Macro Data Weakens, Banks Crush it and the Mkts Rally to New Highs...

Mkts march to new highs - with the Dow adding 84 pts, the S&P 11 pts and the Nasdaq surges by 38 pts on Friday's ‘weaker than expected’ macro data…..soft retail sales, weaker CPI and a falling consumer confidence indicator all sent the message that the FED may be backed into another corner….unable to raise rates as inflation continues to NOT cooperate….(slow down big boy.....not so fast).
 
The banks - JPM, C, WFC & PNC all exceeded expectations and reported much ‘better than expected’ earnings - but are you really surprised?  That has been the chatter all along and as expected once they did ‘blow the doors of the bus’ traders took advantage of the ‘pre-earnings’ rally in the weeks before and SOLD these stocks on Friday…..
 
Now to be fair - while they did report better bottom line earnings numbers - they did express some concern over the future - due to a range of concerns......lack of policy movement in DC is at the top of that list.....  In fact - Jamie Dimon - JPM fame - blasted the DC during his conference call saying that
 
“It’s almost an embarrassment to be an American citizen traveling around the world and listening to the stupid sh*t we have to deal with in this country and at some point we all have to act together.”   
 
Now Jamie is not wrong and his comments  reflect the sentiment of so many people in this country but more broadly - his comments speak directly to 3 major concerns.

The delay of sensible economic policies due to the political uncertainty (witch-hunt) in DC. Only hurts us.

  1. This delay causing the lack of real economic growth - remember we are stuck in the sub 2% range and the longer it persists the longer it leaves the country in a defeated position to  achieve prosperity for everyone.
  2. American credibility as an influencer and as a global power  is being called into question with not only friends and allies around the world, but also with countries that want to see us fail.  North Korea's - Chubby - (Kim Jung On)  is just one example.   

But let’s get back to the mkts…..It was earlier in the week when we heard Janet Yellen’s testimony before congress and it was there that she hinted at a more dovish tone going into the July FED meeting - although she did not back away from a September  tapering of our bloated balance sheet…..but with Friday’ economic weakness in retail sales and inflation data  - traders and investors are betting that the FED will back off…..and this ‘bad news is good news’ caused stocks to rally even further into uncharted waters…..
 
Now look - the Fed’s  mandate of 2% inflation rate is ONE of the necessary growth attributes that helps justify the  normalization of interest rates and monetary policy……and as of Friday the gov’t reported that total CPI came in at 1.6% and core CPI at 1.7% - both in steady decline over the last couple of months - and that is not what she wants to see.  IF this trend  continúes then there will be no way the Fed can meet their mandate of 2% inflation. - which now leaves us to wonder - is the FED fighting inflation or deflation?   And If it’s deflation then the justification  for hiking interest rates does not exist……
 
And what this means is that the Fed will have a tough time of getting  interest rates anywhere near 3% (considered normal)........ And if that is the case - what tools does the FED have to deal with the coming recession?   How will they be able to CUT rates when the next recession hits? 
 
Retail sales were off again, decreasing 0.2% in June versus expectations of  +0.1% growth – this was 'worse than expectations'  and again is another metric showing weakness in the consumer......
 
And if the macro data wasn’t enough to wake you up - the Michigan Consumer Sentiment report also came in weaker than expected, declining to 93.1 from 95.1 in June.  Does anyone else see a pattern?  If you do, remember that this is a pattern often seen in business cycle peaks, where consumer assessment of current conditions hits a peak (95.1) at the same time future expectations start to post significant declines (93.1).
 
All of this weakness caused traders to bid up prices for the Dow and the S&P 500 to new highs again on Friday on very low volumes – assuming the Fed will now move back to their dovish market support of old quantitative easing days – but to that -  I say - 'buyer beware'....the FED is like a trapped rat - they have no choice now, but to continue down this path...and if they do and the economics continue to weaken - then the mkt is surely overpriced......but remember - the mkt can be irrational longer than you can be solvent.....
 
Which brings us to the FEAR Index - otherwise known as the VIX....... What is common with peaks in the mkts and macro data weakness is the apathy in the VIX...... And on Friday, the VIX closed at levels not seen since 1993.  The pattern is unmistakable.....the VIX at record lows and  the mkt at record highs...just sayin...it is something to consider....now if you draw the trend lines on the VIX going back 2 yrs....to Aug 2015.....what do you see?  A steady downtrend......which brings us to the lows of Friday at 9.82......It is a descending triangle - which is often referred to as a 'bullish triangle' - meaning that the resolution to this pattern is a strong move up....but in this case a strong move up in the VIX will create a strong move DOWN for stocks......we are not there yet...but you need to keep your eyes on the 3 levels of resistance.....10.72. 11.49 and then 12.35....As we pierce each level - you can expect the anxiety level to increase..but with 'better earnings' on the horizon - this may be put off until month end......
 
Eco data today includes on the Empire State Manf  Index - exp of 15 (which would be down from 19.8)....... Watch for credit card charge offs and delinquencies coming from  COF, C, BAC, AXP, SYF, JPM  and DFS... rising charge off and delinquencies cannot be dismissed.....no matter how they spin it.
 
US futures are up 1.50 pts.... at 2457.....after Friday's powerful move higher - we are now in that 'new trading range'...with 2425 representing support now.....BLK reports earnings and misses on a number of lines....earnings of $5.24/sh vs. the exp of $5.38...but inflows explode.....$103.62 bil vs $64.6 bil q/q, Retail net inflows of $6.5 bil vs. $4.6 bil q/q and the kicker is that net ETF (Ishares inflows) rose to $73.75 bil vs. $64.48 bil q/q.....which speaks to the passive investing style that is being adopted - and one which should raise concern.......think the crowded trade.....
 
Oil is flat at $46.57 as it tests resistance at $46.82.  Gold up small at $1,230/oz.....Resistance for gold is at $1,239/oz. 
 
Overnight - strong Chinese GDP economic data did little to help China....6.9% vs. the exp of 6.8%....stocks fell by 1%.  Japan was closed, Hong Kong up 0.31% and ASX off by 0.17%.
 
In Europe - soft inflation data is weighing on EU markets... the second round of BREXIT talks has begun and negotiators are beginning to dig deeper into key areas of the breakup.
 
There are not FED speakers today, so the focus will be on earnings and developments out of DC....
 

Take Good Care
KP

 

Apricot Chicken 

 This is a great marinade that is easy to make and the dish works well for the grill –

 You will need:  6 thighs – bone in or boneless chicken breasts….(I prefer thighs – they are juicer and better tasting) .  Apricot Jam, Honey Dijon mustard (if you can’t find it then mix equal parts of Honey and Dijon mustard) , s&p, onion & butter.   

 Sauté the butter and chopped onion in a pan on med heat  until the onion is soft and translucent – maybe 8 – 10 mins…now add 2 tblsp of Apricot jam and allow to soften and combine – like 2 more mins….- remove from the heat and add the honey Dijon mustard & s&p. Mix well &  let cool for 5 mins or so.  

In a large bowl – add the thighs and the marinade – coat well and let sit for 30 mins.  Now – heat the grill on high….place tin foil on the grill grates and then place the thighs on the foil and cook. Turn heat to med and  Brown all over – careful not to burn.   Serve this dish with corn on the cob that you have boiled in water, milk and ¼ stick of butter.   Make a large mixed green salad and dress in a red wine vinegar dressing.   Great for an evening BBQ .   

  
Buon Appetito.

The market commentary is the opinion of the author and is based on decades of industry and market experience; however no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of O’Neil Securities, Incorporated or its affiliates.