 The Market Sum | Insight after the bell
By Caleb Silver, Editor in Chief Thursday's Headlines 1. S&P500 Closes at All-Time High 3. Slack Strikes at the NYSE 4. Chart of the Day - 10-Year US Treasury Yield Hits Low
Markets Closed
 A smart and loyal reader requested that we make this more skimm-able by adding bullets with key points instead of long paragraphs. We aim to please, so we'll try a hybrid version today. Let us know what you think, as always.
S&P500 Notches New Record
U.S. markets rallied across the board today as investors are still hoping for two to three interest rate cuts by the Federal Reserve this year. Many have interpreted Fed Chair Powell's lack of the use of the word 'patience', as a sign that the Fed will lower the fed funds rate by 0.25-0.75% by the end of the year or in early 2020.
The optimism has been contagious as global markets rallied around the world. Yet the yield on the 10-year U.S. Treasury continues to tumble, which is usually a sign of economic turbulence ahead. (James breaks it down in our daily chart, below). Make no mistake...these are atypical times.
The Federal Reserve typically lowers interest rates in times of economic distress. While the US and global economies are slowing, they are hardly in red alert territory. U.S. unemployment is near all-time lows, the economy is growing, albeit slower than in the past ten years, and inflation is tame.
Here is a chart of the S&P500 over the past 90 years with the gray vertical bars indicating periods when the Fed cut rates.
chart courtesy macrotrends.net  Oil Futures Spike on U.S.-Iran Tensions
You can call this an exogenous shock.
That's when events from outside the economic system affect the course or price of things like commodities. These could be short-lived political events, changes in government policy, natural disasters, or the destruction of a $130 million surveillance drone over the Strait of Hormuz in the Middle East.
Iran claims the U.S. military drone violated its airspace as its motive for taking it down, and President Trump said the country made a 'very big mistake.'
It's the latest incident in the escalating conflict between the two countries that stems from the U.S. pulling out of the Iran nuclear deal and imposing economic sanctions on the country.
About a third of global seaborne oil is transported through the Strait of Hormuz, where the U.S. recently ordered an additional 1000 military troops along with an aircraft carrier strike group and two B-52 bombers.
The U.S. also accused Iran of attacking two oil cargo ships last week that belonged to Japan and Taiwan. These recent provocations have boosted crude oil futures, which were steadily declining in recent months as the U.S.-China trade war and concerns about economic supply have pushed down prices.  What's Next An escalation of tensions between the U.S. and Iran will most certainly impact prices, driving them higher, according to several analysts. But this doesn't change the fundamental outlook for oil. Demand is just lower than it used to be and that is a long-term trend. The U.S. has gone from being a net importer to a net exporter over the past few years, which has changed the supply-demand dynamic for global oil producers like OPEC.
OPEC will meet on July 1st and 2nd in Vienna to discuss further production cuts as oil producing countries wrestle with price declines. The situation in Iran as well as Russia's involvement as a non-OPEC member will make things even more complicated.
Here are the top global oil producers, per the EIA.   Slack Scores with Direct Listing
It was a big day for the messaging app, as it made its debut on the NYSE via a direct listing, instead of a traditional IPO. We touched on the difference yesterday, but just in case you need a refresh, read this.
We were down at the NYSE today and the frenzy around the company was intense.
That's actually my hand in the photo.
I joined the Cheddar Network to talk about Slack just before trading opened at 12P, if you want to have a look.
By going with a direct listing, Slack was effectively marketing its own story to investors and selling off existing shares rather than issuing new ones through a public offering. It's a big gamble, but it looks like it paid off for Slack, at least through its first half-day of trading. The 48% gain from its "implied price", indicates that there was robust demand from public investors who want to own a piece of the fast growing platform. The company has significant losses and will continue to lose money for the foreseeable future, but its revenue is accelerating as its paying user base continues to grow.
That said, the company has clearly stated in its prospectus that revenue growth and profitability are not certain:
From Slack's S-1 We have a history of net losses, we anticipate increasing operating expenses in the future, and we may not be able to achieve and, if achieved, maintain profitability.
Buyer beware...
chart courtesy www.koyfin.com  Oracle rocketed more than 8% today, after earnings topped analysts' estimates, and the company provided its fiscal outlook for the coming year. Oil stocks rose today as tensions between the United States and Iran intensified.  Travel and airline stocks dropped today on news of surging oil prices, with more surges likely to come.  Word of the Day As we mentioned above, The Organization Of Petroleum Exporting Countries (OPEC) will be meeting on July 1st and 2nd to discuss production cuts, in order to drive the price of oil up. We just wanted to remind you that this is the behavior of a cartel, and that OPEC is, by definition, a cartel. In the United States, virtually all cartels, regardless of their line of business, are illegal by virtue of American anti-trust laws. Internationally, not so much.
"A cartel is an organization created from a formal agreement between a group of producers of a good or service to regulate supply in an effort to regulate or manipulate prices. In other words, a cartel is a collection of otherwise independent businesses or countries that act together as if they were a single producer and thus are able to fix prices for the goods they produce and the services they render without competition."  Today in History June 20th, 1975 - Steven Spielberg's Jaws is released. The film, expected to cost $4 million to shoot, ended up costing $9 million. That ended up not being such a big problem, though, as the film went on to surpass The Godfather as the highest-grossing film at the North American box office, making $100 million in a little under 3 months. The movie would go on to make more than $470 million. Swim carefully this summer.
Hall, Sheldon; Neale, Stephen (2010). Epics, Spectacles, and Blockbusters: A Hollywood History. Detroit: Wayne State University Press. ISBN 978-0-8143-3008-1.
Priggé, Steven (2004). Movie Moguls Speak: Interviews with Top Film Producers. Jefferson, North Carolina: McFarland. ISBN 978-0-7864-1929-6. Chart of the Day: Bond Prices at New Highs as Yields Hit New Lows  On Thursday, the benchmark US 10-year Treasury yield hit a new low below 2%, a level that has not been seen since November of 2016. This latest slide comes shortly after the Federal Reserve dropped several hints a day earlier that interest rate cuts are likely on the horizon. The extended drop in yields on Thursday pushed up bond prices, due to the inverse relationship between bond prices and yields, boosting the iShares 20+ year Treasury bond ETF (TLT) to a high not seen since October of 2016.
The inverse relationship between bond prices and yields may not be intuitive, but here's a very simplified explanation. Most bonds pay a fixed interest rate. So if interest rates in general fall, a bond's relatively higher fixed rate becomes more attractive, prompting investors to bid up the price of the bond. Conversely, if interest rates rise, investors will no longer be attracted by the relatively lower fixed rate paid by a bond, and the bond price falls as a result.
As shown on the chart above, the inverse relationship between bond prices and yields is clear. As of Thursday after the market close, the 10-year Treasury yield is just slightly above 2%. This represents a whopping 25% drop in the yield year to date. During the same time period, TLT, which represents Treasury bond prices, has risen nearly 10%.
Where might bond prices and yields go from here? With the Fed likely poised to begin a new rate cut cycle in the near-to-medium term, there's a distinct potential for yields to trend further down as bond prices rise to new highs.
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Thursday, June 20, 2019
Spinning Records
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