Spend Your Time Wisely
Financial Review by Sinclair Noe
DOW + 23 = 17,619
SPX + 5 = 2063
NAS + 28 = 4986
10 YR YLD un = 2.33%
OIL + 1.14 = 59.47
GOLD – 7.50 = 1173.60
SILV – .09 = 15.77
Today marks the end of the second quarter; we are halfway through the year. The stock market has been trading in an extremely tight range. After a weak January and a rebound in February, the major indices have moved sideways for 4 months. The Dow Industrials are down 204 points for the first half; the Nasdaq Composite is up 250 points for the first six months; the S&P 500 gained 5 points year to date. The S&P 500 is in the tightest trading range for the first half of a year in more than 2 decades. At some point it will break up or break down; as it is 2015 marks the worst first half of a year for the S&P 500 since 2010.
For the month of June, the Dow fell 2.2 percent, the S&P 500 fell 2.1 percent and the Nasdaq fell 1.6 percent. For the second quarter, the Dow fell 0.9 percent, the S&P 500 fell 0.2 percent. For the Dow and the S&P, that snaps a string of 9 consecutive quarters of gains. The Nasdaq rose 1.8 percent in its tenth straight quarterly advance. During the quarter, the Nasdaq hit its first records since the height of the tech bubble
Historically speaking, the ends of quarters tend to exhibit weakness, as portfolio managers tend to position themselves for the next quarter; it’s called portfolio pumping or window dressing. The last day of the second quarter is a bit of a paradox as “portfolio pumping” has driven the Dow down 17 of the last 24 years while buoying the NASDAQ and Russell 2000 higher in 16 of those years.
Companies in the S&P 500 reported profit growth of just 0.8% in the first quarter, according to FactSet. In the second quarter, they are set to shrink 4.5%. Wall Street analysts often undershoot their profit forecast, so actual profits are likely to come in higher. But that is little comfort to investors staring at a stock market that has grown increasingly pricey. The S&P 500 trades at 17.9 times the past 12 months of earnings, up from 17.1 at the start of the year and close to a five-year high, according to FactSet. The average P/E for the last 10 years is 15.7.
U.S. government bonds have had their biggest quarterly selloff since December 2013. The yield on the benchmark 10-year Treasury note was 2.335% at the end of trade today. It has climbed from 1.93% at the end of March, marking the first quarterly loss since the final quarter of 2013. Bond yields rise as prices fall. Treasury debt overall has handed investors a total return of negative 1.56% between the end of March and Monday. For the year, the return was 0.05%, following a 5.05% return during 2014. Return includes price gains and interest payments. Other U.S. fixed-income markets have also lost ground amid higher Treasury bond yields. U.S. investment-grade corporate debt was the biggest loser this quarter, with a negative return of 3.22% through Monday. Treasury inflation-protected securities lost 1.1%, municipal bonds have lost 0.86% and U.S. corporate bonds sold by lower-rated companies, known as junk bonds, lost 0.04%.
Greek politicians spent the day talking with their creditors, but it was not enough to avoid a default on Greek debt. The deadline was midnight in Brussels, about one hour ago. Greece did not make the €1.5 billion-euro payment. Reports earlier suggested European Commission President Jean-Claude Juncker made Athens a last minute offer. That was followed by reports that Greece had requested a 2-year bailout program from the European Stability Mechanism. Then German Chancellor Merkel rejected more talks before the July 5 referendum in Greece. In reality, the conditions up for a vote were taken off the negotiating table, so the vote is over an offer that no longer exists. The Greek government says it will open 1000 bank branches tomorrow to allow pensioners to cash their pension checks, at least up to €120-euro per week. Beyond that, nobody really knows what will happen next.
Markets across Asia bounced back today, while European indexes remain mixed. You may have heard that the Greek situation will not be harmful to US stocks; and while there was not a chaotic crash yesterday, about $1.5 trillion was erased from the value of equities in the Wilshire 5000 index, while the Dow dropped 350 points, to slip below its 200-day moving average. In the S&P 500, the drop in market capitalization of just 86 companies equaled the entire GDP of Greece (about $242 billion.)
Meanwhile, a new crowdfunding campaign has been set up on Indiegogo.com. With a goal of raising $1.8 billion, the “Greek Bailout Fund” aims to do what the Hellenic Republic’s creditors apparently cannot. And supposedly, every donation gets a postcard from Greek Prime Minister Alexis Tsipras.
Puerto Rico will seek to delay payments on the island’s $72 billion debt load for “a number of years” as part of a plan to bolster the commonwealth’s finances and revive its economy. Governor Alejandro Garcia Padilla appealed to Washington to make unprecedented, “concrete” changes in bankruptcy rules to help rescue the island’s finances. Although U.S. cities and municipalities are eligible to file for bankruptcy, states and Puerto Rico are barred from seeking protection through bankruptcy. And just for comparison, US banks have about $14 billion in direct exposure to Greek default, but almost all of Puerto Rico’s $72 billion in debt is held by US financial institutions.
China is now taking an all-hands-on-deck approach to soothe the country’s plunging stock market, after an unexpected weekend interest rate cut failed to right the ship. Late on Monday the finance and social security ministries published draft rules that would permit the state pension fund to invest up to 30% of its net asset value in securities, potentially allowing $97 billion to enter the market. The Shanghai Composite Index closed up 5.6%.
The Export-Import Bank will expire today at midnight for the first time since the federal agency was created during the Depression. The bank, which guarantees commercial loans for overseas customers of American exporters, will not exactly go out of business. Employees will continue to service all outstanding loans, but new loans won’t be guaranteed. Supporters of the bank, however, are hoping to attach legislative language restarting the bank to a must-pass transportation funding bill in late July, then dare opponents in the House to kill it.
The Conference Board’s U.S. consumer confidence index jumped to 101.4 in June from a downwardly revised 94.6 in May. Both the present situation and expectations indexes advanced.
Chicago PMI rose in June but remained under the 50 level, indicating a slight contraction in conditions. That’s the fourth month below 50 this year.
U.S. existing-house prices rose 1.1% in April, with gains in all the cities tracked by the Case-Shiller 20-city composite index released Tuesday. With seasonal adjustment, prices rose 0.3%. Home prices in April were up 4.9% from a year earlier, slightly slower than annual growth of 5% seen in March. Home prices in Phoenix rose 0.8% in April, with a 3.5% gain for the past 12 months.
Federal Reserve Vice Chairman Stanley Fischer says the US economy probably bounced back to an annual growth rate of around 2.5 percent in the second quarter, and the labor market is approaching full employment. I’m not sure the Fed knows what full employment is. Back in the 1950s the US saw the unemployment rate drop down to 2.9% before it sparked inflation, which was quickly tamped down. The big problem facing the economy is not inflation but unemployment, which then puts a drag on demand. And so far we have not seen enough tightness in the labor market to lift stagnant wages. Fisher said: “We should not wait until we have reached our objectives to begin adjusting policy.” Which sounds a lot like: quit before you cross the finish line. Fisher also said the global situation remained a “significant headwind” for the United States.
For the most part, financial weakness overseas (whether in China or Greece and the Eurozone) is not much concern for the Fed, unless it turns into a significantly stronger dollar or a big hit to US economic growth. Fed officials signaled after their mid-June policy meeting they expect to raise rates in 2015 after keeping them near zero for almost seven years. Several officials have said since their gathering that September could be the time for liftoff. That’s their story and they are sticking to it, at least for now.
President Obama has unveiled a proposal that would make nearly 5 million more workers eligible for overtime pay, a move that touches nearly every sector of the U.S. economy and could face legal challenges. The change would allow salaried workers who earn up to $50,400 per year to qualify for time-and-a-half pay when working more than 40 hours per week as soon as 2016. Under current rules, only those earning less than $23,660 are automatically eligible for the overtime wages.
At 5PM Pacific, time will be stopped in its tracks for one second; a minute will have 61 seconds. It’s a “leap second”, not to be confused with a Leap Year, which won’t happen until 2016. Since 1967, when clocks went atomic, human timekeeping has been independent of the earth’s rotation. The problem is, the moon’s gravitational pull slows down the rotation of the earth; a long, long time ago one day was only about 22 hours; the planet is slowing down and clocks are not. So every few years, to get everything back in sync, scientists add a second. They’ve done it 25 times since 1972. The last time was 2012, but that was on a weekend. June 30 will be the first leap second during regular business hours. One of the concerns is that computerized time does not know how to handle something like a leap second. And not all computer operators have made the adjustment. There could be hiccups in your computer. Nobody anticipates serious problems from this, the internet will not break, just a few minor glitches. The good news is that you now have an extra second. Spend your time wisely.