House Speaker Nancy Pelosi Directs Several Committees to Begin an Impeachment Inquiry… The news isn’t financial exactly, but it definitely weighed on the markets. When the story broke, the Dow Jones Dropped 370 points.
What it means – Everybody gets to check the box next to their campaign promise. Trump can tell his supporters that he’s ignoring legacy Congressmen and blazing a trail as he sees fit, and Democrats can beat the impeachment drum. The only people left out are voters, who will watch their elected officials squabble, bicker, tear at each other, and make no progress on governing the nation. And then we’ll re-elect most of them in 2020 so they can do it all over again. While the top spot might swing back and forth, more than 90% of incumbents who run for office keep their seats.
We can expect this fighting, and the political instability that comes with it, to last for the rest of the election cycle. When things look bad for Trump, expect the markets to falter because investors will weigh the prospects of a Biden, or now Warren, administration.
Treasury Repo Markets Are Thirsty for Cash, the Fed Steps In… The repo, or repurchase agreement, market, where participants exchange Treasury bonds for cash with a set agreement to reverse the transaction in just a few days, lacked banks and money market funds willing to part with their cash. The Fed has filled the void, adding tens of billions of dollars daily for more than a week.
What it means – There’s more than $1.3 trillion in excess bank reserves parked at the Fed. After accounting for regulations and capital requirements, the banks could probably lend other banks $300 billion or so with no problem. But they chose not to. Instead, they kept their cash safely parked at the central bank, earning 1.9% or so, which is their right. If banks don’t want to lend to each other, then those needing short-term cash can look to the Fed, which can supply an unlimited amount. The Fed didn’t pay interest before 2008, and it doesn’t have to pay interest, or at least 1.9%, today. If the central bank lowered the rate on excess reserves, or even began a consistent repo operation itself, this story would fall out of the news cycle.
S&P CoreLogic Case-Shiller 20-City Home Price Index Up Just 2% in July Over Last Year… The monthly number came in flat, with the non-seasonally adjusted number up just 0.1%.
What it means – The real estate price plane is finally landing, let’s hope it doesn’t crash. For more than a year we’ve been watching the growth of the HPI drop closer to zero. With the annual growth rate down to just 2%, we’re getting awfully close.
We should be nearing an inflection point in real estate where modest price increases or even flat prices meet with rising wages and falling interest rates. It could take until the spring selling season, but we can get some affordable inventory in the market, then the next 12 months could be good for entry-level housing.
New Home Sales Up 7% in August, July Sales Revised 4.8% Higher… The three-month average for new home sales jumped to 703,000, the highest reading since October 2007.
What it means – Adding on to the conversation about the Home Price Index, new home sales show that there’s plenty of demand if we can just get some units available. Even the median sales price moved higher, up 7.5% last month, which moves the median sale price from down over the past year to up 2.2%. Interestingly, that puts the new home sales price appreciation almost exactly on top of the HPI, even though that figure was for July.
Durable Goods Orders Up 0.2% in August, Core Capital Goods Down 0.2%… Orders excluding transportation increased 0.5%.
What it means – The headline number looks decent, so does the number excluding transportation. But core capital goods orders remain a problem. Not only did the August number come in weak, but the July number was revised down from 0.4% growth to flat. With July and August both weak on the business side, it’s likely that third-quarter GDP growth will also disappoint. But it’s not all bad news. Weak GDP will give monetary policy doves a reason to hope for another Fed rate cut, which will be good for borrowers, and terrible for savers.
Eurozone PMI Composite Flash Report Drops From 51.8 to 50.4… 50 is the dividing line between growth and contraction. This is the lowest rate of growth in more than six years.
What it means – The report shows a split between manufacturing and services, with manufacturing at just45.6, the lowest level in just under seven years, and services above 50 at 52, although that’s still an eight-month low and was down from the August reading of 53.5.
The problem remains the same, global trade is cooling off, which hits export-based economies the hardest, and explains the troubles in Germany. If the global economy weakens further, expect Europe to take another hit, which will prod the ECB to ease monetary policy, which will weigh on the Fed. We’re all connected, whether we like it or not.
Prop, Prop, Plop… Stock buy backs have provided price support for nearly two years. While buy-backs were the major driver of prices for a decade, CEOs may be having second thoughts.
What it means – Investors examining financial statements and ratios may have overlooked the shrinking number of shares outstanding. Fewer shares results in earnings being optimistically skewed. In quarter 2, buy-backs accounted for 100% of earnings growth.
Buyback data for the 12-month period ending in June 2019 totaled $797 billion down from $823 billion in 2018. For the first and second quarters, amounts were $339 and $389 billion. However, this quarter report shows only $179 billion. Of that amount, Microsoft spent $40 billion. Investors looking for new market highs should carefully examine underlying assumptions of growth and real profits.
Spin Bike, Exercise Class Company Peloton Goes Public, and Runs Out of Gas… The IPO was indicated at $31.50 and went public at $29. But no one wanted to buy at that price or higher. Eventually the shares came out of the gate at $27, a 6.9% drop and the third worst opening of an IPO of $1 billion or more since 2008. The ugly showing probably made one person smile, Uber CEO Dara Khosrowshahi, who watched his IPO languish for hours before coming out 6.7% below its starting price. Potentially facing similar poor IPO results, an increasing number of initial stock offerings have been cancelled this year.
The IPO valued the company at $8.1 billion which is a big number for a firm that’s never banked a profit. Independent valuations generously put the value at perhaps $4 billion, but only if Peloton can attract millions of new users who purchase their equipment and then stick with their monthly subscriptions even after they lose interest and start using the spin bikes for clothes hangers.
Air Force Sgt. Kenneth O’Brien, Traveling to Receive Award, Saves Child on Plane… Proving that good heroes still exist, Sgt. O’Brien was one of a dozen Airmen named “2019 Outstanding Airmen of the Year.” He had guarded the president, saved a victim from a burning car in South Korea, participated in saving the Thai soccer team from the cave, and saved a Thai Naval Seal during that operation. While traveling to receive his award, a one-year old boy became unresponsive on the same plane. O’Brien checked the child, cleared his airway, resuscitated him, handed him back to his parents, then went about his business.
Data supplied by Dent Research/Delray Beach Publishing
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