In 1997, when I first came to the NYSE, there were 5,000 people on the floor of the New York Stock Exchange. » Read More
The Trump agenda may be a bit more iffy, but it is certainly not dead, and the trading community still believes that some kind of tax cut is coming. » Read More
First quarter earnings are now expected to rise 10.4 percent from last year. » Read More
Are you ready for a 2,000 point drop in the Dow? That's what a "normal" correction would look like now.
Normal corrections look kind of scary when markets are at these highs.
The Dow hit a new high on March 1 at 21,115.
That means a 10 percent drop — what would be considered a "correction" — would be a decline of 2,111 points. Sounds pretty steep, no?
Here's an even bigger drop: 3,000 points. Dan Wiener, who runs the Independent Adviser for Vanguard Investors and runs money as president of Adviser Investments, pointed out to clients that over the past 30 years the stock market has declined an average of 14.3 percent from high to low on an intrayear basis.
That translates into a 3,019-point decline from the Dow's March 1 top.
Finally, here's an illustration of the power of staying in the market, not trying to time investing, and the beauty of compounding interest. March 9 was the eighth anniversary of the bottom of the market. It was widely noted that the S&P 500 was up over almost 250 percent since then.
Here's an even more interesting tidbit: It's up about 310 percent when dividends are accounted for.
That's the power of compounded interest! That's about a 19 percent annual compounded gain every year for eight years.
Think about that. Your money would be up an average of almost 20 percent a year when dividends are included and the money is reinvested over the last eight years. That is a remarkable run. Can stocks gain 20 percent a year for the next eight years? Maybe, but it's unlikely: "[Y]ou need to keep your expectations in check," Wiener said.
Saudi Arabia indicated to OPEC its production had increased to 10.011 million barrels per day in February. The markets immediately took this to mean that the Saudis had reversed some of the cuts it had made the previous month.
But in statements issued in the middle of the day, the Saudis reiterated that they were "committed and determined to stabilizing the global oil market."
And that production increase? They insist Saudi crude supply was little changed and in-line with OPEC output cuts. The source of the confusion, the Saudi energy minister said, was "The difference between what the market observes as production, and the actual supply levels in any given month, is due to operational factors that are influenced by storage adjustments and other month to month variables."
If this sounds like a bit of official gobbledygook to you, the market has initially taken it that way as well.
Oil was little changed after this announcement, so the market clearly believes that there are cracks in the Saudi commitment to the production cut deal.
This is adding to the "oversupply trade" that is now taken over as the dominant motif in the energy trade, replacing the "reflation trade" that has dominated for several months.
The result? Crude down another 2.3% to the lowest level since November 30th. Does that date sound familiar?
That was the day OPEC announced the production cuts!
The list of crude troubles is getting longer:
1) High U.S. inventory trends
2) High U.S. rig count
3) Record speculative longs in oil
4) E&P capital spending growth
5) A potential Fed rate hike that takes the dollar higher, hurting oil
Put it all together and it means that a lot of complaceny is getting flushed out of the oil trade in the last few weeks, along with a lot of expectations for higher 2017 earnings in Big Oil:
Energy this month
These are on top of earlier declines that began in January.
As usual, ExxonMobil is the poster child for a lot of these issues. It hit a 52-week low last week. Earnings are expected to increase 60% this year, revenues 30%, much of it predicated on higher oil.
How much higher? Certainly closer to $60, and not $47 where it is now.
Big Oil has two other notable problems independent of the price of oil: 1) continuing low natural gas prices, and 2) increasing difficulty in growing oil production.
Morningstar highlighted the production problem in a note to clients this morning: "With rising resource nationalism, Exxon has found it increasingly difficult to increase production and book reserves. As a result, it's more reliant on higher-cost projects than in the past."
It's not all bad news. Exxon's dividend — now with a 3.7% yield — still appears safe for the moment.
There's one final point: the Saudis may have some motivation for letting go of the production deal. It may have to do with a very important elephant in the room: Aramco. The Saudis certainly are willing to sacrifice market share by cutting production, PROVIDING it will prop up oil prices and lead to a higher valuation for Aramco, which is scheduled to go public next year.
But look what's happening: the Saudis are sacrificing by cutting production, and oil prices are STILL going down.
This is crushing the Saudis' expectations. The Saudis have been saying that Aramaco could be worth north of $2 trillion, but there have been reports for weeks that it could be worth $1.0 to $1.5 trillion.
Yikes! Imagine being the Saudis: "We've sacrificed market share to others, oil is still going down, and now the valuation on Aramaco may not be worth anywhere near what we thought it would be!'
Seen in this light, it would make perfect sense if the Saudis started to question the wisdom of continuing with production cuts.
The S&P 500 Index officially launched 60 years ago on March 4th, 1957. While the Dow Jones Industrial Average — which started way back in 1885 — is the most well-known reference point for the state of the stock market, the S&P 500 is far and away the gold standard for investors.
It's the most popular index in the world, with almost $2.4 trillion indexed to it. Nothing else comes remotely close.
Why did the S&P become so famous? And why did creating indexes by market capitalization win out over other indexing systems, like weighting all stocks equally, or by price, as the Dow Industrials do?
Standard & Poor's was running indexes for many years prior to the invention of the S&P 500. They were running four separate indexes since the 1920s — Industrials, Transportation, Utilities and Financials. In 1957, they decided to combine all four indexes into one index of 500 companies, and the S&P 500 was born.
Here's the key sentence in her speech to the Executives Club of Chicago: "The economy has essentially met the employment portion of our mandate and inflation is moving closer to our 2 percent objective."
In other words, the economy has essentially met the Fed's goals.
This is a remarkable change in tone, but even more remarkable is the market reaction: no change in equities.
The S&P 500, down 2 points before the speech, was essentially unchanged.
Had something close to this been said a year ago, the Dow would have dropped 200 points immediately.
The difference is the Fed has been prepping markets for some time, and judging by the market reaction, the prep has been successful. It began a few months ago, but it began in earnest during Yellen's Congressional testimony. This week Fed official after Fed official has sounded eager to raise rates — the only question was, would she be?
This new phase in Fed policy means they are not as worried about inflation or global risks. During the question and answer portion, Yellen surveyed the global economic outlook and concluded, "Risks are more balanced than I have seen in some time."
She's right about that. It began before Donald Trump's electoral victory. The real reflation trade began in the summer, when interest rates finally began rising and better economic data began materializing in many countries, much of it driven by higher commodity prices.
But the Trump victory was the icing on the cake. The Fed finally has an ally: fiscal stimulus, which has convinced the markets that the economy can suddenly levitate to 3 percent growth, from 2 percent.
That means investors believe the economy can withstand higher interest rates without dramatically slowing economic activity.
The jury is still out on whether this can be accomplished. The irony is Yellen clearly owes a tip of her hat to Donald Trump, who is no friend of hers.
The Snap IPO was one of the smoothest openings we have seen in a long time. No drama at the pre-open, the open, during the day, or the close.
It priced at $17, opened at $24, closed at $24.48.
Why the pop? Four reasons:
1) Markets are at historic highs, the most important factor of all. But a strong stock market is a necessary, but not sufficient, ingredient in an IPO pop.
2) IPO returns have been strong. The average IPO in the last year (March to March) is up 26.4 percent, according to Renaissance Capital. The Renaissance Capital IPO ETF, a basket of the 60 most recent IPOs, is up about 28 percent.
3) Lack of in-demand IPOs. It was a miserable year for IPOs in 2016: 169 companies went public, a nearly 40 percent decline from 2014. 2017 has started out poorly as well. There's plenty of demand, there's just nothing to buy that investors want at the right price.
4) A small float — just 14 percent of the company. This is a typical tactic of tech-oriented firms, which often seek to keep the float to about 10percent or a little more to keep the scarcity level high.
What's next? I've been waiting for the IPO market to open up since late June of last year (seems like forever), but this may finally do it. I am hearing calendars are starting to fill up, bankers are being called.
All of this could fall apart if the market heads south, but here's a few thoughts.
There's three companies doing road shows: 1) Canada Goose, a maker of high-end parkas, 2) women apparel seller J. Jill, and 3) Presidio, a reseller of IT products.
That's a good sign. But there's a raft of companies sitting out there — more than 100 — that could quickly make announcements. Potential candidates:
Mulesoft , an enterprise software firm
Cloudera, a data analytics platform
Chuck E. Cheese, an operator of over 700 family-style restaurants and entertainment centers
Prosper Marketplace, a peer-to-peer lending company
OK, so there's no Uber's or Dropbox's or Spotify's here, but these are substantial companies. And even companies that have been putting off their IPOs like Blue Apron, which provides pre-packaged meals for home meal preparation, could revive if the market holds up.
This is just the tip of the iceberg. If the market holds up and the early chatter is right, we should start seeing the calendar dramatically increase by mid-April.
The markets wanted more specifics on President Donald Trump's proposals on tax reform, infrastructure spending, and reduction in regulations. It didn't get it.
It didn't get anything on a lot of things: nothing on banks or financial reform. Nothing on housing finance reform. Nothing on Russia or China. Almost nothing on energy. Nothing on the upcoming fight over raising the debt ceiling. The emphasis was on Obamacare and immigration, with some mention of border tax issues.
No matter: traders almost unanimously have viewed the speech as a success. The market got something that is perhaps more important: it got a speech which clearly implied that there was a good chance the president could accomplish those goals.
That's a key factor in why the rally has been sustained, and why it hasn't experienced any significant selloffs. Investors have given Trump the benefit of the doubt, and as long as they believe he can push through the agenda the rally will hold up.
Next up is the Fed. Chair Janet Yellen speaks on the economy in Chicago on Friday. The CME Fed fund futures now has the probability of a March rate hike at 70 percent, with two-year Treasury yields near the highest levels since 2008. The Fed's preferred inflation indicator, the Personal Consumption Expenditures (PCE), which measures prices paid by consumers for goods and services, was 1.9 percent year-over-year, the highest level since 2012.
Yellen is speaking at the Executives Club of Chicago on Friday, one day before the Fed enters a blackout period, during which all of the central bank's officials will be quiet ahead of its meeting on March 14 and 15.
So, this will be the last shot she has at summing up the state of the economy.
Here's the issue: Trump is proposing spending programs that seem to imply the economy is weak and in desperate need of help.
But Yellen doesn't see it that way. The economy is clearly in a recovery mode, and she seems ambivalent about how much additional fiscal stimulus the economy might need.
What Yellen and company think about the Trump plan matters a lot. If Trump gets his way and suddenly we have a large tax cut — with additional spending hikes in the form of defense spending and infrastructure — it's likely the Fed will view that as a notable risk to their inflation outlook, just as it looks like they might finally be getting to that elusive 2 percent target.
That means it's far more likely the Fed will get much more aggressive raising rates—we could be talking about the possibility of four rate hikes this year.
So how this plays out is critical because the Fed's commentary is going to color trader perceptions.
And what Trump is saying — or what Trump's associates are leaking — cannot help but make the Fed worried about: 1) a sharp increase in defense spending, 2) leaving entitlements unchanged, and 3) a "big statement" on infrastructure spending.
And over the weekend, the talk was that the border adjustment tax (BAT) — which House Speaker Paul Ryan's plan relies on for offsetting revenue — was dead or dying because it cannot get through the Senate.
Sure sounds to me like there is going to be massive deficit spending coming!
If you don't think this is a problem for the Trump administration, you're kidding yourself. Last night, Elaine Chao made her debut as Transportation secretary at the National Governor's Association. Here's what she had to say about the infrastructure spending: "Everybody wants a better transportation system, but very few people want to pay for it, so that's a big conundrum,'
Sounds to me like everything is still on the table on this one: an increase in the gasoline tax or some other "pay to play" plan. Tax credits and other ways to get the private sector involved in some kind of "public-private partnership," including more use of private toll roads. Using corporate profits returned from overseas.
What's likely to happen? Over the weekend, traders were acting like they were throwing down some kind of ultimatum to President Trump: it's put up or shut up time on the Trump rally, Mr. President. He can't get away with vague promises of cuts in taxes, less regulation, and a big infrastructure plan anymore. We need details, and we need them now.
What nonsense. That bluff has already been called.
The energy giant announced a $13.3 billion deal to sell its oil sands and natural gas holdings in Canada to Cenovus.
Due largely to increases in Medicare and Social Security, federal debt is projected to reach 150 percent of GDP in 2047.
Stocks could soon switch focus to what could be the best corporate earnings and revenue growth in five-and-a-half years.