U.S. equities surged to new highs on Monday, threatening a breakout from a four-month consolidation range that has capped a three-year sideways slide in the market. This continued the upward surge from Friday’s strong payroll report.
The catalyst: Reports that Japan is considering an aggressive $100 billion “helicopter money” stimulus package that would combine new fiscal deficit spending with monetization of the debt by the Bank of Japan — which is reportedly considering changing its holding negative-yielding long-term government bonds into “zero-coupon perpetual notes.”
This would effectively wipe out the government’s obligation to them and represents the next stage in this era of extreme monetary policy.
In the end, the Dow Jones Industrial Average gained 0.4%, the S&P 500 Index gained 0.3%, the Nasdaq Composite gained 0.6% and the Russell 2000 gained 1.1%. Elsewhere, Treasury bonds were under pressure, the dollar was stronger, gold was little changed and crude oil lost 1.4%.
GameStop Corp. (NYSE:GME) gained 4.5% after being upgraded to buy by analysts at Bank of America Merrill Lynch on positive factors set to boost traffic and earnings trends. Tesla Motors Inc (NASDAQ:TSLA) gained 3.7% after CEO Elon Musk cryptically tweeted he is working on the second part of a “masterplan” for the company with details to be revealed later this week.
Working on Top Secret Tesla Masterplan, Part 2. Hoping to publish later this week.
— Elon Musk (@elonmusk) July 10, 2016
Unfortunately, the reports of a SEC investigation into the company’s disclosure of auto-pilot accidents dropped shared 1.7% after hours.
Netflix, Inc. (NASDAQ:NFLX) dropped 2.5% on cautious comments in Barron’s. Twitter Inc (NYSE:TWTR) fell 2.2% on analyst downgrades citing challenged user growth and engagement metrics.
Guess who traveled to Japan, ostensibly to discuss and support new stimulus actions? None other than former Federal Reserve Board Chair Ben Bernanke, who visited the Bank of Japan on Monday morning. All of this is boosted by the electoral victory of Prime Minister Shinzo Abe’s party in Japan’s latest election, increasing his political capital for more proactive efforts to reinvigorate growth.
Abe, in an overnight speech, said he wants to utilize negative government borrowing rates to facilitate investments in modern infrastructure, including high-speed train lines. How is this helicopter money? According to Jefferies, the different between this and regular quantitative easing or asset purchase stimulus is “a combination of extreme monetary easing and fiscal relaxation.”
Jefferies’ Sean Derby believes that the ultimate endgame would be a conversion of the BoJ’s negative-rate bond holdings into perpetual zero coupon bonds. This would effectively turn the bonds into worthless pieces of paper. And it would ease the government’s debt-to-GDP ratio and clear the way for tax cuts and spending hikes.
The gains were technical in nature, driven by a 4% surge in the yen carry cross (yen vs. dollar), the largest such surge since February. Japan’s Nikkei Average got a nice lift, as it was dangerously languishing near its February/June low.
After the close, the second-quarter earnings season got underway when Alcoa Inc (NYSE:AA) reported a top- and bottom-line beat: Earnings came in at 15 cents per share (vs. 9 cents expected) while revenues totaled $5.3 billion (vs. $5.25 billion expected). Operating margins contracted to 14.2% from 16% last year.
Overall, S&P 500 earnings are expected to decline 5.6% from last year for the second quarter, marking the fifth consecutive quarterly decline. Headwinds include strength in the dollar, low energy prices and low interest rates.
For now, despite the U.S. large-cap breakout risk remains extremely high. Stocks are notching new highs on valuation expansion alone as earnings continue to crumble and are unlikely to return to growth until 2017 at the earliest. And while the BoJ is simulative, the Federal Reserve continues to have two quarter-point rate hikes penciled in for 2016.
We also have unresolved political issues surrounding the Brexit vote (with a new British Prime Minister incoming), the U.S. presidential election and simmering tensions in Europe over a possible Italian bank bailout.
Breadth remains narrow, with only around 60% of stocks in uptrends; safe havens continue to be well bid; and most stocks, as represented by the New York Stock Exchange Composite Index, remain around 5% below their record highs.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
