August 31, 2015

Stocks opened lower yet again this morning but quickly pared losses (Dow -52 pts; SPX -.4%; Nasdaq -.3%). Utilities is the worst performing sector, down 2.3% in early trading. Energy stocks swung from a 1+% decline to a 1% gain on a headline that OPEC is concerned about falling oil prices and wants to “talk to” other producers. WTI crude oil turned around and is trading up toward $45.70/barrel at the moment. Crude has climbed nearly $10/barrel in just one week. Shorter term bonds are lower on the day as yields continue their 1-week rise. The 5-year Treasury yield ticked up to 1.52% today. The 10-year, on the other hand, is trading flat (2.17%) over the past week.

Clearly stocks have been an unstable asset class of late. The forward P/E ratio on the S&P 500 Index has fallen from 18 to 16.6 over the last two weeks. The SPX is now down 2.5% year-to-date (total return) and the Dow is off 5.3%. But that doesn’t really tell the story. There are a large number of high-quality (non-energy) US stocks that dipped 20% or more in this recent selloff (i.e. DIS, INTC, MS, SWKS, GILD, BA, PFE, BLK just to name a few). So that begs the question, are we seeing the rolling correction we need to keep the overall stock market rally alive? Probably, and this is not the time to panic.

Chinese stocks continue to whipsaw around, but losses in yesterday’s session (down as much as 3.7%) were pared when the Financial Times reported Chinese regulators will stop large-scale stock purchases aimed at stabilizing markets. CNBC says a two straight days of 5% gains in the Shanghai Composite Index last week were likely due to this government-induced buying. But of course, that’s not sustainable. Most investors would like to see the government step away from micro-managing, or mis-managing, capital markets. Separately, Chinese Premier Li Keqiang said hinted over the weekend at “more targeted and responsive macro-regulation to offset downward economic pressure, [and] more robust reform and innovation efforts to energize the market.” So that seems to suggest more government intervention.

August readings for both the Chicago Purchasing Managers Index (PMI) and the ISM Milwaukee PMI were uninspiring. Both, by the way, are regional business activity surveys. The Chicago PMI dipped to 54.4  but is still above the 50.0 line dividing expansion and contraction. Unfortunately, the new orders component of the index was weak. Barron’s says this report “suggests that activity for the Chicago-area economy may be flat going into the year end.” The ISM Milwaukee held steady under 48 (indicating contracting business activity), hovering around 1-year lows.

August 4, 2015

Stocks sagged again at the open (Dow -16 pts; SPX flat) and there is no clear direction. Commodities are faring a bit better and the dollar is weaker on the day. WTI crude oil is up 2% to $46/barrel but there is a growing chorus of analysts calling for a near-term re-test of $42. By the way, the national average price of gasoline has backed down to around $2.65/gallon. But the California average is currently $3.72 and the Orange County average is near $4.00. Bonds are slightly lower this morning. The 5- and 10-year Treasury yields are currently trading at 1.53% and 2.17%, respectively. I know I mentioned it yesterday, but it bears repeating: the recent move lower in long term rates suggests the economy isn’t strong enough to produce any real inflation, and that means the Federal Reserve won’t be raising short term rates this year.

This is admittedly a very confusing market. The S&P 500 Index has been traveling in a very narrow range, directionless, since the end of January. But the Dow Jones Transportation Average, which is often seen as a leading indicator for the whole stock market, saw a 13% correction through early July, and is still down nearly 8% for the year. The Nasdaq Composite Index is up about 8% so far in 2015, but it has been driven by a very narrow group of winners that represent a large portion of the index (AAPL, AMZN, FB, GOOGL, GILD). Strong cross-currents (i.e. strengthening US dollar another plunge in oil prices) have caused huge divergence between sectors. The energy sector is down 15% this year whereas the consumer discretionary sector is up 11%. And whereas we’ve weathered the melt-down in Greece, markets are now grappling with an economic slowdown in China. It seems apparent that the commodity super cycle is over now that China is no longer able to drive global growth. And then there’s the Fed, dutifully, gradually preparing investors for higher interest rates. And while we don’t believe they will hike rates this year, the Fed is certainly no longer a tailwind for the stock market. From now on, “don’t fight the Fed” means don’t invest against an upward move in rates. So that has (temporarily) taken the wind out of the sails of dividend stocks. All this is to acknowledge that in a near-term trader’s view, the stock rally is looking fragile.

Now zoom out to a longer investment horizon. Famed investor Laszlo Birinyi says he believes the S&P 500 Index will reach 3,200 by 2017. Of course, the current level is 2,100, so he expects strong gains over the long term. Mr. Birinyi notes that this is the second greatest rally in history, and “there’s no reason why we can’t keep on going.” All of the factors listed above—fear of Fed rate hikes, Greece, China, stronger dollar—are “noise,” and this rally has been hated by investors all the way up. He advises, “Don’t’ get shaken out by all this noise.”

July 29, 2015

Stocks opened higher again this morning (Dow +84 pts; SPX +.4%), led by the cyclical sectors. Looking back over the last week, we note that the SPX sold off about 3.2%, right back to its 200-day moving average and bounced. That’s a good sign, suggesting an orderly market that continues to trade in a tight range. Yesterday (and again today), we’re seeing an interesting anomaly: value is beginning to outperform growth. The iShares Russell 1000 Growth ETF (IWF) is up 1.40% since yesterday’s open, and the Russell 1000 Value ETF (IWD) rose 1.62%. This could mark the beginning of a new market trend.

WTI oil rebounded a bit this morning, back up to $48/barrel after briefly dipping to $47/barrel yesterday. Analysts at Bank of America say they expect oil prices to remain low due to a supply glut that will persist for another 18 months. Specifically, they say supply will continue to outpace demand by 1 million barrels per day through 2016. That said, we note Jim Cramer last night said he believes oil has bottomed. We’ll see.

Bonds are moving lower in anticipation of the Fed’s monthly policy announcement this afternoon. The 5-year Treasury yield is back up to 1.63%. But that’s significantly lower than it was back in early June. So maybe it’s dawning on bond investors that the Fed won’t likely raise interest rates year. Investors are eager to tear through the statement for any signs the Fed is acknowledging economic softness.

Second quarter earnings season is progressing; nearly half of the S&P 500 Index companies have reported. Aggregate sales growth is roughly flat with year-ago levels, and earnings growth is +2.3%. When it comes to exceeding Wall Street expectations for sales and earnings, consumer discretionary and healthcare sectors are leading the pack. Energy and utilities sectors are lagging badly.

Pfizer (PFE) beat expectations on both top (sales) and bottom (earnings) lines even though sales fell 7% y/y and earnings declined 3% y/y. Excluding the negative effect of the stronger dollar, revenue grew 1% in the quarter. He stock is up 1.6% in early trading. Separately, Gilead Pharmaceutical (GILD) reported a stellar quarter with sales up 26% and earnings up 33%. Sales of the company’s newer Hepatitis C drugs came in higher than expected. The stock was up 2.2% yesterday and another 4.7% today.

US pending home sales were up 11.1% y/y (as expected) in June. That growth rate is at the high end of the range over the last several years. So the fact that pending sales volumes were down a bit from May levels is not a cause for concern. The housing outlook remains positive.

October 30, 2014

Stocks opened lower this morning, but quickly turned around (Dow +139 pts; SPX +.2%). Commodities are mostly lower. WTI crude oil is down on the day, but still holding above $81/barrel. Bonds are modestly higher as yields fall back a bit. The 5-year Treasury yield is at 1.57% (remember, it bottomed out at 1.34% two weeks ago), and the 10-year is trading at 2.28%.

The Federal Reserve concluded its policy meeting yesterday. As expected, the QE3 bond purchase program was allowed to end. The accompanying statement from the Fed held a couple of minor surprises. First, it didn’t mention anything about weak global economic growth posing a risk to our economy. Also, it implied that they are more comfortable with recent improvement in the labor market. The economy is getting better. The Fed again mentioned a “considerable period” of time before rate hikes are appropriate. No surprise there. Of course, the statement addressed persistently low inflation. The Fed seems to think the recent dip in inflation is mostly due to falling energy prices (natural gas, oil, gasoline), and is therefore temporary and doesn’t pose a real risk. So on balance, CNBC’s Steve Liesman noted a “hawkish tilt to this statement.” And he predicted that economists are going to begin focusing on wage growth, which was been weak. If the labor market is tightening up, that will definitely follow. So manic depressive traders had a difficult time with the statement. On the one hand, the economy is improving and risks are decreasing. That’s a good thing. On the other hand, the Fed is more likely to raise interest rates in the first half of 2015. That might be bad for stocks.

US third quarter GDP growth came in at 3.5% vs. Wall Street expectations for 3.0%. That means the Q2 – Q3 timeframe saw the highest economic growth of any 6-month period in more than a decade. The Personal Consumption (or consumer spending) portion of GDP rose 1.8% vs. 1.9% expected. That’s passable, not great. Government spending increased and the trade deficit shrank. The GDP inflation gauge (core PCE deflator) was a mere 1.4%. Remember, the Federal Reserve’s target for inflation is 2.0%. JP Morgan just lowered its fourth quarter GDP estimate to 2.5% because it believes Q3 sort of borrowed some growth from Q4. The bump in government spending could be temporary; we’ll see.

Visa reported a very solid third quarter, handily beating Wall Street earnings estimates. The total volume of payments across its electronic network rose 11% y/y and total service revenue climbed 7.9%. Management noted some caution regarding the impact of Ebola on global consumer spending (really?) and the slower pace of economic growth in Europe. Currency volatility (that is, a stronger dollar) could also begin to impact revenue. However, management still thinks the company can achieve revenue growth in the low double digits in fiscal 2015. The stock is up over 8% this morning.

Deep water oil driller Ensco also surprised Wall Street when it reported better than expected revenue and earnings. Total revenue rose by 9% and operating earnings were up by 16% y/y. It’s tempting to think that with oil prices down around $80 deep water drilling isn’t very profitable. But the company says its total rig utilization rate is at 88% (not too bad) and its drilling backlog is $11bil. Average dayrates were up 5% during the quarter. The stock is up about 1.7% in early trading.

Omnicare also beat Wall Street earnings per share estimates by 2 cents and raised fiscal 2014 earnings guidance a bit.  The beat was quality—driven by a higher gross profit margin and lower operating expenses. Total revenue grew by 6.1% y/y. The stock is flat this morning, holding near an all-time high.

Earlier this week, we got a third quarter earnings report from Gilead Sciences that initially disappointed. The company reported earnings per share of $1.84, which translates to year-over-year growth over 100%! But it was dragged down by ObamaCare related expenses, without which earnings would have been $2.05/share. The primary issue, however, was a decline in sales of Hepatitis C drug Sovaldi. It looks like Gilead’s other Hep C drug, Harvoni, ended up cannibalizing Sovaldi. It’s a high class problem to have, and didn’t prevent management from raising sales guidance.

October 14, 2014

Stocks gapped up at the open—we’ll see if its lasts. The Dow and SPX are currently up 131 pts &, 1.19% respectively. Remember, 1905 is the level to watch on the SPX—that is resistance. The industrials sector is up sharply (+2.5%) and energy staged a huge turnaround just now (up over 1%).  The spot VIX Index backed down a bit to 21.6 and November VIX futures are trading around 20. So market volatility is expected to drift down in the near term after spiking. WTI crude oil is down to $84/barrel and Brent crude is down around $86. The IEA downwardly revised its global oil demand forecast for 2014 and 2015. Copper, iron ore and gold are all up on the day. Yields fell in early trading. The 10-year Treasury yield dipped to 2.2% briefly this morning and then ticked up to 2.22%. The 30-year Treasury bond dipped below 3% this morning.

Falling yields have run their course, says bond fund manager Jeffrey Gundlach. He’s calling a bottom for the 10-year at 2.2%. If, he says, the 10-year moves lower than that, the Fed will be on hold with interest rates indefinitely. As a side note, after last week’s release of the Fed minutes I’ve come to believe the Fed will not raise rates any time soon—probably not within the next year.

Wells Fargo reported third quarter results in line with analysts’ estimates. Revenue rose 3.5% y/y and earnings climbed 3%. Wells’ mortgage business improved a bit after taking a pounding over the last year. Mortgage banking revenue rose 2% from the second quarter. On a year-over-year basis, mortgage loans are down by half. Interest income from the traditional banking business rose 2%; fee income rose 6%. The bank’s loan portfolio grew by 3.7% y/y. The quarter was decent, but there just isn’t much growth in banking at the moment. The stock is down 1.8% in early trading.

JP Morgan missed third quarter earnings estimates, with business falling in most segments. Consumer banking profits fell 9% y/y and corporate & investment banking fell 34%. Asset management was the standout, rising 20%. The stock is down about 1% in early trading.

Skyworks reported very strong preliminary third quarter results, beating revenue and earnings estimates by a wide margin. This comes after Microchip Tech issued a huge profit warning on falling China business last week. That warning took down the entire semiconductor space (SOX Index down 11% in less than a week). But this new announcement seems to have breathed fresh life into the group. Intel, which reports after the bell today, is up nearly 3%; Xilinx and Texas Instruments are up about 2%, etc.

Johnson & Johnson reported a good quarter, beating earnings forecasts and reporting solid progress launching new drugs. Unfortunately, they called out continued pricing pressure on some medical devices, such as orthopedics. Hospitals are apparently getting more aggressive on price. Zimmer and Stryker are down this morning in sympathy. J&J also alluded to a possible price war with Gilead in Hepatitis C drugs. Gilead is down 1.6% in the wake of that comment. The stock is down this morning, despite the fact that management raised its earnings forecast for the current fiscal year.

April 23, 2014

Stocks sank at the open, but have recovered some ground. The Dow and SPX are about flat at the moment. Telecom, tech and healthcare are leading to the downside. Commodities are mixed in early trading: copper and gold are flat; WTI crude has retreated a bit in recent days to about $102/barrel. By the way, despite recent weakness, gold is up 7% year-to-date. Bonds are trading slightly higher on the day. The 5- and 10-year Treasury yields ticked down to 1.71% and 2.70%, respectively.

From time to time I mention the American Assn of Individual Investors (AAII) US bullish sentiment index. Well, it’s fallen precipitously from December’s multi-year high of 55, now down to 27. That’s the lowest level in a year. Typically market bottoms coincide with dips in this index.

Markit Economics says its US PMI gauge remained roughly flat in April with March levels. The so-called Flash PMI, which is a preliminary figure, posted 55.4 vs. 55.5 in the prior month. Economists were expecting 56.0. New orders, output and backlogs actually improved during the month while the employment, inventory and pricing components fell. By the way, Markit’s China PMI (not to be confused with China’s official PMI) rose slightly to 48.3 from 48.0 in the prior month. So while a little better, the Chinese manufacturing sector is still contracting. Policy makers are toying with limited stimulus measures (i.e. tax relief, reductions in bank reserve requirements), but it looks like more will be required. Economic growth is clearly slowing.   

New home sales fell to an annualized rate of 384,000 units in March vs. economists’ consensus forecast of 450,000. On a month-over-month growth basis, that’s a 14.5% plunge, and is clearly weighing on markets this morning. The median new home price rose 12.6% y/y to about $290,000, and for-sale inventories edged up to 5 months supply. Limited inventory and higher prices are the primary reasons why the housing recovery is moderating.

We got a large number of Q1 earnings announcements this morning. All of the following companies beat Wall Street earnings estimates: Boeing, Hercules Offshore, Six Flags Entertainment, Procter & Gamble, Gilead Sciences, Northrop Grumman, Johnson Controls, Ingersoll-Rand, General Dynamics, EMC, Dow Chemical, Praxair, Polaris Industries, TD Ameritrade, Delta Air Lines, Norfolk Southern, and Thermo Fisher Scientific. Ok, so that covers defense contractors, industrials, biotech, tech hardware, life sciences, chemicals, consumer goods, financial services, railways, and leisure… That’s a fairly broad swath of the US economy, suggesting this earnings season will be upbeat. So far, about one-third of S&P 500 Index companies have reported.     

April 11, 2014

Stocks opened lower again this morning. The Dow and SPX are currently off 76 pts & .3%, respectively. Energy and utilities are the only sectors in the green at the moment. The Nasdaq and Russell 2000 are now down about 7%% from their March highs. Commodities are mostly higher on the day—gold is up and the dollar is at a five-month low. Copper is also higher despite growing concern about the Chinese economy. Bonds are higher again today; the 10-year Treasury yield edged down to 2.62%. This is close the bottom of its recent trading range (1.60 – 1.80%).

Yesterday, the SPX fell 2.1% and the Nasdaq plunged 3.1%. For the Nasdaq, this was the worst intra-day loss since Nov 2011. Big money sold stocks and bought bonds yesterday. The initial reason given on CNBC was slower economic growth, although we got no significant news yesterday on the economy except for initial jobless claims, which were very positive. Then they tried to throw out the recent jobs report, saying it wasn’t strong enough. I’m calling shenanigans on all of that.

The selloff seems to have begun with large scale liquidations by hedge funds that were heavily invested in momentum stocks like NFLX, TSLA, FB, ALXN, CELG, GILD, etc. Losses were most severe in the tech and biotech sectors. In fact, about 65% of the Nasdaq 100 is now in correction territory (down over 10%). We all know that hedge funds tend to move in a herd. Unfortunately, however, because a large portion of exchange volume is driven by hedge funds and high-frequency trading firms, volatility was amplified and the damage quickly spread to other sectors. My question is this: are hedge funds and high frequency traders taking money off the table because they’re afraid of a weak earnings season? Or are they selling because their go-to stocks had become overpriced? Bloomberg pointed out yesterday afternoon that the SPX is trading at about 15.5x earnings vs. about 20x for the Nasdaq. So we could definitely see more rotation out of the higher growth, higher multiple, higher beta names. 

Jim Cramer said, “This is one of the most mystifying days in ages.” He blamed the market action on China’s weak economic data (see yesterday’s update). He also said overseas investors are being driven to the US bond market as they look for safety at a reasonable yield. He urged investors to get into stocks with good dividend yields. The point is, he says rising demand for bonds is NOT a result of a softening US economy.   

Carter Worth, chief market technician at Oppenheimer, said of the market action, “Despite all the fireworks, very little has happened.” He was putting everything into perspective. The SPX is only down about 1% on the year. Unfortunately, however, he sees the index falling about 12% in the near term to complete a normal correction.     

WFC and JPM reported first quarter earnings this morning. JPM missed analysts’ consensus earnings estimates (EPS $1.28/share vs. $1.46). Mortgage revenue fell 42%, and fixed income securities trading revenue fell 21% y/y. Total revenue was down 7.7% y/y. CEO Jamie Dimon said on the call he has “growing confidence” in the economy. WFC, on the other hand, reported Q1 EPS of $1.05/share vs. analysts’ consensus estimate $.96/share. More of a traditional bank, Wells doesn’t have the investment banking and securities trading operations common at money center banks like JPM. Revenue fell 3% y/y, but there were fewer days in the quarter compared with Q113. Wealth management and brokerage services revenue was up 41%; community banking rose 31%; mortgage originations were down 28%. Both banks are still cutting jobs—JPM will shed 5,000 by the end of the year.

March 24, 2014

Stocks opened higher this morning, but quickly gave back gains. The Dow and SPX are currently off 55 pts & .7%, respectively. Healthcare is leading to the downside—biotechs are down 3-5%. Gold is down today. WTI crude edged up over $100/barrel today, and if you look past some volatility, oil prices have been generally rising since the middle of 2012. Bonds are mostly unchanged; the 10-year Treasury yield is hovering around 2.76%.

Bloomberg reports the Nasdaq Biotech Index crossed into correction territory—down more than 10% since its February high. The index has been rallying steadily (along with most other industries) since March 2009, and along the way stock valuations have expanded. Gilead Sciences (GILD) is trading at 18.5 times 2014 expected earnings, Celgene (CELG) is trading at 19.4 times, and Biogen Idec (BIIB) is trading at a lofty 27 times. Second tier biotechs are more pricey than that. Strategists and investors are increasingly asserting that the index is experiencing a much-needed correction to reset valuations. Some expect downside bias to hang around for another couple months, but others note strong fundamentals persist in biotech, where promising new drugs and pricing power add up to solid future earnings growth.

An important gauge of China’s manufacturing business activity fell for the third straight month in March. The Flash Markit/HSBC Purchasing Mangers’ Index (PMI) ebbed to 48.1 from 48.5 in February. Remember, any reading below 50.0 indicates contraction. To be clear, this is a private estimate of Chinese business activity. The official stats have not yet been published by the Chinese government. But increasingly, investors are leaning on private research firms to get a handle on Chinese economic trends. There is widespread suspicion that government numbers are more or less fabricated. China’s economic growth is slowing, and some have called for monetary (central bank) stimulus to goose the numbers. But Vice Finance Minister Zhu Guangyao told CNBC this weekend the government will take a more cautious approach to stimulus than it has in the past.   

Caterpillar’s CEO says China’s real problem isn’t a credit bubble, but the rapid pace of reform in the financial system. Caterpillar does a lot of business in the country, and hasn’t seen a spike in “defaults, past-dues, repossessions” that would suggest real credit trouble. The new government’s top priority is reform, moving toward a more market-driven economy. Going forward, government spending and exports will contribute less to economic growth, and consumer spending will account for more and more.

Markit’s US Manufacturing PMI fell to 55.5 in March (preliminary) following a 57.1 reading in February. This is the first piece of data we have for the month of March, so it’s spooking investors this morning. But if you look back at data over the past three years, 55.5 is near the high end of what we’ve seen. Remember, anything over 50.0 suggests economic expansion.