Market Outlook for Monday, June 26, 2017

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News - "Mid-Afternoon Market Update: Avis Climbs Following Deal With Waymo; Neothetics Shares Plunge"

Toward the end of trading Monday, the Dow traded up 0.19 percent to 21,434.44 while the NASDAQ declined 0.21 percent to 6,251.93. The S&P also rose, gaining 0.11 percent to 2,441.00.

Leading and Lagging Sectors

Utilities shares rose by 0.85 percent in the US market on Monday. Top gainers in the sector included American Midstream Partners LP (NYSE: AMID), RGC Resources Inc. (NASDAQ: RGCO), and FirstEnergy Corp. (NYSE: FE).

In trading on Monday, technology shares fell by 0.25 percent. Meanwhile, top losers in the sector included Numerex Corp. (NASDAQ: NMRX), down 8 percent, and RealNetworks Inc (NASDAQ: RNWK), down 7 percent.

Top Headline

U.S. durable goods orders declined 1.1 percent for May. However, economists were expecting a 0.6 percent drop for May.

Durable goods orders, ex-transportation, rose 0.10percent, while core capital-goods orders slipped 0.2 percent in May.


Equities Trading UP

Avis Budget Group Inc. (NASDAQ: CAR) shares shot up 11 percent to $26.82 after the company disclosed that it has formed a partnership with Alphabet Inc (NASDAQ: GOOG) (NASDAQ: GOOGL)’s autonomous car business, Waymo. Under a multi-year agreement, Avis will service and store 600 of Waymo’s self-driving cars. The fleet is part of Waymo’s test program in Phoenix, Arizona. The arrangement solves a key problem faced by companies working to incorporate autonomous cars into ride-hailing services.


Shares of Sparton Corporation (NYSE: SPA) got a boost, shooting up 21 percent to $22.13 as Ultra Electronics confirmed that it is in advanced discussions to acquire the company.

VOXX International Corp (NASDAQ: VOXX) shares were also up, gaining 13 percent to $8.90 as the company agreed to sell Hirschmann Car Communication to TE Connectivity for $166 million.


Equities Trading DOWN

Matinas BioPharma Holdings Inc (NASDAQ: MTNB) shares dropped 21 percent to $2.20. Matinas BioPharma reported that Phase 2 clinical study of orally-administered MAT2203 for the treatment of vulvovaginal candidiasis did not meet expectations.

Shares of Neothetics Inc (NASDAQ: NEOT) were down 70 percent to $0.710. Neothetics disclosed that LIPO-202 did not show any improvement on efficacy measurements.

Stratasys, Ltd. (NASDAQ: SSYS) was down, falling around 12 percent to $24.43. Goldman Sachs downgraded Stratasys from Neutral to Sell.


Commodities


In commodity news, oil traded up 0.70 percent to $43.31 while gold traded down 0.80 percent to $1,246.30.

Silver traded down 0.37 percent Monday to $16.645, while copper rose 0.11 percent to $2.6375.

Eurozone

European shares closed higher today. The eurozone’s STOXX 600 gained 0.37 percent, the Spanish Ibex Index rose 0.62 percent, while Italy’s FTSE MIB Index jumped 0.81 percent. Meanwhile the German DAX climbed 0.29 percent, and the French CAC 40 surged 0.56 percent while U.K. shares rose 0.31 percent.

Economics

U.S. durable goods orders declined 1.1 percent for May. However, economists were expecting a 0.6 percent drop for May. Core capital-goods orders slipped 0.2 percent in May.

The Chicago Fed National Activity Index dropped to a reading of -0.26 in May, compared to a reading of +0.57 in April.

The Dallas Fed manufacturing business index slipped to 15.00 in June, versus a prior reading of 17.20. Economists were expecting a reading of 16.00.

Chart
Today's Earnings
TickerCompany NameTime
EBFEnnis6:00 AM
NGNovagold Resources4:00 PM
SCHNSchnitzer Steel8:00 AM
Today's Economic Events
Event NamePeriodYearTime
FOMC Member Williams Speaks  1:20 AM
Durable Goods Orders (MoM)May20178:30 AM
Durable Goods Ex-Transportation (MoM)May20178:30 AM
Durable Goods Ex-Defense (MoM)May20178:30 AM
Capital Goods Orders Non-Defense Ex-AirMay20178:30 AM
Chicago Fed National Activity IndexMay20178:30 AM
Dallas Fed Manufacturing Business IndexJun201710:30 AM
6-Month Bill Auction 201711:30 AM
3-Month Bill Auction 201711:30 AM
2-Year Note Auction 20171:00 PM
Movers & Shakers - "Monetary Policy And Financial Imbalances: Is Transparency Virtuous?"

In Saturday's Wall Street Journal, Sebastian Mallaby has authored an intriguing article entitled: "The Fed Should Surprise Us." The thesis of the article is that Fed "transparency is not always virtuous." He argues that by being less transparent, the Fed "could discourage traders from taking on too much risk."

According to Mallaby, central bank transparency works until it does not. He cites the 1999 and mid-2000s as periods during which transparency "appeared" to be working. Flash forward a couple of years and that view had been OBE (overwhelmed by events).

Mallaby notes that the Fed learned the 1970s lesson but not the lesson of 2008. It will hike inflation and destroy jobs when inflation threatens. However, when other imbalances such as excessive credit creation and overvalued asset prices percolate, the Fed fails to take action. Interestingly, these positions become self fulfilling - as Mallaby states, "the calmer markets remain, the better central bankers feel."

It is hard to disagree with Mallaby. We recall the Fed's conference in Jackson Hole, Wyoming, in August 2005, at which Alan Greenspan (at the time nearing retirement) was "annointed" the "greatest" Fed chairman ever. Not four years later, in the midst of the global financial crisis, he sat in the hot seat before Congress and humbly admitted that his "ideology" had "failed." The hero at the 2005 Conference, it turns out, was Raghuram Rajan, who had the audacity to present a paper entitled: "Has Financial Development Made the World Riskier?" He concluded (correctly, in our view at the time) that it had. He later reflected that he felt "like an early Christian who had wandered into a convention of half-starved lions."

So what is the Fed to do? We agree that the Fed should act less predictably. Maintaining its current stance permits market participants opportunity to "game" the central bank. For example, as the Fed began to tighten the fed funds rate from 1% in 2004, it pre-announced rate hikes. Investors were understandably enthralled. Positions were built based on that continued trajectory. Today, as Mallaby notes, the situation is even more pronounced, given algorithmic trading, selling volatility, etc.

Complacency reigns supreme today! These positions become self- fulfilling - belief that markets will remain calm generates positions that result in markets that are calm... until they are not (2000 and 2007-8)!

What tends to follow these periods of market complacency can quickly become very ugly. There is much to be said for the Fed abandoning transparency and "acting less predictably." The alternative (e.g. "continued transparency") is for these positions (e.g., selling volatility, etc.) to continue to accumulate in an environment of generalized complacency, ultimately triggering a massive unwind when the crisis inevitably arrives.

Conclusion

One caveat we would add to Mallaby's argument is the sizable private sector debt ratio that presently exists. Despite the crisis, private sector leverage remains high (at about 150% of GDP versus 170% in 2008). If the Fed becomes less transparent at this point in time and unexpectedly raises rates, the impact could be quite significant, given risks of deleveraging and balance-sheet recession. However, a return to a more "ambivalent" posture by the central bank makes very good sense.

It is difficult to forecast market complacency or how long today's "complacent" environment might persist. Given current asset class valuations (expensive virtually across-the-board, with the exception, perhaps of non-US equities), we currently hold a 16% cash position in our multi- asset class portfolio. With that said, our current Market State currently reveals few signs of market turbulence. The reality is that market sentiment can turn on a dime, so we intend to be prepared. We are willing to sacrifice modest upside for capital preservation in the current environment.