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When it comes to stocks, the best advice is to stick with the old adage and follow the money.
More and more, "follow the money" means following flows into exchange traded funds. And July is continuing the strong trend we have seen all year, with $23.4 billion of investor money flowing in, finally putting ETFs in the U.S. over the $3 trillion mark in assets under management, according to ETF.com.
To give you an idea of how strong the flows have been, last year ETFs had record inflows of $287 billion the entire year. We're at $272 billion in inflows in just the first seven months.
Put another way: the inflows in the first seven months have equaled about 9 percent of all the ETF assets under management. That is a lot of money coming in.
Several trends stand out, but the most noticeable is that money keeps pouring into bond ETFs. iShares Corporate Bond, iShares High Yield, iShares Aggregate Bond and Vanguard Intermediate Term Corporate Bond all had significant inflows. Why? With bond yields staying stubbornly low, investors are going anywhere they can to find yield.
Earnings are humming along, with gains of more than 10 percent now expected for the S&P 500 in the second quarter. There's one potential fly in the ointment: Big Oil. ExxonMobil, Chevron and other Big Oil names will begin reporting on Friday. Something unusual is happening: because oil never rallied in the second quarter as anticipated, analysts have been continuing to take down estimates for oil company earnings, and also continue to lower them for the third and fourth quarter.
This normally wouldn't be an issue, but Big Oil is expected to be an unusually large part of the earnings gain we are expecting for the index in the second quarter. In fact, the earnings gains are very lopsided, concentrated in three sectors:
Q2 earnings: who's contributing the gains
The rest: 25%
Source: Thomson Reuters
Those numbers for energy have been dropping like a rock for months: Energy was expected to contribute about 40 percent of the expected gains for Q2 just a short while ago.
That means there is more pressure on the other sectors to take up the slack.
How did this happen? It happened because no one — not analysts, not strategists, not astrologers — can get the price of oil right. They can't even get the direction of oil right.
I'm not kidding. In January, when oil was well over $50, analysts confidently predicted it would average around $56 by July, according to FactSet.
Wrong! Not only did it not go up toward their target price, it promptly went straight down, bottoming around $42 in June.
Regardless: it's been bad news for oil stocks, which are closely correlated to the price of oil and, depending on the company, to natural gas as well (which also dropped).
Beginning in April, analysts started scrambling to reduce earnings estimates for Big Oil. Here's what the estimate looked like for ExxonMobil:
Exxon: Q2 earnings est.
April 1: $0.99
July 1: $0.89
That's a 15 percent drop in expectations, a steep decline for such a big company. And analysts kept dropping their estimates in July, even after the quarter ended, which tells you that they are pretty clueless about the implications of such a big drop in oil on earnings and capital spending.
And they're doing it for the third quarter estimates as well: they started at $1.07 on April 1, and are now down to $0.85, a 22 percent drop.
It's even worse with Chevron, where estimates have come down nearly 25 percent:
April 1 $1.13
July 1: $0.97
And you can see what this is doing to their stocks: with the S&P 500 up 10 percent this year, Exxon and Chevron are both DOWN 10 percent for the year.
All in all, 25 of the 34 energy companies in the S&P 500 have seen mean EPS estimates come down in the month of July, according to FactSet.
Aside from the price of oil, there's a broader problem for Big Oil: production growth is flat to declining for many of the big names, including ExxonMobil. For a multinational company like ExxonMobil, it's getting harder and harder to replace the oil that is pumped out of the ground with new oil.
Paul Sankey, a well-respected oil analyst at Wolfe Research and a regular guest on CNBC, downgraded ExxonMobil last week, saying "Based on historical volume performance, XOM is at risk of shrinking on a sustained basis."
One specific problem for Exxon, Sankey points out, is that it has lost a big driver of production growth: Russia. A huge joint venture with Russian oil giant Rosneft never panned out because Vladimir Putin invaded the Ukraine and the subsequent sanctions made it impossible for Exxon to move forward with development plans.
Still, there are some bright spots. ExxonMobil has its massive chemical operations (about 30 percent of revenue) which have done well. Refining operations should also be strong.
But Big Oil's biggest asset — and the reason it has kept the interest of a good part of Wall Street for the past couple years — is high dividends, funded by debt.. ExxonMobil pays a 3.8 percent dividend yield, Chevron 4.1 percent, far in excess of the S&P's 1.9 percent yield. Those dividends still are safe, but judging by the reaction this year it's clear that the stock is not going to move anymore on a dividend boost. It's going to move on a commodity boost.
So what will ExxonMobil and Chevron say? The key issues will be production and capital spending. With oil below $50, the main hope is discipline on spending.
We see this already in the smaller companies that have reported. Hess, Anadarko Petroleum and ConocoPhilips all said they would reduce capital expenditure plans for the year.
Besides spending discipline, the hope for the bulls rests on the weight of history. First, both Exxon and Chevron have only fallen short of the consensus estimate three times in the last three years, and with estimates cut so drastically the bet now is they will hit the EPS target. Production and capital expenditures may be a different story.
But the biggest help may be the lack of enthusiasm for the entire energy sector. Lindsey Bell, Investment Strategist for CRFA Research, summed up the state of the entire analyst community in a note to clients yesterday: "[We] remain on the sidelines because we think earnings will be unimpressive, especially regarding guidance, despite numerous top line beats."
Of 18 analysts tracked by FactSet, only 5 have a Buy, 7 have a Hold, and 6 have a Sell.
Given the "Buy" bias on Wall Street, that unenthusiastic endorsement that may end up being Big Oil's biggest asset.
We have seen a classic midday dip in the markets Thursday because certain sectors are absurdly overbought, and the volumes have been thin. When bids are very light because there is not a lot of interest in bidding up the market at these prices, very small drops can cascade into larger drops. It always starts with the leaders, in this case the Apples and the Googles, along with biotech (look at IBB), then secondary leadership like materials stocks, which have done well this month (look at US Steel midday).
I'll give you an example of absurdly overbought: one of the most widely followed metrics of market momentum is the RSI (Relative Strength Index) which charts the momentum of an index or stock over a short period of time, in this case usually 14 days, on a scale of 1 to 100. A reading above 70 is considered overbought, below 40 is oversold.
Right now, the Nasdaq composite index has an RSI of 99.33. I have never seen this reading in 20 years, although I am not sure if it is an historic high. Regardless: a reading of 99.33 on a large index is absurdly overbought.
Nasdaq Composite, 2-day intraday with RSI (14) in lower panel
There's many other ways you can illustrate the overbought nature of the market. The Nasdaq is 12 percent above its 200-day moving average, and almost 4 percent above its 50-day moving average. These are well above norms, particularly for indexes, and in the past when these tend to reach these kinds of levels they usually pull back. It's called reversion to the mean.
I'm not trying to turn anyone into a technical analyst; I'm well aware of the aversion many of my fundamental friends have to this way of looking at the markets. But the markets have gone nowhere but straight up for the past three weeks, and in this case technical talk is a useful way to illustrate an old adage: no tree grows to the sky forever.
Fifteen years ago, on July 26, 2002, Barclays began offering a new way to invest in bonds through a new division called iShares. It was called an exchange-traded fund, or ETF, and even though only four funds were launched that day, it changed the way bonds are traded.
Fifteen years later, there are nearly 1,000 bond ETFs worldwide, with assets over $700 billion, most of it ($500 billion) in the U.S.
That's a success by any measure, but the head of the biggest ETF provider in the world says the business is going to get bigger. Much bigger.
"People have come to understand the merits of index investing: you keep more of what you earn," Martin Small, head of iShares America, told me. IShares, which was bought by Blackrock in 2009, is the largest ETF provider, with $1.2 trillion in assets under management.
Before it was Amazon killing the retailers. Last week it was Amazon disrupting appliances. Now there's a broader concern: Amazon has the potential to disrupt the middleman in general, particularly those that work in the $7 trillion business-to-business (B2B) space.
Here's the issue: If you don't make the object you are selling, or don't have some sort of intellectual property, or solve a pain point for a customer, then you're just a middleman, and you are increasingly more vulnerable. The concern is that these middlemen will start losing volume because sales in general are going to the internet and because it's increasingly difficult to get pricing.
In 2005, Amazon bought a business called SmallParts.com. No one paid much attention to it, not even after 2012 when Amazon renamed it Amazon Supply with the idea of supplying industrial and commercial customers.
That started to change in 2015, when it was rebranded Amazon Business. The much larger goal: to be a supplier to the entire B2B community, a business that encompasses much more than just the industrial space.
Banks have been reporting earnings, and one item not getting enough attention is a rapidly growing line item called "noninterest income," which is a boring term for fees that banks charge their customers, both businesses and consumers. It's a business that's growing like mad: for some large regional banks, it's already close to 40 percent of their income!
Some growth in fee revenues is happening because customer accounts are growing, but banks have been pushing up what they charge for fees for years.
These fees come in all shapes and sizes, but consumers are familiar with most of them: Withdrawal fees for ATMs. Deposit fees. Transaction fees. Insufficient funds fees. Annual fees. Inactivity fees. Checking account fees. Mortgage fees. Credit card fees. Fees for deposit slips even. It's endless!
Let's just look at two of the most typical fees:
1) Overdraft fees
Bankrate.com says the average overdraft fee for a checking account was $33.04 in 2016, down 0.1 percent from 2015, but prior to that it had increased for 17 straight years.
That adds up to big profits for the banks. According to the Federal Financial Institutions Examination Council, JPMorgan made $1.9 billion from overdraft charges last year, Wells Fargo made $1.8 billion, and Bank of America made $1.7 billion. Together, consumer paid $17 billion in overdraft and NSF fees in 2015, according to the Center for Responsible Lending (about $53 for every American). This, despite the fact that by law bank customers must choose to opt into ATM overdrafts.
For some banks, overdraft revenues are a significant part of their income. In the first three quarters of 2016, among banks with more than $1 billion in assets, overdraft fee revenue accounted for an average of 8.1 percent of banks' net income, according to the Public Interest Research Group.
2) ATM fees
This really makes me nuts, particularly if you are taking money out of a bank that's not your own or out of your network. Bernie Sanders made an issue of it during the presidential election. He said ATM fees should be limited to a maximum of $2. That went nowhere.
Bankrate.com found that in 2016 the average withdrawal fee for a non-customer bank was $2.90, a record for the 12th straight year. Your own bank charged an average of $1.67 more, a 2-percent increase from 2015. Add it up, and the total average fee for withdrawing from a non-customer bank was $4.57, a record high for the 10th consecutive year
Of course, not everyone pays these fees. Many accounts don't charge for out-of-network withdrawals, and many banks will raise the customer bank fee if you maintain a high enough balance.
Is there any limit to how high these can go? Believe it or not, there doesn't appear to be. The Consumer Finance Protection Board (CFPB) was established in 2011 in the wake of the financial crisis to provide consumer protection in the financial sector, but there is no regulatory limit on what banks can charge for service fees on deposit accounts.
I'll repeat that: there is no regulatory limit on what banks can charge for service fees on deposit accounts. That means that if a bank wants to charge you a $20 fee to withdraw $20 from their ATM, they can do it.
Under the Credit CARD Act of 2009, there are limits on certain fees that can be charged for credit cards. For example, card companies can't charge you a fee if you go over the limit on your card unless you give them permission to authorize purchases above your limit. Penalty fees are supposed to be reasonable and in proportion to the violation. Unlike for a bank account, you can't be charged an inactivity fee.
But for bank deposit accounts, the sky is the limit on fees. What to do? Shop around, to begin with. Bankrate.com found that 38 percent of banks offer non-interest bearing checking accounts with no monthly fees or balance requirements.
Ed Mierzwinski, who has spent more than 20 years as a consumer advocate at the Public Interest Research Group, has two suggestions: First, many banks will waive certain fees if you keep open multiple accounts. He also recommends having direct deposit of your paycheck, which will often result in a waiver of a balance requirement.
His final suggestion: If you're really want to keep fees to a minimum, consider joining a credit union. "That's what I do," he said, noting that many are now full-service companies that that offer mortgages, car loans, etc.
One final point: The banking industry has been actively involved in rolling back what they view as excessive regulations imposed on them since the financial crisis. There has been a particularly strong effort to defang the consumer banking watchdog, the CFPB. A bill, HR 10, the Financial Choice Act, has passed the House of Representatives and is awaiting action in the Senate. It would take away the CFPB's independent funding, make its director fireable at will by eliminating its independent agency status, and take away most of its tools to enforce the laws, including the authority to sue companies for unfair and deceptive practices.
—CNBC's Kirsten Chang contributed to this report
The state of the markets as earnings season begins: are we really overpriced?
Earnings season begins this week in earnest, with reports from Bank of America, IBM and Visa, among others. But there is a growing chorus of voices insisting that the market is topping out. The worries revolve around four main complaints: 1) The bull market is eight years old, few bulls have lasted longer and it is reaching the end of its lifespan, 2) The Fed will have a tougher time than anticipated managing the reduction of its balance sheet and increasing rates, 3) Political developments (lack of progress on tax cuts) are already slowing the advance of the markets and 4) The stock market, particularly technology, is overpriced.
Let's just tackle the idea that the market is somehow overpriced. Stocks are at historic highs because earnings are at historic highs and the global economy is improving. It's that simple.
But is the market overpriced? The most important determinant of stock prices is forward earnings estimates. According to JP Morgan, the forward price/earnings ratio for the S&P 500 is 17.5, which is slightly expensive but well within historic norms. The 20-year average is 16.
Even the complaint that technology stocks are too expensive doesn't ring true — as a group technology stocks are below their historic average P/E. Thee forward P/E is 17.9 versus the 20-year average of 20.8.
Amazon is serving notice to retail IPOs.
The announcement today that Amazon would be entering the meal kit delivery business has hammered competitor Blue Apron for another 10-percent decline. It seems like a long time ago, but the company only went public a little more than two weeks ago at $10. It dropped below that on its second day of trading and has been pretty much straight down since then. It broke below $7 this morning.
Wait a minute: Didn't we all know that Amazon was going to get into the meal delivery business? We talked about it leading into the IPO, and particularly after the Amazon-Whole Foods announcement. Everyone knew about this, right?
Apparently not. Down 10 percent on heavy volume tells me someone didn't get the memo. Or they weren't listening.
So why are they all trading down Friday?
There's two issues: fundamental and seasonal.
First, the soft economic data we saw Friday — retail sales, but particularly the Consumer Price Index — clearly lowered the chances for a Fed rate hike later in the year. That brought down Treasury yields, which is lowering the chances for increased profits from one of the primary profit centers for banks — interest income.
Less well-known is a seasonal phenomenon: Banks tend to trade up in the month before JPMorgan's earnings report, trade slightly down on the day of the report and are generally flat in the month after.
Here are the results for banks (represented by the SPDR KBW Bank ETF KBE) since 2010 in the month before JPMorgan reports earnings, the day of, and a month after:
Banks and earnings
One month before JPM: up 1.0%
Day of: down 0.1%
One month after: down 0.3%
Note that even a month after JPMorgan reports, banks tend to be down slightly (down 0.3 percent), while the S&P 500 is typically up 0.5 percent.
Bottom line: Expect some downward earnings revisions on second half bank earnings around lower interest income, but factor in the seasonal weakness as well.
Disclosure: NBCUniversal, parent of CNBC, is a minority investor in Kensho.