May 13, 2014

Stocks are up in early trading (Dow +15 pts; SPX +.1%). Yesterday’s rally brought the SPX and Dow to new all-time highs. The only sectors in the red so far today are consumer discretion and telecom. Commodities are mixed. WTI crude is up over $101/barrel, and so far this year oil prices have been higher than in 2013. Copper, tin and nickel (the base metals) have all been rising of late. Dennis Gartman (on CNBC yesterday) reminded us that this doesn’t happen unless global economic growth is firming. Bonds are higher on the day, strangely enough. The 5- and 10-year Treasury yields ticked down to 1.62% and 2.62%, respectively. That’s really a head-scratcher. So far in 2014, lower yields have meant lower stock prices. So we may sell off later in the day.

Retail sales rose a mere .1% m/m in April (less than expected). Prior month retail sales, however, were upwardly revised to a very healthy 1.5% gain (from the initial estimate of 1.1%). That’s the strongest monthly gain in four years. We’re scheduled to get earnings announcements from Macy’s, Wal-Mart, and Kohl’s this week, so it seems investors are reserving judgment on consumer spending pending those reports.

China’s factory output and retail sales missed economists’ estimates, confirming deceleration in the world’s second largest economy. Output was up 8.7% y/y in April vs. 8.9% expected. Sales were up 11.9% y/y vs. 12.2% expected. Fixed asset investment also slowed. It’s no surprise to investors that the Chinese economy may not achieve the official 2014 GDP target of 7.5% growth. Most economists are calling for monetary policy easing—lower bank reserve requirements, lower short term interest rates—as well as increased government spending to offset the weakness.  

M&A remains a huge theme this year. AT&T is apparently in advanced negotiations to acquire DirecTV for about $50bil. You may have heard that Comcast is trying to buy Timer Warner Cable for about $45bil. Today, Pfizer’s CEO is before the UK parliament making his case for the proposed acquisition of Astrazenica. Yesterday, Hillshire Brands announced it will take over Pinnacle Foods. And now we hear that British American Tobacco has hired investment bankers to look for takeover targets in the US. The company already owns about 42% of Reynolds American, which is thought to be a takeover target of Lorillard.   

 

April 24, 2014

Stocks opened higher (Dow +20 pts ; SPX +.27%). Telecom and materials stocks are lagging. Utilities and tech are moving ahead in early trading. By the way, utilities remains the best performing sector in the SPX year-to-date). Commodities are mixed—copper is up about 2%; WTI crude oil backed down under $102/barrel. Bonds are mostly unchanged. The 5- and 10-year Treasury yields are hovering at 1.74% and 2.69%, respectively.

Markets are a little jittery about rising tensions between Russian and the Ukraine. Russian thug Vladimir Putin, who seems to have masterminded the annexation of Crimea and may have designed on other parts of Ukraine, warned of consequences should the government of Ukraine continue rooting out civilian rebels sympathetic to Russia.

Durable goods orders shot up 2.6% m/m in March after rising 2.1% in February. That’s the largest gain since November, before severe winter weather took a bite out of the US economy. Gains were fairly broad-based, and included large increases in orders for computers & electronics and civilian aircraft. Capital goods orders excluding defense and aircraft—a proxy for US corporate capital spending—rose a very healthy 2.2% after falling 1.1% in the prior month. This is very good news, suggesting the economy is getting back on track.

Apple reported a solid quarter yesterday afternoon, beating both revenue and earnings expectations. In fact, sales beat Wall Street forecasts by about $2bil. The company sold 43.7 million iPhones vs. about 38.5 mil expected. And it sold about 16.4 million iPads vs. 19.8 million expected. In addition, management announced some capital allocation moves, including a 7 for 1 stock split, and a larger stock buy-back program. In fact, the company plans to issue more debt in order to increase buybacks. This is great news; Apple is doing all the capital allocation things for shareholders that tech companies have typically refused to do (think Microsoft from 2001 to 2008).   

Facebook also beat Wall Street revenue & earnings estimates. Revenue rose 72% y/y and the company’s advertising revenue is successfully navigating the transition from desktop to mobile. In fact, mobile now accounts for 59% of the total. Strangely, the CFO announced he is leaving the company before the end of the year. A replacement has already been designated.  

The US FDA says it will regulate e-cigarettes, a growing $3bil market. Crucially, it looks like rules will still allow e-cigarette companies to advertise on TV and sell flavored versions of tobacco products. So, at least initially, it looks like rules will be less onerous than expected. Lorillard, Altria and Reynolds are all up on the day.

March 4, 2014

Stocks are rebounding from yesterday’s route. The Dow and SPX are currently up 192 pts & 1.27%, respectively. The SPX is now sitting at a fresh all-time high. Gains are broad-based across market sectors; healthcare and industrials are up over 1.4% in early trading. The Russell 2000 (small-caps) is up about 1.85%. CNBC is calling this a “classic short squeeze.” Commodities are mostly lower, also reversing yesterday’s trend. WTI crude oil retreated back to $103/barrel and gold is down modestly. The 10-year Treasury ticked up to 2.66%. I’m guessing yields will resume their longer term trend higher.

Investors seem to have concluded that the geopolitical crisis in Ukraine/Crimea will be short-lived with minimal impact on us. Overnight, the US pledged $1bil in loans to stabilize the country’s finances, and the Russian defense minister ordered troops involved in combat drills to return to their bases. Vladimir Putin seems to have convinced everyone (for the moment) that troops deployed to Crimea were only intended to protect Russian military installations.

ISM’s New York regional business index fell to 57.0 in February from 64.4 in the prior month. Any reading above 50.0 indicates improving business activity. The index sat at about the same level a year ago. About 55% of respondents noted bad weather as the biggest impediment to their businesses. I noted that the employment component of the index rose to 65.7, and the forward-looking business conditions outlook shot up to 76.3. These are very strong results.   

Tobacco stocks are all up over 2% today. Reynolds American, one of the largest tobacco companies in the US, is preparing a bid to buy Lorillard. While cigarette sales volumes are falling by about 3% per year, Lorillard’s Newport brand has somehow fared better. Even more important, Lorillard is a first mover in the e-cigarette market, having acquired the Blu brand back in 2012. A combination of both companies would control about 37% of the US cigarette market. The WSJ reports Lorillard is probably worth more than $20bil, its current market-cap.