WEEKEND WRAP: Green Lights for Stocks; Flight From High Tax States Varies US Landscape

For equity investors, the week was all about Friday.

After flailing about the prior four sessions, US indices got a sizable boost on the final day of the week, sending traders home satisfied with a positive result for the week.

With the Dow, NASDAQ, and Composite mere percentage points short of all-time highs, the S&P 500 is within three points of its record closing high, recorded earlier this year, on July 26 (3,025.86).

So, with all the uncertainty surrounding geo-political events - impeachment, Brexit, trade war - stocks continue to perform magic as solid investments in a ZIRP and NIRP environment.

With the Fed committed to "not QE" through the second quarter of 2020 (at least), stocks have in front of them a glowing green light signaling fresh all-time highs. The FOMC is expected to cut another 25 basis points at its meeting this week, the second to last of the year.

In commodity trading, WTI crude oil was bid, closing out the week at 56.63 a barrel after slumping down to $52.45 over the prior two weeks. Gold and silver, both sluggish over the past month, finally were bid on Thursday and Friday. Gold was as high as $1518 on Friday, settling in at $1504, while silver crested above $18 per ounce and closed right on that number Friday.

Ten-year treasury notes continued to be shunned, finishing out the week with a yield of 1.80%, with some correlation to ongoing cuts in the federal funds rate. Bond traders are expressing a preference for short-term maturities, with 1, 2, and 3-month bills nearly at the same yield as the 10-year. While the yield curve has returned from inverted to a rather dull slope, there's certainly no consensus on direction. With the 10-year yield at its best level since August, it is still well below the average 2.72% which prevailed in the first quarter.

Earnings reports have been unreassuring, with as many misses as those topping estimates. Overall, mega-corps are still making money, just not so much to boost their prices significantly. In this environment, banging out 5-8% year-over-year gains has to be considered pretty solid, being that the current economic cycle is well past the mid-point and may be nearing an end.

Recession talk has subsided for now, though different regions throughout the vast US landscape offer varied results. In general, flight from high-tax states - New York, New Jersey, Massachusetts, Maryland, Connecticut, Illinois, and California, in particular - to Southern enclaves continues apace. Retirees are taking their money and running for the state line, seeking reduced property, income, and estate taxes in more conservative states.

States that have not raised their minimum wages significantly are experiencing an influx of new residents, and with that, housing, roads, and commercial spaces are being constructed at a hot pace. Meanwhile, the Northeast continues to suffer from an overabundance of taxation, regulation, and handouts to the indigent at the same time its infrastructure is crumbling and best residents are leaving.

New York is a prime example of the dangers of liberal policies causing middle and upper class flight. While undocumented (illegal) migrants (aliens) are offered free food, housing, and education, long-suffering native New Yorkers are feeling put out, footing the bill for government largesse while good jobs are scarce and property taxes are near the highest in the nation. Home values are depressed, despite low interest rates and job creation is limited by the excessive minimum wage and other requirements of employment paid for by companies.

New York leads the nation in lost manufacturing jobs in 2019, estimated to have shed 10,000 positions through the first nine months of the year. The Empire State has also suffered significant losses in the hospitality and construction industries, due to the higher minimum wage and lack of growth in commercial and residential building.

These so-called "high tax states" are going to face a cash crunch, as higher paid workers are replaced with low-skill, low pay employees. The revenue will not be enough to sustain the high costs of state agencies and pensions. A major bust has been building for years in many states who will have to face the reality that the days of big promises are over and government staff reduction and budget cuts are on the table.

The United States is a big country, and, similar to the nations of Europe, some states may be booming while others are failing.

Caveat Emptor.

At the Close, Friday, October 25, 2019:
Dow Jones Industrial Average: 26,958.06; +152.53 (+0.57%)
NASDAQ: 8,243.12, +57.32 (+0.70%)
S&P 500: 3,022.55, +12.26 (+0.41%)
NYSE Composite: 13,146.24, +27.33 (+0.21%)

For the Week:
Dow: +187.86 (+0.70%)
NASDAQ: +153.58 (+1.90%)
S&P 500: +36.35 (+1.22%)
NYSE Composite: +139.60 (+1.07%)

Amazon Misses, Gold, Silver Bid

Even more sloshing around as the week progresses. The Dow traded in a range of just 217 points, ramping back and forth across the unchanged line.

All other indices saw gains, although they were slight. The NASDAQ topped the list with nearly a one percent rise.

Within an hour of the opening bell Friday, Amazon (AMZN) reported eps of 4.23 per share versus an expected $4.59, a miss of 7.8%. This follows poor thrid quarter reports from Caterpillar (CAT), 3M (MMM), and Texas Instruments (TXN), on Thursday.

Gold and silver are being well bid, with silver gaining over 2.5% above $18 per ounce for the first time in over a month.

At the Close, Thursday, October 24, 2019:
Dow Jones Industrial Average: 26,805.53, -28.42 (-0.11%)
NASDAQ: 8,185.80, +66.00 (+0.81%)
S&P 500: 3,010.29,, +5.77 (+0.19%)
NYSE Composite: 13,118.91, +4.52 (+0.03%)

Stocks Sluggish As Bonds Offer Nearly Risk-Free Money Making

Markets churned through another day of earnings hits and misses.

Nothing really to see here as the investing community awaits the penultimate FOMC meeting of 2019, slated for October 29 and 30. Another 25 basis point reduction in the federal funds rate is expected at that time.

While cuts such as is expected in October used to be good for a good pop in stocks, lately, Wall Street has been less-than-enthusiastic when interest rates are slashed. This is clear from the current yield on the 10-year note, which refuses to budge, hovering in the 1.70-1.80 range.

That's not supposed to happen. Bond traders, however, are not being herded into low-yielding offerings at the behest of the Fed. There are certainly other ways to spread risk, into corporates or even shorter-maturity treasuries, and the bond vigilantes are taking them. There's a certain logic to taking 1.74% on a one-month bill rather than locking up money for 10 years for a yield that is only marginally higher. Having cash on hand to seize upon opportunity is smart investing.

With the yield curve so flat, there's little reason to probe the longer end, though, for safety's sake, the 30-year bond is now yielding a healthy 2.25%, nearly the best since rates were clobbered in August.

Earnings may be taking center stage for now, but the heart of the market is clearly in fixed income. Too much speculation, over-valuation, and memories of 2008 in stocks has sent money scurrying to safer places.

At the Close, Wednesday, October 23, 2019:
Dow Jones Industrial Average: 26,833.95, +45.85 (+0.17%)
NASDAQ: 8,119.79, +15.50 (+0.19%)
S&P 500: 3,004.52, +8.53 (+0.28%)
NYSE Composite: 13,114.39, +42.53 (+0.33%)

Earnings Not Carrying Stocks Higher

US companies are making money, just not enough to satisfy the investing appetites at this stage of the expansion.

Traders have been poring over third quarter reports for the better parts of two weeks now, and what they're seeing is unimpressive. Gone are the heady days of the early internet boom, when companies reported growth at torrid paces. Today's market is mundane, predictable, and eventually more conditioned to move on Fed-speak, rate moves, or geopolitics, rather than fundamentals, those boring profit statements from multi-nationals.

The good news is that stocks aren't experiencing another October like the last, when the indices tumbled day after day, wiping out most of the annual gains from 2018. That underlying fear of having a rug pulled out from under may be why nobody is either irrational or exuberant at this juncture.

This and next week are the busiest reporting weeks of the month. Unless there are some big negative surprises, one can reasonably expect markets to simply glide along until the Fed meeting at the end of October, when another 25 basis point cut in the federal funds rate is expected.

At the Close, Tuesday, October 22, 2019:
Dow Jones Industrial Average: 26,788.10, -39.54 (-0.15%)
NASDAQ: 8,104.30, -58.69 (-0.72%)
S&P 500: 2,995.99, -10.73 (-0.36%)
NYSE Composite: 13,071.86, -16.76 (-0.13%)

October Surprise? S&P 500 Closing In On All-Time High; McDonald's (MCD) Misses

For a Monday, trading wasn't very impressive. The back-and-forth of the equity markets we've been seeing for many months have elicited a cautionary mood. There's modest dip-buying and rallies are being sold, though not excessively. It makes a great market for traders on commission or those who are in and out of stocks faster than political media pundits can say, "Russia."

It being the heart of third quarter earnings season, there are likely to be bumps and grinds, but the news of the day was the S&P picking up 20 points to close above 3,000, the first time it's been there since September 19. Prior to that, the S&P remained at elevated levels for the last two weeks in July, topping out at 3,025.86 on the 26th before taking a five percent dive in August.

The question now, with impeachment talk fading, troops coming out of Syria and a tentative cease fire between the Kurds and Turks imposed, a China deal looking better every day, and still-solid employment figures, is whether the index can make a new all-time high and hold there. The Fed is certainly doing its part, adding as much liquidity as it can, as quickly as possible, but yields on the 10-year note are not making it any easier, reaching 1.80% on Monday. The good news from the bond pits is that the curve is no longer inverted and hasn't been for some time, easing recession fears.

Thus, there are shifting winds, buffeting the sails of sellers and buyers alike, but the S&P 500 appears to be marching toward uncharted territory. Another session like Monday's would put it over the top.

As far as alternatives, the aforementioned bond arena is looking better and better, though far-out alternatives like gas generators, extra canned goods, firewood, and gardening supplies have taken the front seat on the road to self-sufficiency.

It's no joke that preppers are still prepping for the inevitable crash and burn, or civil war, or zombie apocalypse. It's coming, but no one knows when. For the most part, all those canned goods have to be rotated at last every few years, but, hey, everybody has to eat.

Gold bugs and silver surfers have been backstabbed repeatedly by the futures traders whose sole mission in life, it seems, is to keep a lid on the price of precious metals. They've done a stellar job, smashing down gold every time it crests above $1500, and silver, whenever it gets to $18 per ounce, is sold as if it's some form of monetary kryptonite.

That leaves stocks, or maybe it's time to think about buying a few cows and a brace of chickens. McDonald's (MCD) may be thinking along those lines. They missed on both top and bottom line estimates with EPS coming in at $2.11 vs. $2.21 expected. Overall, it wasn't bad, however. Despite a miss on domestic same store sales - +4.8% vs. +5.2% expected - which is causing a decline of about four percent in pre-market trading, most companies would be happy with growth above four percent, especially established brands like Mickey D's.

Investors always overreact, and this is no different, though with a multiple closing in on 30, maybe the fast food giant is a bit overpriced above $200 per share.

You want fries with that sell order?

At the Close, Monday, October 21, 2019:
Dow Jones Industrial Average: 26,827.64, +57.44 (+0.21%)
NASDAQ: 8,162.99, +73.44 (+0.91%)
S&P 500 3,006.72, +20.52 (+0.69%)
NYSE Composite: 13,088.61, +81.97 (+0.63%)