"My retirement date, every time you ask me that, I'm going to say five years. I don't want to retire." -- Jamie Dimon
Ever play sports? Or do anything that you had to get yourself fired up about? Then you know how I feel this morning. I am sure, whatever your background, that somewhere along the way big events woke you up early. Poof, you're ready to rock. Today is "go time". We have already seen some quarterly earnings results trickle in this week. Now that Alcoa (AA) no longer bats lead off, the first day of big financial sector earnings has become, at least for me, when "earnings season" unofficially gets under way. Tape on the foil. So it is that the banks bat lead off together. This morning, we'll hear from the likes of Citigroup (C) , JP Morgan Chase (JPM) , Wells Fargo (WFC) and PNC Financial (PNC) . Next week, the ball keeps rolling, as Bank of America (BAC) , Goldman Sachs (GS) , Morgan Stanley (MS) , US Bancorp (USB) , Signature Bank (SBNY) and KeyCorp (KEY) all go to the tape with their results. We'll also hear from some tech, the railroads, and even some oil next week. It is the financials, however that really take the temperature of not of the marketplace, but of the entire economy itself, so let's dig in a little bit. I hope you brought your e-tool.
I have often said that should the spread gapping the yields between two-year Treasuries and 10-year Treasuries approach 1%, I would strengthen my long position in the banks. It has (currently standing at 0.961%, which is actually down from earlier this week), and I have. So, I come into this earnings Friday longer the banking space than I have been in a couple of months now, but not nearly so long as I was earlier in the year, when we thought things would be far easier for this group in the wake of last year's election.
Still, the wider the gap between short term and long-term rates, that's how money is made in traditional banking. That's how margin is created. There is a catch, though. The loans have to be there. While the Fed has done their part by this group, creating a better-looking landscape for home equity lines of credit, for credit cards (revolving credit), and for all types of loans in general, it looks like demand for credit on the consumer side has withered somewhat throughout the quarter. Oh, there's still growth in the space, but it has slowed. The banks know this. So do the analysts, and it will not come as a surprise, but this will impact forward-looking guidance. That will be so very important today, as going into the later part of this year, the year-over-year earnings comps will become that much tougher.
Why has the growth of front demand for credit slowed? Think about it. If you run a small business, or any business for that matter, if you even just run a household, are you going to stick your neck out ahead of uncertainties regarding health care reform, tax reform, a potential infrastructure build? The answer is as little as possible. Loan performance could also be an issue. Where are we seeing defaults? That uncertainty, too, will hamper the ability to guide forward.
Another potential danger zone will be trading revenue today. While the numbers here overall will likely look better than they have over the last several years, they will not look pretty compared to the last couple of quarters. This has been a recent area of strength for C and JPM, but I think you'll see them have to explain things today, like drops in trading volumes across the industry, particularly for municipal bonds, and mortgage backed securities. To cover any drop here, you may see improved data regarding investment banking that will be spotty, and not likely a strength for everyone. To be sure, guidance will matter to investors as much, if not more than anything else today. For some, the recently announced dividend increases and corporate repurchase announcements across the industry may end up being exactly what the (good) doctor ordered.
Blades of Steel
You kids catch the action across the steel space yesterday? No? Really, what were you doing? Just in case you were busy elsewhere... Bang. Nucor (NUE) ran 2.6%. Bang. US Steel (X) ran 3.7%. Bang. AK Steel (AKS) ran 7.1%. What gives? Well, President Trump spoke on the topic (again). "Steel is a big problem, we're like a dumping ground ... and I'm going to stop it". That is just what this crew needed to hear. Way back in April, the administration announced that it would look into limiting the import of steel on concerns that steel being dumped from Asian and European theaters raised national security concerns. The deadline for a response from the administration passed in June, as no decision has been made and much opposition has been raised.
What do I think? I think that any foreign action that weakens U.S. industry is indeed a national security concern. The very reason that the Union won the Civil War was the ability to ramp up industrial production in the northern states. The Union army could be issued new cannon and new equipment, while the Confederate army had to capture most of theirs. Simple analogy? Yes, but I think it gets the point across. Then again, I am long NUE in anticipation of something happening across this space, so I am talking my book. Bear that in mind as you judge my thoughts.
In related news, Chinese imports of iron ore over the first six months of 2017 were up 9% year over year. Last year, China imported a record amount of iron ore, and this year is on track to top it. Know what they make with iron ore? Steel, gang. Rebar futures (hot as heck) ran yesterday to more than a 40-month high. Apparently Chinese domestic steel is falling out of favor across the nation due to pollution concerns.
Is this an opening market for U.S. steel makers? Australia may have something to say about that, but I sure think that this is interesting. China has long shown an interest in propping up the domestic economy through massive infrastructure building... whether it was needed or not. Reverse dumping? Wouldn't that be a hoot? Maybe not necessarily realistic, but food for thought.
My trader friends out there may not have noticed, but my macro-nerd pals certainly did. The Department of the Treasury released their budget statement for June yesterday afternoon. It was ugly. Treasury went to the tape with a $90 billion deficit, where something closer to a deficit of $40 billion had been expected. The excessive negative components came from Social Security, Medicare, and Interest paid.
Just last month, the CBO (Congressional Budget Office) raised their guidance for the deficit for the fiscal year ending on September 30 to 3.6% of GDP. That is up from the projection of 2.9% made six months ago. Some revision. Nice job, guys. That said, some tough decisions will have to be made, and if you think these numbers are ugly, the fight in Washington will be even uglier. By the way, the Treasury has been employing cash conservation measure since March. Treasury has not made public comment on when the well runs dry, but outsiders still expect the government to be able to fund itself into October. The debt ceiling looms.
08:30 - CPI (June): Expecting 0.1% (1.7%), May -0.1% m/m (1.9% y/y)
08:30 - Core CPI (June): Expecting 0.2% (1.7%), May 0.1% m/m (1.7% y/y). The numbers most highly focused upon in this space by traders today will be the year over year data, especially at the core. We have seen, from January through May, slowing core inflation for four consecutive prints. That streak starts at 2.3% for January, and drops all the way to May's 1.7%. Include food & energy, and the move spans from 2.7% down to 1.9% over the same span. Not pretty.
08:30 - Retail Sales (June): Expecting 0.1%, May -0.3% m/m.
08:30 - Core Retail Sales (June): Expecting 0.2%, May -0.3% m/m.
08:30 - Control Group (June): Expecting 0.4%, May 0.0% m/m. May was an extraordinarily weak month for retail sales. Weak auto sales put pressure on the headline print, but weakness was not just seen at the headline. Gasoline sales posted a dramatic -2.4% m/m print. Electronics & Appliance sales went to the tape with astounding -2.8% m/m in May as well. In fact, outside of non-store retailers (e-commerce), and furniture, there were no other plus signs in that report on a month over month basis. For those not quite sure what the Control Group is, that is sort of a "super core" for retail sales. The Control Group excludes not only autos as does the traditional core, but also gasoline, food service, and building materials. We expect if not growth, to see at least some stabilization in June's numbers.
09:15 - Industrial Production (June): Expecting 0.3%, May 0.0% m/m.
09:15 - Capacity Utilization (June): Expecting 76.7%, May 76.6%. Industrial production has been wildly inconsistent. After a very poor January and February, we actually saw nice growth in March and April. Unfortunately, that was a setup, as May data was just awful. You may recall that May was more than a little funky. That month, of the five major regional Federal Reserve district manufacturing surveys, both New York and Richmond severely disappointed, with New York actually falling into contraction. Utilization also dipped in May. The data should improve from there for June, and get utilization at least back to its April level.
09:30 - Fed Speaker: Dallas Fed Pres. Robert Kaplan will be in Mexico City this morning to speak on monetary policy. Kaplan does vote on policy this year, and has been quite hawkish. Kaplan will take questions today from both the audience and the media.
10:00 - Business Inventories (May): Expecting 0.3%, April -0.2% m/m. There's no way to sugarcoat this one. Business inventories were just horrible in April. Just a refresher, Business inventories are made up of three components: wholesale inventories, retail inventories, and manufacturing inventories. Arguably the highest in profile among these are wholesale inventories, which fell off of a map (-0.5% m/m) that month. Retail inventories also showed up with a minus sign attached. Now for May, we already now that wholesale inventories improved (0.4% m/m). That means that this report is probably going to look much better. Given the dated nature of this report, and the headline importance of other macro-economic items already released this morning, traders are unlikely to react to this item.
Note: Retail Sales, Industrial Production, Business Inventories, and inflation all factor into GDP projections. Currently the Atlanta Fed's GDPNow forecast for the second quarter is running at an annualized 2.6%. You will hear from Atlanta later today.
10:00 - U of M Consumer Sentiment (July-adv): Expecting 95.2, June 95.1. Now, nobody could call a consumer sentiment reading of 95.1 weak. That said, this item is weakening, and that number was the weakest in this space since last November. Looking inside this report, we see that current conditions actually improved from May to June. It was future expectations that started to give way, including expectations for inflation. Without some obvious legislative progress, the "hotter than not" soft data will continue to let air out of the tires.
13:00 - Baker Hughes Rig Count (Weekly): Last Week total 952 (+12), oil 763 (+7). After largely going sideways for a couple of weeks, the number of U.S. rigs producing oil started growing significantly last week, though not within the Permian Basin. Given the recent support seen for the commodity and consecutive large drawdowns in inventory, it will be interesting to see this item lands today.
Sarge's Trading Levels
These are my levels to watch today for where I think that the S&P 500, and the Russell 2000 might either pause or turn.
SPX: 2462, 2457, 2449, 2442, 2434, 2427
RUT: 1448, 1441, 1429, 1423, 1417, 1406
What's Hot On TheStreet
More issues for food makers: As if food makers such as Kraft Heinz (KHC) and grocery retailers like Kroger (KR) and Walmart (WMT) didn't have enough issues on their plate thanks to Amazon's (AMZN) advances.
A significant demographic headwind could add further pressure on the packaged food and grocery store sectors in the years ahead, according to Wolfe Research analyst Scott Mnushkin. The U.S. government reported recently that the fertility rate in the U.S. (births per 1,000 women) hit a record low of 62.0 in 2016, with the number of births down about 1% from the prior year. With births declining and immigration slowing, population growth in the U.S. has stalled.
For the aforementioned sectors, Mnushkin points out, it's critical households are formed in order for demand to materialize. The fact that's not happening at a decent clip is troublesome.
All eyes on Apple's iPhone 8, per the usual: Barclays analyst Mark Moskowitz is not buying the projected "super cycle" in Apple's (AAPL) stock after the tech titan releases its highly anticipated iPhone 8 later this year. Amid reports that the highly anticipated smartphone may not include wireless charging, enhanced 3D technology, or Touch ID, Moskowitz contends that the phone's OLED display, the lone headline feature, won't be enough to convince consumers to upgrade.
"With OLED, we struggle to see the incremental benefits visually that would inspire a customer to replace an adequately-performing device," he noted.
Crowley, who built the location intelligence company into a service with 50 million monthly active users across its two apps since founding the company in 2009, spoke with TheStreet'S Natalie Walters at the company's hip headquarters in Soho, New York.
"I can see what Amazon is trying to do there," Crowley said. "I think it's super brilliant." As for what Crowley is up to at FourSquare right now, check out TheStreet this weekend.
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