After moving higher earlier in the week the equity markets gave back that gain on Friday with the Dow Jones off 279 points to close at 17,826. It was down 1.3% for the week, amidst earnings anxiety, mixed economic data, and renewed concern about rate hikes given an uptick in inflation. The S&P 500 ended at 2,081 off 1.0% for the week. Its total return YTD is now just under 2%.
European stocks lost 2% over the week as worries over Greece‘s debt negotiations resurfaced. And after the close in China, officials raised margin requirements. Buying stocks with borrowed money has been driving Chinese stocks higher. Markets were off 5% in “post-close trading” suggesting a weak start on Monday.
Energy stocks rallied on a $5 jump in oil prices to $56 bucks. Oil hit a low of $45 in early March. Energy shares are up 5% so far in April. Crude oil supplies appear to be peaking and the rig count is at its lowest level since 2010. OPEC forecast supply to tighten later in the year as U.S. output falls. The Middle East remains mired in turmoil suggesting possible oil supply disruptions.
S&P Q1 earnings, while still negative, are inching up. ISI notes S&P earnings estimates for Q1 have improved over the past three weeks to -3.1% from -5.6%. Some notable financial results include:
JP Morgan, the largest U.S. bank by assets, reported a quarterly profit of $5.9 billion, or $1.45 a share vs. analysts’ estimates of $1.40 a share. Quarterly profits were up 12% year-over-year. In his annual letter to shareholders, Jamie Dimon bemoaned the increasing regulatory environment, which is leading to less liquidity in the capital markets, and the impact of legal costs (estimated at $36 billion for JPM) since the financial crisis.
Meanwhile, the biggest bank by market capitalization, Wells Fargo, saw quarterly profits slip for the first time in 4 years after reserving for losses on its big energy portfolio. Net income was $5.8 billion down 2% year-over-year.
Goldman Sachs earnings out Thursday were very strong. Headline EPS of $5.94 was ahead of consensus of $4.25 with net income of $2.8 billion exceeding expectations by 45% in the quarter.
Electric Shock: General Electric said it plans to shed most of GE Capital and refocus on industrial operations. The move could allow GE Capital to escape designation as a systemically important financial institution (SIFI), which comes with increased oversight by the Federal Reserve. At one time GE Capital contributed 50% of company earnings. Pretty soon that could be down to 10%. On Friday the company reported a $13.6 billion loss on restructuring charges. Gain from continuing ops did top analysts’ expectations – barely.
10 year Treasuries remain pinned below 2%. In fact this week yields fell almost another dime to 1.87%. A quarter of Eurozone government debt is trading at negative yields, and benchmark 10-year German Bunds could soon join the club. German 10 year bond yields are now 0.08% as the ECB affirmed Wednesday that its QE bond buying will run through September 2016. These ultra-low rates are giving a bid to U.S. Treasuries from overseas buyers.
The WSJ reports that Japan has overtaken China as the largest foreign owner of U.S. government bonds for the first time since the 2008 financial crisis. “China’s decade long voracious demand for U.S. government debt has been shifting down amid its slowing economy. Investors in Japan, on the other hand, have been snapping up U.S. bonds, lured by one of the most attractive yields in the developed world.”
Factoid: Japan owns $1.2 trillion, while China owns $1.2 trillion of $17 trillion U.S. debt. But the Federal Reserve now owns twice as much at $2.4 trillion owing to its QE programs.
The FT reports that: Emerging market economic growth has slipped to its slowest pace since the 2009 slump, as developing nations struggle with the impact of a stronger U.S. dollar and weaker commodity prices. (Many EM countries/companies have issued debt in dollars which is now harder to pay back given dollar strength – which also exacerbates outflows of capital). Capital Economics says estimates for EM growth are “flagging.” Despite this, YTD EM stocks are doing quite well up around 9.5%.
The IMF highlights slowing in longer term secular EM growth rates in their latest World Economic Outlook released Wednesday. “This chapter finds that potential output growth across advanced and emerging market economies have declined in recent years. In advanced economies, this decline started as far back as the early 2000s and worsened with the global financial crisis. In emerging market economies, in contrast, it began only after the crisis. The chapter’s analysis suggests that potential output growth in advanced economies is likely to increase slightly from current rates as some crisis-related effects wear off, but to remain below pre-crisis rates in the medium term. The main reasons are aging populations and the gradual increase in capital growth from current rates as output and investment recover from the crisis. In contrast, in emerging market economies, potential output growth is expected to decline further, owing to aging populations, weaker investment, and lower total factor productivity growth as these economies catch up to the technological frontier.”
Over the short term the IMF said it is raising its projection for economic growth in Japan and Europe this year and downgrading its forecast for the U.S. due to the strengthening U.S. dollar. It cut its U.S. economic-growth forecast to 3.1% from 3.6% this year, boosted the figure to 1% from 0.6% for Japan and increased its Eurozone estimate to 1.5% from 1.2%.
Meanwhile, China’s economy expanded at its slowest pace in six years in the first quarter. China’s GDP rose 7% from a year earlier, in line with Beijing’s target for the full year of about 7%. Still, it was below the 7.4% for all of last year and 7.3% recorded in the last quarter of 2014. It’s the second weakest quarter (on an annual basis) since 2001.
The month-over-month sequential gain for the headline CPI inflation rate in the U.S., reported Friday morning, was 0.2% in March after a 0.2% gain in February. That translates into a 0.0% year-over-year gain through March. The core CPI was higher than expected, up 0.2% last month. That translates into a 1.8% year-over-year gain.
The April 15 Tax Day has Ed Yardeni asking, “Are the rich paying their fair share, whatever that means? You decide: “
- The latest available IRS data for 2012 show that taxpayers earning $50,000 or less paid just 6.3% of federal income taxes, the lowest in at least the past 12 years. Those earning $50,000-$100,000 paid 16.2% of the total, also the lowest in the past 12 years. The $100,000-$200,000 crowd paid 22.3%, while the $200,000-$500,000 group paid 19.7%, and the $500,000+ club paid 35.5%.
- Millionaires paid 25.9% of all federal individual income taxes. They accounted for only 0.3% of all tax returns. The $500,000+ club, who paid 35.5% of the taxes, accounted for just 0.7% of all tax returns.
- During 2012, 35.7% of tax returns showed no individual income taxes were paid at all.
Wells Fargo on economic data out next week:
- Home demand – new and existing home sales – should rebound in March from subpar readings in January and February. A tight supply of inventory continues to translate into home prices climbing.
- We estimate 1Q real GDP rose a modest 1.0%. Adverse weather and the west coast port strike probably weighed upon overall growth by around 0.5%. We expect a sharp rebound in 2Q growth.
- Are wage gains accelerating? The employment cost index should advance 0.6% in 1Q with the risks to the upside. This would put the y/y gain at 2.6%, the fastest since the 4Q of 2008.
Have a great weekend everyone! I’m taking a little R&R late next week and then heading to the Altegris Strategic Investment conference in San Diego. You’ll be in Nick’s capable hands for a few weeks.
Jeff Pantages, CFA®
Chief Investment Officer