The market was drifting before a big one-two punch of strong manufacturing numbers from the Chicago-PMI (Purchasing Managers Index) report and news of a takeover offer for Hershey from Mondelez International.

Hungry for Food Stocks

The Hershey deal sent consumer staples, particularly food stocks soaring, and the SPDR Select Sector Fund (XLP) actually made a true breakout rallying to all-time highs on very strong volume.  Not only do these names pay great dividends, but they are also acting like momentum  stocks.

Interestingly, there’s still a very cautious tone to the market reflected in numerous areas today.   Utilities were the second best performing S&P 500 sector, and the 10-year Treasury yield dipped to 1.47 (but we took profits on our TLT position).

Then there’s market breadth that once again saw blue-chip names moving higher; 323 names on the New York Stock Exchange hit 52-week highs as would-be stock investors are still opting for quality for a sense of comfort.

Breadth Milestones	52-week highs	52-week lows
NYSE	323	89
NASDAQ	18	27

 

Breadth Movers	Advancers	Decliners
NYSE	77%	21%
NASDAQ	68%	29%

 

Market Cheers Good Economic News

The Chicago PMI reading of 56.8 is well above the 50.7 consensus and the highest level since October 2014.  Moreover, backlogs surged to their highest level since March 2011.  On the other hand, the employment segment plunged to a reading of contraction with its fastest decline since November 2009.

This is interesting against the backdrop of massive anti-trade sentiment that points to job deterioration in manufacturing even as the output increases.

The message from the session is that the market wants good news from the corporate world and from its economic data.

Trade War & Limiting Corporate Profits

The topic of trade continues to dominate the world of politics, and it’s beginning to resonate with business as much as approaches to taxes and regulations. I am a huge proponent for pushing for more open foreign markets, especially in China.  However, I am  concerned with the vilification of corporate earnings. Yesterday, Donald Trump mentioned the share of the Gross Domestic Product (GDP) controlled by workers has steadily declined and has shifted to corporations. 

Moreover, I have  heard that Elizabeth Warren and Bernie Sanders have made similar comments. However, U.S. corporate profits have been driven largely by selling into foreign markets in addition to low-cost manufacturing abroad.  Many overseas jobs cannot be done in America unless corporations are forced to cap profits and in some cases, eat losses. Considering the recent slump in profits, it could be a moot point, but it’s worrisome. The current war on corporate profits has ground the wheels of commerce to a virtual halt.

Today’s Session

With the Bank of England still warning about the British Exit vote and worries about the impact on the continent, metals are higher this morning on potentially more central bank action.   Gold has already broken out and could be ready for the next leg higher.

Stocks are meandering much like yesterday at this time but off pre-opening lows.  The bias is to the upside but occasional catalysts are still needed to get the market in gear.  Right now there is a feeling the train is leaving the station and that means a couple of up-ticks could spark additional buying although the three day weekend could mitigate risk-taking.

 

Comments

Visited an apple packing house in Wenachee to pick up a crate or two. The background chatter (in Spanish) was missing. The robots just whirred and clicked. z on 7/1/2016 10:25:53 AM

The US economic policy is to Tax Corporation as much as possible. So far it is 35%, the caveat is to negotiate deductible goodies to those willing to play with the power in place. Obviously some industries are getting killed such as the coal industry. But the green industries are getting more deductible taxes on depreciation etc.. None the less the corporate tax is high. Dividends are the function of profits, more taxes less profits less dividends. Uncle Sam tax dividends at 22%, one way or the other Uncle Sam will tax you. Corporations have to move to low taxes area and low labor cost. The profits are up and Uncle Sam will get his 22% regardless. At some point the labor cost will even out, in the meantime the US Middle Class will have been destroyed. The way the democrats want to accomplish it is through high taxes in the industrialized world and low taxes in the developing world. By taxing in a confiscatory amount in the industrialized world and not practically taxing in the developing world, the left over take home will be the same. This scheme is negative for the US; paying taxes will never be accepted as positive by the American Middle Class. This is pure redistributing socialism, but the name is taboo! Philippe on 7/1/2016 11:06:59 PM

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