U.S. Stocks Were Dragged Down this Week - Alaska Permanent Capital Management


U.S. Stocks Were Dragged Down this Week

PantagesU.S. stocks were dragged down this week by disappointing earnings from companies such as Microsoft, Caterpillar, and Procter & Gamble which reported that a rising dollar had cut into profits.

For the week the S&P 500 was off- 2.7% to 1996. Ten year Treasury bond yields fell 14 bp to 1.67% and the long 30 year Treasury bond hit an all-time record low of 2.24%.

Stock optimists can point to Apple, which reported the largest profit in history. Quarterly net profits of $18bn topped Exxon’s $15.9bn record. Apples cash position at $178 billion exceeds the market capitalization of all but 17 of the companies in the S&P 500!

The big six banks saw y/y group profits drop for the first time since the financial crisis. However, individual company results were all over the map. Citi and BAC profits dropped 50% (mainly legal charges), Goldman and Wells Fargo profits were flattish, while JP Morgan and Morgan Stanley net income rose 21% and 75% respectively.

APCM’s Jason Roth notes that yield curve flattening is typically bad news for financial companies that borrow short and lend long as this negatively impacts their net interest margin.

The FOMC met Thursday and its statement confirmed an improving US economy, falling inflation (likely temporary) and cited “international developments” for the first time in a while. The latter may mean sluggish growth overseas or worries about a strong US dollar zapping economic strength here in the US. Rates fell a little on the news with bond investors thinking maybe this will push out tightening into the third quarter and not the June meeting.

The CBO reports that from a peak of 9.8% of GDP in 2009, the federal budget deficit shrank to only 2.8% in 2014. It is expected to narrow to 2.6% of GDP in 2015, which would put it slightly below its long-run average of 2.7%. The deficit should remain at roughly that level for the next few years, before widening gradually from 2019 onwards. The improvement in the deficit has been achieved through a flat trend in outlays and a big rebound in revenues.

Good news! The Obama administration said it would drop its plan to raise taxes on 529 college-savings accounts, after the proposal sparked widespread criticism over its potential impact on the middle class.

Capital Economics on US GDP out this morning: The 2.6% annualized gain in fourth-quarter GDP was slightly below the 3.0% consensus forecast but, following the breakneck 5.0% gain in the third quarter of last year, this slowdown is nothing to worry about. 

Oil prices jumped $3 on Friday to $47.50 on news that the US drilling rig count had shrank at the fastest pace since 1987. It dropped by 94 rigs, to 1,226 working oil rigs. That is 24% below the peak reached last October. Less pumping means less supply and higher prices – eventually.

The big number next week will be the US unemployment report out Friday. Consensus is for a drop to 5.5% in the unemployment rate and for +220,000 new jobs. Last month average hourly earnings fell -0.2% m/m. Most analysts expect a rebound of +0.4% this month.

It’s going to be a long cold winter for Russia. S&P downgraded Russian debt to junk.

CHINA DAILY: “The yuan’s appreciation against the euro following QE launched in Europe will increase the continent’s popularity as a travel destination for Chinese.”

The left wing Styria party gained power in Greece and is vowing to renegotiate austerity measures with the IMF and others. It has stopped privatization of several government-owned transportation and energy companies already underway. Analysts think Greece will not default on debt but rather creditors will “extend and pretend” giving Greece more time. Maybe, but “Grexit” is a real possibility in our view. It’s not the end of the world.

I attended an Anchorage Estate Planning Council meeting Monday to hear state economist Neal Fried speak about the economy in Anchorage. AEDC will do the same next Thursday.

Fried was downbeat forecasting a loss of 400 jobs this year versus 200 last year, primarily in construction. He compared today’s economy to the 1980s (when oil prices plummeted) but believes the economy is more stable and diversified today, especially with respect to having a bigger service sector. It will not be déjà vu all over again! There is a much lower level of new home construction versus the 80’s. The demographics are better with an older, less transient, population (still younger than the lower 48). He pointed out that Alaskans median HH income is $72,000 well above the $52,000 US average. And he expects tourism to be strong given a better US economy although the strong dollar may crimp foreign visits. He opined that oil around $45 was about average (in real terms) over the past 30 years. I sat with him and he admitted being quite apprehensive about the impact of falling oil prices on the economy.

Recent news has been troubling with respect to oil prices and the Alaskan economy. The WSJ headlined an article as Obama’s Trans-Alaska Oil Assault: He’s slowly starving the current pipeline so it will have to shut down. “The President is using “executive authority” to designate 12 million acres in ANWR as wilderness walling it off from development”. And it looks like more regulations are coming for NPRA and off shore oil drilling.

Meanwhile oil analyst Daniel Yergin had a fascinating article in the New York Times reviewing changes in oil supply and demand including the role of shale oil as a disruptive technology. He thinks prices will begin to rise in 2016 but $100 oil is a thing of the past.

Enjoy Super Bowl XLIX everyone. Kickoff at 2:30. Seven hours of pregame coverage. It now costs $4 million for a 30 second commercial.

Jeff Pantages, CFA®
Chief Investment Officer


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