Equity Markets Defy Fundamentals in Face of Crummy Bond Yields

Yet, another week of corporate earnings (with a few exceptions such as Alphabet Amazon and Facebook) brought anemic numbers, as did the latest readout of U.S. durable goods orders.

Orders for durables fell more than expected at 4%. If you remove the notoriously volatile commercial aircraft category, the report is only down .5%. On its face, that’s not bad. But given the weakness in GDP (first quarter output was revised downward to 0.8% from 1.1%), you can conclude that the economy is weaker than most economists have forecast. Also last week, initial jobless claims rose to 266,000 for the week ended July 23. The result was an increase of 14,000 over the previous week and more than 3,000 above economists’ forecasts.


While many indicators like GDP are lagging indicators, the market is at all-time highs and the economic data is weaker than most thought. If you throw inflation into your decision tree, you should see that the economy is standing still or stagnant.


With negative interest rates and monetary stimulus galore, a stagnant economy is very unusual. Businesses and sovereign bond investors around the world are begging for fiscal stimulus. Japan announced a fiscal stimulus package this week worth more than $200 billion.

Stocks in the People’s Republic of China also came into focus last week because government regulators have started to discuss reining in rising stock market prices by increasing regulation over wealth management firms. China also reported a decline in manufacturing activity. Early today, Shanghai stocks were off 1.1 percent while other Asian markets were up.


Global earnings, meanwhile, are another continuous weak spot as the fulfillment of expectations are driven mainly by management downgrades. Credit Suisse posted earnings better than expected despite the fact that earnings came in lower than 2015. Results such as this have been the tale of the second quarter. Wall Street guided earnings down on most companies at the beginning of this year and that is why Alexander Alternative Capital believes the market got off to such a bad start in 2016.


Now that we’re more than half way through 2016, we see a lot of companies are beating earnings estimates – thanks to reduced guidance.


When you take a deeper dive -- and last week I used Apple as an example -- you see that estimates were revised down significantly at the beginning of the year. Apple is the most visible example, but there are many examples of the same phenomenon. One outlier this earnings cycle is Facebook, which never guided its estimates downward and has outperformed its own guidance on EPS and topline revenues.


Although robust earnings reports were in the minority last week – and you can expect a continuation of the trend this week – investor flight from bonds continues to help fuel the rally in equities.


As we’ve discussed in this space before, bonds are up sharply in value, while yields, which move south as prices move north, are in sharp decline. So despite rising stock prices, investors are stampeding toward stocks with lofty dividends.


In addition, the strong dollar is making U.S. stocks with limited exposure to volatile currency exchange rates also appear attractive to investors. Utilities have been a primary beneficiary.

With generous dividend yields from American stocks, why buy sovereign debt with negative interest rates, or even U.S. Treasuries with yields at 1.5 percent or less?


Oil Price Malaise Deepens


Oil prices continued their slide as suppliers continued to pump with alacrity in the face of weakening economies worldwide. West Texas Intermediate crude dropped below its 200-day moving average of $40.70 per barrel, although it later rebounded to $41.60. Exxon Mobil posted a bad earnings miss for the second quarter.


Alexander Alternative Capital is sticking to its forecast of $33 a barrel due to economic weakness in the U.S., Europe and Latin America, as well as China’s efforts to rationalize its economy.


On the natural gas front, the U.S. Energy Information Administration reported spot prices at most market locations rose during its reporting week ended Wednesday, July 27. The Henry Hub spot price rose 8 cents from $2.72 per million British thermal units (MMBtu) to $2.80/MMBtu. At the New York Mercantile Exchange (Nymex), the August 2016 contract expired at $2.672/MMBtu, up a penny. The September 2016 contract rose to $2.660/MMBtu, up 4 cents.


Florida Alternative Investment Association


We reiterate the two forthcoming hedge fund events in the second half of this year that will be conducted in South Florida and sponsored by the Florida Alternative Investment Association (FLAIA).


The first event, “Opportunities in the Energy Space 2017, will take place on October 21 in Miami.


The second event, “Global Macro Perspective in 2017,” will take place on November 29, also in Miami.


Agenda details are under construction.


The first event, “Opportunities in the Energy Space 2017, will take place on October 21 in Miami.


The second event, “Global Macro Perspective in 2017,” will take placed on November 29, also in Miami.


Watch this space for more details.


Our Watch List this week:



--PMI and ISM Manufacturing Indexes



--Motor Vehicle Sales.



--ADP Employment Report



--Factory orders.

--Initial Jobless Claims



-- Baker Hughes Oil Rig Count

Brian Valero