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Money Daily has been providing business and financial market news, views, and coverage on a nearly continuous basis since 2006. Complete archives are available at moneydaily.blogspot.com.

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Troubling Prospects for US Stocks as Interest Rates Continue Rising, Earnings Are Hit or Miss; Gold Closing in on $2000

Friday, October 20, 2023, 9:02 am ET

With the 30-year bond yield topping 5.00% (currently 5.10%) and the 10-year note yielding 4.99%, stocks fell again on Thursday, as Wednesday and Thursday wiped out gains from earlier in the week, setting the major US indices up for a rough weekly tally.

As of Thursday's close, the Dow is down 256 points, NASDAQ is off by 221, the S&P has shed 50, and the NYSE Composite is lower by 127. Worst of all is the Dow Jones Transportation Index, down 263 points, nearly two percent for the week. Should the trannys close lower for the week (a very likely prospect), it would be the 10th loser of the last 12 weeks. The Transportation Average is down 13.65% since the end of July.

Earnings have been hit or miss, with the next two week the busiest for third quarter reports.

One of the hits came forward this morning, as American Express (AXP) reported a solid beat. The company reported a profit of $2.45 billion, or $3.30 per share, up from $1.88 billion or $2.47 per share a year earlier. On the downside, AmEx boosted its provisions for credit losses to $1.23 billion, up 58% from last year, to account for the increased likelihood of consumers defaulting on their debt. Despite beating estimates, the stock is flat in pre-market trading.

Speaking of defaults, not to be left out is Discover Financial Services (DFS), parent of the popular (cash back) Discover Card, which reported troubling numbers for their third quarter. The company reported third-quarter 2023 adjusted earnings per share (EPS) of $2.59 on net income of $683 million, down 33% year over year. Discover also bolstered its provision for credit losses, to $1.7 billion, more than double what it was a year ago.

Investors punished the stock, sending it down to 84.59, a loss of -7.26 points, or -7.90% on the day. The price is the lowest seen for the stock in nearly three years (December, 2020). The troubled credit card and banking firm is busy fending off lawsuits and federal probes while looking for a new CEO and trying to keep customers paying their monthly tribute at an average rate of 21%, a formula for failure. Analysts from thestreet.com are calling for the stock to fall as low as $61. It's likely worse than that.

As US markets are set to open in less than an hour, here's how the day's trading shapes up. Futures are in lockstep lower, with the S&P down 10, NASDAQ down 25, and the Dow Industrials off by 56 points. Overnight, Asian stocks were lower, though not as severely as Thursday.

Europe, however, is being pummeled. All of the major indices are lower by one percent or more, led by the DAX in Germany, dropping 202 points (1.34%) on the day. The Dax is teetering on the cusp of correction territory, down 9.85% since making an all-time high on July 28. France's CAC is down 82 points (1.19%) and the FTSE (England) is lower by 83 points (1.10%). Most of Europe is in recession, which seems to be cruising across the Atlantic towards the US and Canada.

Friday is a big options expiration day as well, so expect more volatility. The VIX popped over 21 on Thursday for the first time since the banking crisis in March of this year. That hasn't ended, by any means.

For now, the price of oil is somewhat behaved, considering the potential for conflict and disruption in the Middle East. WTI crude is above $89 and poised to go higher, depending on circumstances.

Precious metals have been bid for the past two weeks, with gold topping $1997 earlier this morning and silver tagging along at a high of $23.40.

At the Close, Thursday, October 19, 2023:
Dow: 33,414.17, -250.91 (-0.75%)
NASDAQ: 13,186.18, -128.13 (-0.96%)
S&P 500: 4,278.00, -36.60 (-0.85%)
NYSE Composite: 15,196.37, -128.59 (-0.84%)


Stocks Remain Under Pressure as 10-Year and 30-Year Yields Near 5.00%

Thursday, October 19, 2023, 9:23 am ET

Spiking bond yields sent stocks lower on Wednesday, as the 10-year note topped 4.91% and the 30-year bond reached as high as 5.02%, both cycle highs in the overheating treasury market.

Earnings reports from the likes of Morgan Stanley (MS) and Tesla (TSLA) didn't help matters, though 3rd quarter reports from Netflix (NFLX) and Taiwan Semiconductor (TSM) after the close raised spirits leading into Thursday's session.

Early into this earnings season, reports have been a mixed bag. Even in the banking sector there was a split, with JP Morgan (JPM) and Citigroup (C) beating expectations, while Morgan Stanley and Goldman Sachs (GS) missed and were under selling pressure.

Thursday morning brought reports from American Airlines (AAL), AT&T (T), and Truist Financial (TFC). There were conflicting articles concerning AAL, some citing rising labor costs related to their recent deal with pilots, others touting the adjusted earnings of 0.38 per share, beating analyst estimates of 0.25.

Here's the nitty gritty:
The company posted a GAAP third-quarter net loss of $545 million, or ($0.83) per diluted share.
Excluding net special items, third-quarter net income was $263 million, or $0.38 per diluted share.

Depending on whether one agrees with adjusted figures or is a sane investor relying on GAAP, the company is either thriving or barely surviving. In pre-market trading, shares are two to three percent higher, but the company is severely depressed, the stock price sliding steadily from a high of $40 in late 2018 to the current range between $10 and $12.

AT&T reported gross revenue of $30.4 billion, a 1% increase year-over-year and free cash flow for the quarter of $5.2 billion, up $1.3 billion from the year ago quarter. Investors are pleased that the company also increased its free cash flow estimate (this is a new ploy), sending shares up five percent in pre-market trading. This is yet another company with serious issues. In early 2019, prior to the pandemic shutdowns, the stock traded at just below $30/share, while today it can be had for under $15, a 50% loss. However, the company maintained its dividend of $1.11, a yield of roughly eight percent.

So, buyers are hoping (or betting) that the company will not lose value going forward, which would negate the outsized gains on the dividend. Look for this company (and others) to cut their dividend in 2024, as economic conditions worsen. There are no free lunches.

Truist Financial (TFC) saw profits decline 31% on higher loan loss provisions and lower interest income from mortgages and credit-card debt. The banking crisis from March and April never ended. This regional lender is proof in the flesh.

Around the world, stocks were under pressure, but nowhere more so than in the Far East, as the Nikkei dropped more than 600 points (-1.91%), Hong Kong's Hang Seng shed 2.46% and indices in China all continued lower. European stocks bolstered the trend with England's FTSE dropping 80 points (-1.05%). Germany's DAX and France's CAC were marginally lower, but suffered serious downfalls Wednesday.

Futures are pointing to a mixed to slightly higher open. Oil, silver, and gold are all lower. The 10-year note is steady at 4.92%.

At the Close, Wednesday, October 18, 2023:
Dow: 33,665.08, -332.57 (-0.98%)
NASDAQ: 13,314.30, -219.44 (-1.62%)
S&P 500: 4,314.60, -58.60 (-1.34%)
NYSE Composite: 15,324.96, -216.41 (-1.39%)


As Bond Yields Rise, Stocks Are Feeling the Pain

Wednesday, October 18, 2023, 9:32 am ET

It doesn't take a super-computer, AI, or any hot-shot analyst to figure out that when yields rise - as they have been for nearly two years - stocks will be affected negatively. It's common sense, or, what used to be common.

Real investors, as opposed to the fake ones presented on CNBC or FoxBusiness, buy stocks based on performance, prospects for growth, and dividend yield. Hmmm... there's that word again, yield. It means the percentage profit one can make on a particular investment. With bonds or fixed-income vehicles, it's easy to calculate. For instance, a ten year note at four percent will turn an annual profit of $40 on $1000 invested for 10 years.

With stocks, it gets a little more challenging, but not much. Buy a stock at $50/per share with a $1.00 annual dividend, you get a two percent return. $1000 gets you 20 shares, with a $1 annual dividend kicker, or $20. If the stock rises, all the better for your investment, but your dividend yield declines. If the stock goes down, yield on the dividend rises. At $100 per share, your dividend yield goes to one percent, but, your 20 share investment has doubled in value to $2000.

If the stock falls to $25/share, your dividend is still $1.00, but the yield has increased to four percent. Overall, though, your investment of $1000 is now worth $500, and therein lies the problem with dividend-yielding stocks in a rising interest rate environment. Sooner of later, more and more investors are going to rush to the safety of a corporate bond, note, a treasury issuance, or some other fixed rate of return. And that return keeps getting better and better, the riskier conditions are for stocks.

Right now, today, a 10-year treasury note, is yielding about 4.85%, meaning that a $1000 investment will get a return of $48.50 every year for 10 years, after which your investment of $1000 is returned to you. So, over that time, you've taken in $485.00, or a 48.5% return on your original $1000. Not too shabby.

Now, there are certainly stocks that returned better than 48.5% over the last ten years, but what about the next ten, or five, or three? What if the stock goes down? If that stock doesn't offer a dividend, your loss is easily calculable. If it does, however, how long are you going to hold it? If it stays down for an extended period, your dividend - whatever the yield - will serve only to minimize your losses. It's a conundrum, a guessing game, a quandary.

Here's the unvarnished truth. Stocks are headed lower. There's little doubt that in the current environment, economies cannot consistently grow, which means that they're either going to experience some degree of homeostasis or contract, i.e., recession. Generally speaking, stocks should follow the path of the overall economy, though they often do not. However, every major index around the world has been waning over the past three to six months. Germany's DAX is down eight percent since the end of July. France's CAC is down 7.8% since April 21.

The Dow is down 4.6% since July 31. The NASDAQ is off 5.8% since July 18, and the S&P 500 is down 4.7% since July 31, and those US stock indices made some nice gains already in October, so there's room for more slippage.

There's the case for fixed income over stocks, and no AI was used in making that call.

Futures are lower. European stocks are down as theUS open approaches.

At the Close, Tuesday, October 17, 2023:
Dow: 33,997.65, +13.11 (+0.04%)
NASDAQ: 13,533.75, -34.24 (-0.25%)
S&P 500: 4,373.20, -0.43 (-0.01%)
NYSE Composite: 15,541.38, +56.88 (+0.37%)


Goldman Sachs Misses, Bank of America Posts Strong 3rd Quarter; Retail Sales Up 0.7%; Investors Worried

Tuesday, October 17, 2023, 10:06 am ET

With earnings season roaring along, two American big banks posted divergent numbers for the third quarter, as Bank of America saw profits up 10%, while Goldman Sachs took charges that harmed its profitability.

Goldman Sachs earnings were $2.06 billion, down 33% from $3.07 billion a year ago, largely affected by a $506 million write-down on GreenSky, a specialty lender it agreed to sell, and $358 million in impairments on real estate investments. The commercial real estate sector is being financially bulldozed across cities nationwide as lease rates have plummeted and WFH (work from home) has kept offices at lower capacities.

US retail sales were up 0.7% month-over-month, unadjusted for inflation, which was probably the primary cause of the gains (in addition to prospects for Brandon in the 2024 election cycle) that also saw the prior two months revised higher.

Investors have not retreated from their "good news is bad news" position. figuring that a strong economy will tip the Fed's hand to raise interest rates again at the next FOMC meeting, which begins exactly two weeks from today and concludes on Wednesday, November 1.

According to bank earnings this quarter, outside of Goldman Sachs, the American economy seems to be just buzzing right along, putting upward pressure on prices and wages, exactly not what the Fed wishes to see. Stocks made huge moves on Monday, but, with futures cratering prior to the open, they may be in a position to give most, or all, of it back on Tuesday.

Just remember, the better the economy gets, the worse it is for stocks. Keep in mind that the yield on the 10-year note is up 10 basis points this morning, indicating more risk in the market and tighter business conditions going forward.

Meanwhile, it appears that the people in charge of Joe Biden's schedule plan on shipping him off to Israel, which is a really stupid idea, just so the world can see our resident numbskull mumble and bumble across another international stage.

It's obvious that nobody wants to talk about Ukraine anymore, for obvious reasons, like, Russia is kicking a$$ and taking names. War in the Mideast always seems to overshadow everything else. This time is no exception, though the talk from Israeli diplomats predicting a "long siege" are troubling. The Middle East could be a cauldron for more death, dying, and blowing up of things.

Well, the casino is open...

At the Close, Monday, October 16, 2023:
Dow: 33,984.54, +314.25 (+0.93%)
NASDAQ: 13,567.98, +160.75 (+1.20%)
S&P 500: 4,373.63, +45.85 (+1.06%)
NYSE Composite: 15,484.50, +160.80 (+1.05%)


WEEKEND WRAP: Global Issues Unresolved; Gold, Silver, Crude Oil Higher, Gas at the Pump a Relief

Sunday, October 15, 2023, 11:44 am ET

The week was mostly positive, at least through Wednesday, as stocks continued to rally from Friday's non-farm payroll surprise. Matters became more concerned Thursday, after an auction of $20 billion of 30-year bonds was not well-received, with a high yield of 4.837%, the highest since August, 2007, sparking a selloff on maturities 6-months or greater, but especially at the long end, sending the 10-year up 12 basis points (4.70%) and the 30-year up 13, to 4.86%.

Friday saw renewed buying in treasuries, stocks down, with all but the Dow sustaining losses, and a massive price hike in gold, silver, and oil, as WTI crude jumped nearly $6.00 on the day.

The background to the frenetic trading was conflict in the Mideast, as Israel prepared to deliver retribution to Hamas for the brutal attacks of the prior week. As of Sunday morning, the IDF (Israeli Defense Force) was still amassing tanks, troops, and armored vehicles on the border of northern Gaza, an assault imminent.

Israel's forces are likely to move by Monday morning, starting what's expected to be a slaughterhouse in Gaza City. Civilians have been advised to clear out from the area, and most are complying. How this moves markets around the world is anyone's guess, though it appears that whatever comes next will not be kind to equities or fixed income securities.

Adding to the general confusion is the condition of the US House of Representatives, flailing about leaderless, as nominee Steve Scalice failed to receive sufficient support to replace ousted Kevin McCarthy. It's unlikely the Republicans can coalesce behind one candidate, given the diversity of opinion on matters ranging from border security to Ukraine to support for Israel. The coming next few weeks, running up to the Fed's FOMC meeting on October 31 - November 1, look to be unsettled.


Stocks

The 30 Dow Industrials ended a three-week losing streak with a positive gain, up 0.79%, but remains below its 200-day moving average. Losing 250 points Thursday and Friday, the NASDAQ erased gains from earlier in the week, finishing in the red overall after two straight winning weeks.

The S&P remains in no-man's land, between its 50- and 200-day moving averages, making its second straight small weekly gain after four consecutive weeks in the red. Stuck beneath its 200-day moving average like the Dow, the NYSE Composite posted a win for the week, its first in the last four. Extending its slump, the Dow Jones Transportation Average completed the week with its ninth loss in the last 11.

Overall, it appears the rally that began last Friday on the blowout September jobs report, has run its course. After all, the creation of over 300,000 jobs (a number roundly criticized as being fake and inaccurate) should have been bad news for stocks, since a strong economy implies that the Fed will have to continue raising interest rates, a condition of which Wall Street isn't particularly fond. The four-day buying spree didn't have much in terms of momentum other than stocks being temporarily oversold.


Treasury Yield Curve Rates

Date 1 Mo 2 Mo 3 Mo 4 Mo 6 Mo 1 Yr
09/08/2023 5.52 5.56 5.55 5.60 5.49 5.42
09/15/2023 5.51 5.56 5.56 5.60 5.49 5.43
09/22/2023 5.52 5.58 5.56 5.61 5.52 5.46
09/29/2023 5.55 5.60 5.55 5.61 5.53 5.46
10/06/2023 5.59 5.60 5.63 5.64 5.59 5.43
10/13/2023 5.60 5.58 5.62 5.62 5.57 5.41

Date 2 Yr 3 Yr 5 Yr 7 Yr 10 Yr 20 Yr 30 Yr
09/08/2023 4.98 4.68 4.39 4.35 4.26 4.52 4.33
09/15/2023 5.02 4.72 4.45 4.41 4.33 4.59 4.42
09/22/2023 5.10 4.80 4.57 4.53 4.44 4.70 4.53
09/29/2023 5.03 4.80 4.60 4.61 4.59 4.92 4.73
10/06/2023 5.08 4.87 4.75 4.79 4.78 5.13 4.95
10/13/2023 5.04 4.80 4.65 4.66 4.63 4.97 4.78

Market participants are keeping the pressure on long-dated US treasury offerings. In the nine sessions so far this month, the average closing price on the 30-year bond has been 4.854%. With geo-political tensions rising, it's going to be hard to keep the 30-year bond below five percent for much longer, much less six or seven percent or even higher in coming years. Along with the stealthy nature of de-dollarization, there's simply too much volatility and risk in the market for yields to remain at these somewhat suppressed levels.

Besides, the 30-year consistently yielded between six and eight percent for almost all of the 1990s and was never lower than 4.79% from 2000 until it was discontinued February 18, 2002. Subsequently reintroduced on February 9, 2006, for the brief span until the GFC in October, 2008, the 30-year yield held around 4.50%. By November of 2008, the yield had dropped below 4.00% and bounced above 4.00% in 2009 and 2010, but continued lower for the years of ZIRP and QE, bottoming out at 1.17% on the 21st and 24th of April, 2020, after emergency rate cuts by the Fed.

Bond players with short memories (or no memory, for the under 40 crowd) are about to be jarred back to reality. Long rates could conceivably ratchet much higher, as inflation persists and the world grows more violent. Silence on the part of Russia and China is deafening.

Spreads on 2s-10s rose to -30 during the week, but by Friday had settled just above last week's level, at -41. Full spectrum (30-days out to 30-years) finished at -82, a significant departure from the -64 at the end of last week, as the 30-year lost ground overall, from 3.95% to 3.78%.

For reference, full spectrum was -99 basis points three weeks ago, -109 four weeks back, and -119 five weeks ago. 2s-10s were -66 three weeks ago, -69 the week before that, and -72 five weeks back.

The normalization in 5s-10s was short-lived. Five-year notes had lower yields than the 10-year on six of the past eight sessions, ending Friday with the 5-year at 4.65% and the 10-year at 4.63%, once again slightly inverted.

Eventually, the yield curve will become up-sloping out to 30-years with the persistent "kink" of 20-year bonds becoming a permanent feature, but not until short rates are steadied or lower and long rates face the reality of being very much out of favor.


Oil/Gas

After ending at $82.81 on October 6, which was down from $90.77 the week prior, WTI crude took a severe turn higher on Friday, finishing at $87.72 over geo-political speculation. The Mideast situation has changed all oil dynamics. The direction of the conflict between Hamas in Gaza and Israel threatens to spiral out of control. Already, it has been reported that Hezbollah has stuck Israel from bases in Syria and there's persistent talk in the US about Iran's involvement, with the neocon Lindsey Graham calling for air strikes on that country's oil refineries. It's just the kind of rhetoric to get oil bulls' attention and drive prices higher.

Since oil's price was depressed until Friday, the US national average for a gallon of unleaded regular gasoline took another significant dive over the course of the week, from $3.70 to $3.57. Inventories of gas and other distillates have built up recently on slack demand and oil price swings have only been effective to the downside.

According to gasbuddy.com, Georgia, Texas, and Mississippi continued to trend lower, to $3.04, down ten cents or more from last week. Next were South Carolina ($3.07), Louisiana and Alabama ($3.10), and Tennessee ($3.13). Florida remain on the high side of the Southern states, at $3.30, a full 15 cents lower than last week.

In California, the average fell 20 cents to $5.63, down from a high of $6.07 two weeks past. Prices eased elsewhere, with Washington ($4.91) exiting the $5.00 club. Nevada fell to $4.78, down 15 cents. Oregon ($4.52) and Arizona ($4.31) were also lower over the week, with Utah ($3.91) and Idaho ($3.97), also dropping below the $4.00 threshold. Prices remain higher than usual in Montana, but also below $4.00, at $3.91 this week. There are now only five states in the $4.00+ club.

In the Northeast, the highest gas prices remain in Pennsylvania ($3.76) and New York ($3.77). The lowest prices in the region are to be found in Ohio ($3.15) and Kentucky ($3.21), both down significantly the past two weeks. North Dakota ($3.64) tops the Midwest, with Illinois close behind ($3.59). The remainder of midwest state range from $3.30 to $3.53.


Bitcoin

This week: $26,888.30
Last week: $27,856.60
2 weeks ago: $27,157.40
6 months ago: $30,326.60
One year ago: $19,271.00

Bitcoin lost some ground over the week, but remains near the middle of its recent range. The whole crypto space is becoming something of a bad joke. It's a near-certainty that people running from war in Gaza or Ukraine aren't out looking for the next bitcoin kiosk or ethereum dispensary. Most people, even in peaceful places, seek currency they can touch and see.


Precious Metals

Gold:Silver Ratio: 84.97; last week: 89.27

Per COMEX continuous contracts:

Gold price 09/15: $1,945.60
Gold price 09/22: $1,944.90
Gold price 09/29: $1,864.60
Gold price 10/06: $1,847.00
Gold price 10/13: $1,945.90

Silver price 09/15: $23.31
Silver price 09/22: $23.82
Silver price 09/29: $22.39
Silver price 10/06: $21.76
Silver price 10/13: $22.90

On Friday, gold and silver joined crude oil in a commodities bull run that took gold up $62.90 in one day and nearly $100 for the week. Silver bolted 80 cents on the day and $1.14 for the week, a move of 5.24%. Tied to the ongoing and possibly escalating situation in Israel and in the wider Mideast, the sudden rush to hard assets took most people by surprise, but was barely worth a mention in the usually-brain-dead national press.

What most people hope will become a sustained move higher is sadly predicated on more death and destruction rather than a return to principled finance and sound money. As war mongering and actual combat is further promoted, the opportunity for peace is eroded, making precious metals an obvious choice for long term stores of value.

Commenting on price moves from here forward would be premature and anybody suggesting this one-day event is some kind of breakout should be heard with a healthy dose of skepticism. Gold is still more than $100 from its all-time high, while silver won't be in any meaningful territory until it surpasses $26/ounce. In other words, there's still time to buy, and probably plenty of it.

Here are the most recent prices for common one ounce gold and silver items sold on eBay (numismatics excluded, free shipping included):

Item/Price Low High Average Median
1 oz silver coin: 27.00 41.00 32.86 32.93
1 oz silver bar: 29.99 41.99 34.11 33.61
1 oz gold coin: 2,000.00 2,202.86 2,074.83 2,053.73
1 oz gold bar: 2,014.04 2,104.63 2,029.53 2,018.63

Despite the sudden upswing in silver, the Single Ounce Silver Market Price Benchmark (SOSMPB) fell sharply again this week, down $0.89, to $33.38, from the October 8 price of $34.27 per troy ounce.

The drop in the price of one-ounce silver items on eBay was somewhat surprising, given the massive jump on Friday. Perhaps most people were caught off guard or the buyers are somewhat tapped out, or, incredulous over a one-day move. Most ardent stackers have seen this show before and aren't about to get hopes up only to see the COMEX cabal knock back the price with their suppression hammer.

Silver pieces were actually lower in price and ungraded items were in especially short supply, suggesting that more people see value in holding rather than selling at this juncture. However, if silver is to break out, this period would still be a good entry point.


WEEKEND WRAP

War and punishment. It seems there are no longer good guys or bad guys, only guys with guns, bent on killing each other. Should they have at it and the neocon war-mongers get their way, maybe they'll keep shooting until they run out of bullets, which would be an fitting end to their madness and lust after power.

In the meantime, there's no resolution to any of the larger issues facing the US, Europe, the UK, or the rest of the world, though the East-West bi-polar split does appear to be widening. Change will happen. It always does.

Make sure you're on the right side of it.

At the Close, Friday, October 13, 2023:
Dow: 33,670.29, +39.15 (+0.12%)
NASDAQ: 13,407.23, -166.99 (-1.23%)
S&P 500: 4,327.78, -21.83 (-0.50%)
NYSE Composite: 15,323.70, -5.85 (-0.04%)

For the Week:
Dow: +262.71 (+0.79%)
NASDAQ: -24.11 (-0.18%)
S&P 500: +19.28 (+0.45%)
NYSE Composite: +109.67 (+0.72%)
Dow Transports: -108.30 (-0.73%)


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idleguy.com July 2024
IdleGuy.com July 2024, Vol. 1 #6