OPEC Agrees to extend production cuts and Oil prices drop on the news???? Stock market is still showing signs of strength based on strong earnings and revenues after the first quarter earnings wrap up….

Markets rallied last week; Technology stocks continued to lead the way, with the NASDAQ outpacing all other indices for the week as well as year-to-date. The notable exception, though, was the Energy sector which declined despite an extension of OPEC’s production freeze agreement (more on this below). Political headlines have mostly followed President Trump on his first overseas trip to Saudi Arabia, Israel, the Vatican, Belgium and Italy. The momentary reprieve from the domestic spotlight allowed investors to refocus on generally encouraging economic and corporate data. The estimate for first quarter GDP growth was increased to 1.2%, from the initial 0.7%, on stronger consumer spending and business equipment purchases. And, the preliminary reading for the Purchasing Manager’s Index of manufacturing and services activity rose from 52.7 in April to a better-than-expected 53.9 in May (readings above 50 indicate expansion). Economic conditions in other major developed markets are also improving; as such, investors are apparently reallocating assets to Europe and Japan to participate in growth opportunities as their economies accelerate. We added to our international exposure a few weeks ago and are now overweighting the sector. The value of the dollar reflects, in part, this transfer of funds; the dollar, which had risen roughly 30% from 2014 through 2016, has retreated approximately 5% in 2017. Further declines would effectively raise the costs of imported goods; the associated impact on inflation could, in turn, justify higher interest rates. These topics may well be discussed at the Federal Reserve meeting on June 13‑14.

As widely expected, OPEC agreed on Thursday to extend its production cuts through March 2018. The news fell flat, though; following the announcement, crude oil prices declined 5% and energy-related stocks sold off. Investors may have been disappointed that the group did not unveil a more aggressive policy, such as deeper cuts, a longer time frame for the agreement, or an explicit price objective. Perhaps more likely, the market was dominated by traders looking to turn a quick profit by “buying the rumor, and selling the news.” Meanwhile, U.S. crude oil inventories have declined for seven consecutive weeks; domestic supply should begin to fall more rapidly as peak driving season approaches. OPEC’s pact indicates ongoing cooperation among major oil producers, including Russia, and strong adherence to the terms of the agreement. Notably, U.S. shale producers are not party to the deal; indeed, OPEC is facing the harsh reality that the economics of shale oil will effectively govern their price and output objectives. The wide-ranging benefits for the U.S. economy of this “new world order” should include meaningful opportunities in areas such as manufacturing, transportation, petrochemicals and refineries, as well as crude oil and liquefied natural gas (LNG) exports. The emergence of U.S. shale as a permanent fixture in the world oil markets will have broad-ranging geopolitical and economic impacts for decades to come.

Source: Pacific Global Investment Management Company

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

 

 

Last Week's Headlines

  • The second estimate of the first-quarter GDP was a bit more positive than April's preliminary estimate. The gross domestic product increased at an annual rate of 1.2% compared to the preliminary estimate of only a 0.7% annual rate of growth. The fourth-quarter GDP grew at an annual rate of 2.1%. Accounting for the increase in the annual growth rate were increases in business investment and consumer spending, while the decreases in state and local government were smaller than previously estimated. Gross domestic income (the sum of income less costs in the production of GDP) increased 0.9% in the first quarter, in contrast to a 1.4% decrease in the fourth quarter.
  • Continuing a trend of less than robust economic news for April, new orders for manufactured durable goods decreased $1.6 billion, or 0.7%, following four consecutive monthly increases, including March's 2.3% gain. Shipments decreased 0.3%, led by a 0.5% drop in shipments of transportation equipment. On the positive side, unfilled orders and inventories both increased.
  • New home sales fell precipitously in April, according to the Census Bureau. Sales of new single-family homes were 11.4% below the March rate of sales, and only 0.5% above the April 2016 rate. The median sales price of new houses sold in April was $309,200 ($318,700 in March). The average sales price was $368,300 ($385,400 in March). With the number of sales falling, the inventory of new homes for sale rose 16.3%, representing a supply of 5.7 months at the current sales rate. By comparison, the supply of homes for sale in March was 4.9 months.
  • Sales of existing homes were also off in April — slipping 2.3% compared to March. Low supply held down sales as the median number of days a home was on the market fell to a new low of 29 days, according to the National Association of Realtors®. Despite the decline, existing home sales are still 1.6% above their pace a year ago. The median existing-home price for all housing types in April was $244,800 ($236,400 in March), up 6% from April 2016 ($230,900). April's price increase marks the 62nd straight month of year-over-year gains. Total housing inventory at the end of April climbed 7.2% to 1.93 million existing homes available for sale, but is still 9% lower than a year ago (2.12 million) and has fallen year-over-year for 23 consecutive months. Unsold inventory is at a 4.2-month supply at the current sales pace, which is down from 4.6 months a year ago.
  • According to the advanced international trade report from the Census Bureau, exports fell in April while imports increased, pushing the international trade deficit higher for the month. The trade deficit was $67.6 billion in April, an increase of $2.5 billion from March. Exports of goods for April were $125.9 billion, $1.1 billion less than March exports. Imports of goods for April were $193.4 billion, $1.4 billion more than March imports.
  • Consumer sentiment in May remained at the same high level as April. Consumers were not quite as enthusiastic about current economic conditions, but were optimistic about the economy moving forward.
  • In the week ended May 20, the advance figure for seasonally adjusted initial claims was 234,000, an increase of 1,000 from the previous week's unrevised level. The advance seasonally adjusted insured unemployment rate remained at 1.4% for the sixth consecutive week. For the week ended May 13, there were 1,923,000 receiving unemployment benefits, an increase of 24,000 from the previous week's revised level.

 

 

Eye on the Week Ahead

Memorial Day week unofficially kicks off the summer, which is typically a slower time for market activity. However, two important economic reports for May are out this week. Personal income and outlays looks at consumer income, spending, and price changes for consumer products and services. It is one of the main indicators of inflationary trends relied upon by the Fed. Also coming out this week is the May employment report. New hires kicked up in April following a weak March, although increases in average hourly earnings have only marginally surpassed the rate of inflation.

 


 

Fortem Financial 2016. All rights reserved. Data Sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. The opinions expressed are solely those of the author, and do not represent those of Fortem Financial, LLC or any of its affiliates. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful. Carefully consider investment objectives, risk factors and charges and expenses before investing.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighed index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

Political events finally affect the market, with the biggest one day drop in more than eight month. Is this a sign that market volatility will actually pick up or just more of the same old same old???

Markets were volatile last week as political events continued to dominate headlines. On Wednesday, revelations related to President Trump’s dismissal of FBI Director James Comey unnerved investors; the 373-point drop in the Dow Jones Industrial Average was the Index’s largest decline in more than eight months. Markets recovered a portion of Wednesday’s sell-off on Thursday and Friday and markets are up today as economic data provided some reassurance of favorable business conditions. Jobless claims, which dropped to near-record lows, point to tight labor markets and rising wages. The Philadelphia Federal Reserve’s monthly survey of manufacturing conditions signaled continued improvement in factory activity, including strength in new orders and backlogs. Also, earlier in the week, the Industrial Production report for April showed accelerating manufacturing activity; an increase in spending on major equipment purchases underscores growing confidence in the economic outlook. Deere’s earnings report corroborated signs of an improving industrial economy with the company forecasting an 18% rise in equipment sales for its fiscal third quarter (July) compared to the prior year. Rising expectations for global GDP expansion, including Europe, Japan, and China, are also providing support for corporate growth plans even as the embattled White House’s pro-growth agenda may be on hold for the time being.

West Texas Intermediate crude, the North American benchmark, rose above $50 per barrel for the first time this month. Earlier in the week, Saudi Arabia and Russia committed to a 9-month extension of OPEC’s production freeze agreement ahead of its meeting next Thursday in Vienna. Although not a member of OPEC, Russia is the world’s largest crude oil producer; as such, its cooperation is essential to achieving OPEC’s objectives. In addition, the cartel is reportedly considering deeper production cuts in an effort to bring down global crude inventories. At the same time, U.S. shale producers have dramatically increased output by 465,000 barrels per day, or 5.4%, since September. The dueling dynamic has led some analysts to posit that any agreement by OPEC and Russia would merely result in market share gains for North American producers with minimal impact on oil prices. This analysis, though, overlooks the role of oilfield service providers that have had to accept significant discounts for their services over the past two years. As activity levels improve, we anticipate that pricing for these services will rise, and push oil prices higher as a result. The sector, which has lagged the broader market thus far this year, remains poised for gains as the industry recovery unfolds.

Source: Pacific Global Investment Management Company

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

 

Last Week's Headlines

  • The pace of new home construction took a step back in April, according to the Census Bureau. Housing starts, housing completions, and the number of building permits each lagged in volume compared to March. The annualized rate of housing starts in April was 2.6% below the March total. Privately owned housing completions were 8.6% below the revised March estimate. And the number of building permits issued in April for all residential housing units was 2.5% behind March's total. However, compared to a year ago, housing starts (+0.7%), housing completions (+15.1%), and building permits issued (+5.7%) are ahead of their respective totals from April 2016.
  • According to the Federal Reserve, industrial production advanced 1.0% in April for its third consecutive monthly increase and its largest gain since February 2014. Manufacturing output rose 1.0% for the month following a 0.4% decline in March. The indexes for mining and utilities posted gains in April of 1.2% and 0.7%, respectively. However, capacity utilization for the industrial sector increased 0.6 percentage point to 76.7%, a rate that is 3.2 percentage points below its long-run average. Nevertheless, total industrial production in April was 2.2% above its year-earlier level.
  • In the week ended May 13, the advance figure for seasonally adjusted initial claims was 232,000, a decrease of 4,000 from the previous week's unrevised level of 236,000. The advance seasonally adjusted insured unemployment rate remained at 1.4% for the fifth consecutive week. For the week ended May 6, there were 1,898,000 receiving unemployment insurance, a decrease of 22,000 from the previous week's revised level. This is the lowest level for insured unemployment since November 5, 1988, when it was 1,898,000.

 

Eye on the Week Ahead

The first-quarter GDP report based on updated information is released this week. The initial report in April revealed lackluster economic growth for the start of 2017. The latest figures on durable goods orders, which are included in the GDP computation, are also available this week. Both of these reports are good indicators of the relative strength of the economy through the first part of 2017.

 


 

Fortem Financial 2016. All rights reserved. Data Sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. The opinions expressed are solely those of the author, and do not represent those of Fortem Financial, LLC or any of its affiliates. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful. Carefully consider investment objectives, risk factors and charges and expenses before investing.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighed index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

What does Director Comey have to do with the market?

With some of the news coming out about about Director Comey and the impact it is having on our political environment (and market), we wanted to share a research piece we read. In answer to the question we placed at the head of this email, there is no direct connection between Director Comey and the markets. Earnings have been strong, economic data has been good, and we believe fundamentals will continue to do well. However, there are some legitimate concerns over the news coming out and whether there is any truth to the claims. Markets don't like uncertainty, and with the odds of a turnover in Washington increasing as they have, uncertainty has risen.

That said, Dan Clifton from Stategas said, "The past eight days are like nothing we have seen in politics, ever. The mood in DC is very different today than in the past couple of months. We are heading into a larger period of uncertainty, one in which there is a growing doubt Trump will be President of the United States in 2018.

Betting odds this morning place a 33 percent probability that Trump will be impeached in 2017, up from 24 percent yesterday and 13 percent a week ago.

Our big takeaway this morning is that if Comey goes on the record in sworn Congressional testimony and says that Trump tried to obstruct a federal investigation, the appetite in Congress to protect the president will fall considerably. But if this is just another anonymous leaked story to smear the president (many of the recent anonymous leaks have proven to be false), then we can continue this blind leak, more uncertainty game, but never get any real direction one way or another. Comey could face legal risks if he goes on the record with this claim, but did not report the incident at the time. This latter point has some people believing the memo is just a smear tool which is why going on the record will be a key data point.

Impeachment is a big and complicated step that would require Republicans to turn on a president of their own party. Impeachment requires 67 votes in the Senate, but the thought is no longer a Democratic wish list. Every Republican member of Congress has the word impeachment in his or her head this morning. Democrats smell blood in the water. The press is in a feeding frenzy. Trump Administration staffers have become demoralized. We cannot begin to explain how dour the mood is on Capitol Hill among Republicans.

Every morning since Donald Trump has been elected president, we have awakened to negative news stories about the president and his administration. Upon reading the negative coverage, the first question we ask is “what does this mean for earnings?” The second and related question is “what does this mean for the agenda getting through from a regulatory and legislative perspective that can further enhance earnings?”

Very few stories over the last six months had much impact on these two questions. Most of the stories were based on information from people who did not want Trump to be president and were grinding an axe. There was a lot of noise and even some smoke due to the president being associated with bad characters. But at the same time, earnings have surprised to the upside thus negating the political noise from Washington.

We want to remind everyone we are very suspicious of anonymous leaks. A number of damaging leaks in the past week have been proven completely wrong such as whether the FBI asked for more resources for the Russia investigation and whether the Deputy Attorney General threatened to quit. Moreover, the Senate Intelligence Committee Chairman is on the tape this morning saying that Comey was very forthcoming to the committee and never mentioned the events reported in last night’s news. The Acting FBI Director further testified last week that he had no evidence of the Russia investigation being obstructed. The sudden shift is noteworthy.

All of that being said, last night’s news becomes a much bigger deal if: 1) Comey goes on record and 2) Comey claims Trump tried to obstruct a federal investigation. Why this gives us some pause is that if Comey does go on record, he could face legal jeopardy if he did not disclose these conversations immediately. We urge caution here as we don’t know all of the facts.

But Comey going on the record with sworn Congressional testimony saying the president tried to obstruct a federal investigation would be a real game changer. It does not really matter if this becomes a “Comey said, Trump said” thing. Trump’s approval rating is 38 percent. Republicans see the generic ballot of Congressional control flashing a wave election. There may not be much of an appetite to protect the president. Congressional Republicans have a transactional relationship with Trump, which is different than the support Reagan and Clinton had in previous administrations.

 

Potential options in that scenario:

  1. Republicans Assign A Special Prosecutor To Investigate Trump’s Dealings With Comey: Democrats have been pushing for this on the Russia investigation and Republicans have been reluctant. Two options exist here for Republicans. First, Republicans can appoint a Special Prosecutor to investigate the circumstances around Comey’s firing. This could buy some time, displace the issue for a while, and then allow Republicans to move on the policy agenda to get some policy wins on the board. Another option would be to have a Special Prosecutor for Russia which could take over a year of investigation and drag out some of this building uncertainty.
  2. Trump Resigns And Pence Takes Over: This would be the most elegant solution for markets since it leads to an easier transition, absent the idea that the bureaucracy successfully took out a sitting president (which will have to be dealt with later). Our experience is that Trump is a fighter and when his back is against the wall, he fights and usually wins. We see this option taking place if the votes are there to actually impeach the president and the Republicans come to Trump and let him know he should step aside to avoid the vote.
  3. Congressional Republicans Move On Impeaching The President: If Trump does not want to go voluntarily, Republicans may be forced into impeachment. We cannot underscore how tough this option would be with a Republican House, with some very loyal to the president needing to move first followed by 67 votes in the Senate. But that probability is no longer zero.
  4. The 25th Amendment Is Invoked To Replace The President: I cannot even believe I am using the phrase 25th Amendment in a client note. How far we have come. This would empower the vice president and a majority of the officers of Trump’s executive departments to remove him from office if the president is “unable to discharge the powers and duties of his office.” Should the president contest, a 2/3 vote in Congress is needed to confirm the vice president and executive officers’ decision. Some in Congress like this option better because it is the president’s own administration that would start the proceedings and gives cover should they need to vote. Conversely, this is a stretched reading of the amendment which was more designed for a president wounded by an assassination attempt or suffering from health factors. But this option came up in three different conversations yesterday.

The fact that we had to lay these options out is indicative of an environment in which uncertainty is going higher, driven by an increasing probability of some premature change at the highest level of the United States government.

 

Investors need to keep in mind some parts of the agenda will continue regardless of the background noise.

  1. Financial Deregulation: We believe the President is close to appointing the Vice-Chair of the Federal Reserve for Supervision. This appointment will set the plan in motion to deregulate the banking sector via the Federal Reserve stress tests in 2018. The Senate will need to approve the appointment, but it looks like Randal Quarles will get the needed votes.
  2. Energy Infrastructure: Last week the President announced new appointments to the Federal Energy Regulatory Commission (FERC). These appointments are needed for a quorum on the commission to approve $50bn of energy infrastructure projects via pipeline and LNG export terminals. We continue to believe investors are missing this theme, which is not really impacted by current headlines.
  3. Tax Reform: Conversely, if the current headlines turn to have a bigger bark than bite, and we have many examples of sensational headlines being proven wrong in recent weeks, the agenda can be turned on fairly quickly. Our base case has been that as Trump gets into trouble, Congressional Republicans will need legislative victories. This has been somewhat out of consensus, but we believe the Senate Finance Committee is rallying around a tax reform plan that reduces the corporate tax rate to 23-25 percent without a border adjustment or major changes to the interest deduction. We have seen Congressional movement in the past week on healthcare and tax reform that has been constructive.

 

We also have some concerns:

  1. FY 2018 Budget: Congress needs to pass a FY 2018 budget to create the reconciliation instruction for tax reform. With the inability to balance the budget over 10 years, reaching an agreement may be difficult. This will be a Republican-only exercise and therefore the party needs to be on the same page.
  2. Debt Ceiling: Republicans have relied on Democratic votes for key budget and debt ceiling votes. Democrats will now hold them hostage over Trump investigations. Republicans are going to need to sit in a room and figure out how to get the entire party on board with raising the debt ceiling to avoid Democratic leverage. This may be the toughest fight of the year and could be happening in the Fall as the investigations and negative headlines creep up."

Source: Strategas

As always, if you have any questions or concerns you'd like to discuss, please call or email us.

Best regards,

Fortem Financial

 


Fortem Financial 2016. All rights reserved. Data Sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. The opinions expressed are solely those of the author, and do not represent those of Fortem Financial, LLC or any of its affiliates. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful. Carefully consider investment objectives, risk factors and charges and expenses before investing.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighed index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

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