-action status over Apple intentionally slowing down their phones as the devices’ batteries aged. Last week, Apple confirmed that it slowed down the iPhone 6, 6 Plus, 6S, 6S Plus, and SE through a software update. The company said this feature “smoothed out the instantaneous peaks only when needed to prevent the device from unexpectedly shutting down.” Lithium-ion batteries, which are used in iPhones, “become less capable of supplying peak current demands when in cold conditions, have a low battery charge, or as they age over time, which can result in the device unexpectedly shutting down to protect its electronic components.” The software update prevented this from happening. Still, iPhone owners argue that Apple should have been more transparent about how it treats and recognizes aging batteries.
The Conference Board reported this morning that their Consumer Confidence Index for December slipped to 122.1 from a revised 128.6 in November – which was a 17-year high. Americans were a little less confident in their outlook for jobs and business conditions. Notably, only 15.2% of Americans said jobs were “hard to get,” a 16-year low. An index that measures future conditions dipped to 99.1 from 111.Consumers were more optimistic about conditions right now. The “present” situation index edged up to 156.6 from 154.9 and reached the highest level since 2001.
The S&P/Case-Shiller national index of existing home sales rose a seasonally adjusted 0.7% in the three-month period ending in October. It was up 6.2% compared to the same period a year ago. The 20-city index also rose a seasonally adjusted 0.7% for the month and it’s up 6.4% for the year. Both indexes advanced 0.2% in raw or unadjusted terms. The 20-city index that skews toward the biggest metro areas is still 1.3% below its all-time high, though. Big cities generally experienced even bigger booms before 2006 and the ensuing housing bust and some have not climbed all the way back. For now, inventories are tight and that is pushing prices higher. Prices rose in more than half of the largest U.S. markets, led by San Francisco and Las Vegas. In Phoenix, prices increased 0.3% for the month and are up 6% over the past 12 months.
The National Association of Realtors says pending-home sales ticked up 0.2% in November. NAR’s index of pending home sales tracks real-estate transactions in which a contract has been signed, but the deal hasn’t closed. The index reading was 109.5, where 100 is equal to the average level of contract activity during 2001. That is 0.8% higher than a year ago. The housing market’s biggest headwind remains extremely lean levels of inventory available for sale. In November, NAR said there were 3.4 months’ worth of homes for sale, the lowest on record back to 1999. New buyers coming into the market are finding out quickly that their options are limited and competition is robust; that could mean slower sales in 2018, though not necessarily lower prices.