The Daily Prophet: Last Bastion for Stock Bulls is Fading Fast

Connecting the dots in global markets.

What happens when record-high stock prices and a subpar earnings season collide? We may be about to find out. Even though the S&P 500 Index climbs to new heights on an almost daily basis, analysts have been quietly reducing their third-quarter profit forecasts, seeing a gain of just 3.6 percent after the big 11 percent jump in the second quarter.

This is important because with the core of the Trump administration's growth-oriented economic agenda in jeopardy amid political turmoil in Washington, about all the stock bulls have left to justify valuations that by some definitions exceed those at the top of the internet bubble is the prospect of continued earnings growth. In fact, the S&P 500 climbed 3.6 percent in a month, the best pre-earnings season in five years, according to Bloomberg News' Lu Wang. Yes, earnings estimates tend to start out muted as company executives guide analysts lower only to beat the forecasts in a phenomenon known as underpromise and overdeliver, but the 4.9 percentage-point reduction is almost double the average cut in the past year, Wang reports.

"Markets expect most companies to handily beat the Street’s estimates. The current rally makes no sense otherwise; why buy now when supposedly lackluster earnings reports will drag stocks lower in the coming days?" DataTrek co-founder Nicholas Colas asked in a recent research note. One thing Colas finds disturbing is that the expected gain in earnings is less than the estimated 5 percent jump in revenue, implying negative earnings leverage.

Bond traders return to work after the Columbus Day holiday closed trading in U.S. dollar-denominated debt on Monday, and one key level will be on everyone's radar screen: 2.40 percent. That's the yield on the benchmark 10-year Treasury note that markets guru Bill Gross said could mark the start of a bear market in bonds, according to Bloomberg News' Brian Chappatta. The yield ended Friday at 2.36 percent, up from this year's low of 2.01 percent on Sept. 8. “If we move above 2.4 percent, there is a chance that this long-term bull market in bonds is broken and bond investors should be on the defensive instead of the offensive,” Gross, manager of the Janus Henderson Global Unconstrained Bond Fund, said Friday on Bloomberg TV. Treasuries are in their longest losing streak of 2017, falling in each of the past four weeks. The next trigger for higher yields may come from reports this week on inflation, which Federal Reserve Chair Janet Yellen has called a “mystery” for remaining tame amid job-market strength, according to Chappatta. Then again, many of the best and brightest have called for an end to the three-decade bull market in bonds in recent years only to be embarrassed as the market found a way to rebound from various bouts of softness.   

Lots of market professionals in recent years have asserted that the so-called global search for yield could only end one way: badly. In a world where almost $10 trillion of fixed-income assets carry negative interest rates, investors were ignoring clear risks just to get a little extra yield, the experts said. On Monday, Turkey was a prime example of what could go wrong. Foreign investors had bought $9.3 billion worth of Turkish equities and bonds this year through September, already making 2017 the biggest year for such purchases since 2012, when $15 billion was pumped into the nation's markets. The money poured in despite Turkey's twin deficits, faster inflation and tensions in the region stemming from a push for independence by Kurds in Iraq. Turkish markets ground higher, nonetheless -- until Monday, when stocks, bonds and the lira all tumbled as the U.S. and Turkey stopped issuing visas for each other’s citizens in a spat related to last year’s failed coup against President Recep Tayyip Erdogan. “This row just adds to all the other concerns people have about Turkey,” Simon Quijano-Evans, a strategist at Legal & General Investment Management, told Bloomberg News. “It’s not going to trigger" an emerging-market "contagion, because every market is idiosyncratic. But it does show that political risk is a concern for investors.”


Gone are the days when OPEC could twist the oil market in any direction it wanted just by -- and sometimes not -- uttering a few key words at the right moment. Saudi Arabia and OPEC both made comments in the past 36 hours that look ostensibly supportive of oil prices, but the reaction from crude futures has been muted, according to Bloomberg News' Alaric Nightingale. Brent, the global benchmark, erased earlier declines to trade marginally higher at $55.67 a barrel, close to parity with Friday’s close. West Texas Intermediate, the U.S. crude marker, did a little better, gaining about 23 cents from its Friday close to just under $50, having earlier been about 16 cents down. To recap, OPEC Secretary General Mohammad Barkindo said in an interview in India on Sunday that “extraordinary measures” may be required to prop up the oil market. Saudi Arabia, the world’s biggest oil exporter, then took just such a step, saying it will limit November allocations of crude by an “unprecedented” amount. “With rising production levels and no definitive word from OPEC and the Russians that they are going to extend the cut or deepen it, the rally seems to have lost its momentum,” Gene McGillian, a market research manager at Tradition Energy in Stamford, Connecticut, told Bloomberg News.

Sometimes the price of an asset doesn't tell the whole story. On Oct. 6, when Russian legislators said North Korea was preparing to test a missile that could reach the U.S. West Coast, transactions were posted for the purchase of calls that give the holders the right to buy more than 1.5 million ounces of gold for delivery in December 2018 for $3,000 an ounce, according to Bloomberg News' Susanne Barton and Michael Roschnotti. That’s a wager that prices will move higher than the $1,923.70 record set in 2011. “This is the buying and selling of a lottery ticket,” Tai Wong, the New York-based head of base and precious metals trading at BMO Capital Markets, said in a telephone interview. “Most market makers will typically not want to sell options like this because your upside is limited to just the premium but you’re exposed to massive liability if something unimaginable happens.” At 11:35 a.m. on Friday, 15,000 lots of the December 2018 gold calls were traded. Another 7,500 lots for $2,600 calls and 7,500 lots for $2,000 calls changed hands at the same time, making up the three most heavily traded bullion options that day, exchange data compiled by Bloomberg show. Each lot involves 100 ounces of gold.

The International Monetary Fund on Tuesday will release its World Economic Outlook, which gives its latest view of where the global economy is headed. In its last update in July, the IMF kept its 2017 estimate of economic growth unchanged at 3.5 percent, which would be higher than the 3.2 percent recorded in 2016. Since the July estimates, the economic data has come in stronger than expected. The Citi Economic Surprise Index -- which measures data that exceed forecasts relative to those that miss -- has risen from a level of about negative 5 to a positive 21. Investors are desperately searching for anything that helps justify record-high prices in many markets, whether they are in equities or corporate credit, and the IMF report could give clues to what happens the rest of this year.

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