July 22, 2015

Stocks opened lower for the second consecutive session (Dow -80 pts; SPX -.25%). Tech and telecoms are leading the market lower (down >1%). The dollar is a bit stronger on the day and commodities are lower. WTI crude oil has been hovering around $50/barrel for the last few days. Bonds are higher on the day as yields dip. The 5-year Treasury yield is down to 1.65% and the 10-year is trading at 2.30%.

You may have noticed huge divergence between sector returns this year. Energy and materials sectors are down 10% and 9%, respectively; healthcare and consumer discretionary are up 12% and 10%, respectively. This is really a stock-picker’s market.

Jim Cramer of CNBC’s Mad Money says he’s been completely wrong on oil lately. He notes high quality oil stocks are down to new lows even though WTI crude oil is trading higher than it did last March. He wonders if hedge funds have been liquidating energy holdings to pay off margin debt. Either that, or oil is poised to move significantly lower and investors are getting out of the way.

Earnings reports are driving day-to-day market action. Microsoft (MSFT) posted its biggest quarterly loss in history, due to a write-down of the value of its acquisition of Nokia’s handset business. This is just another in a long line of misguided acquisitions. Excluding the write-down (and other one-time expenses), sales fell 5% y/y and earnings rose 7%. The company is preparing to release Windows 10, and really hoping somebody cares. The CEO is talking about revitalizing Windows and reinvigorating growth. But in the meantime, the company guided current quarter sales below expectations and blamed the stronger US dollar. The stock was down 3% in early trading.

Boeing (BA), on the other hand, reported a pretty good quarter. Sales grew 11% y/y and beat expectations. Earnings—down 33% y/y—were also better than expected. One of the metrics that investors really hone in on, cash flow, grew nicely and that puts the company back on track to achieve its target of $9bil in operating cashflow this year. The stock is up modestly this morning.

Apple (AAPL) is down 4%+ after reporting what looks like a good quarter. That’s nothing unusual. According to CNBC, Apple almost always beats Wall Street consensus sales & earnings estimates, but the stock responds positively to earnings announcements only about 60% of the time. Anyway, second quarter sales and earnings shot up 33% and 45%, respectively. Unfortunately, the company shipped 47.5 million iPhones in the quarter, whereas Wall Street was expecting something closer to 50 million. Investors are jittery about consumer electronics demand in China, and that’s enough to shake out the weak hands.

March 12, 2015

Stocks opened sharply higher this morning. The Dow is currently up 182 pts and the SPX is up .9%. Financials, consumer discretion and utilities are leading the way in early trading. The dollar is weaker this morning against a basket of foreign currencies. That’s giving some room for commodities to move higher, except WTI crude oil, which is down under $48/barrel. Brent crude oil is up a bit to $58/barrel. Copper is up on better than expected credit growth data out of China. Bonds are higher on the day as yields fall. The 5- and 10-year Treasury yields are trading at 1.57% and 2.08%, respectively.

The American Assn. of Individual Investors (AAII) tracks investor sentiment, and from time to time I mention their bullish sentiment index. Well, the index has collapsed over the last 3-4 weeks and is back down to levels not seen since last August. To give some perspective, the 1-year high is 58 and the low is 27. Today’s reading is 31.6, so it’s hard to argue stocks are in a bubble situation. Not only is there no euphoria, but sentiment isn’t even strong.

US retail sales dipped .6% m/m in February vs. economists’ consensus forecast for a .3% gain. January sales growth was left unrevised at -.8%. This time, the decline in sales was not due to gasoline but rather a pullback in auto sales. Retail sales excluding autos fell .1% in the month. Spending on furniture, electronics, building materials, restaurants and healthcare also declined. Obviously, some of this has to be blamed on extreme winter weather back east. But it’s true that so far, lower spending at the gas pump hasn’t translated to stronger consumer spending elsewhere. It’s like Barron’s said over the weekend: “Shoppers aren’t cooperating.” On a year-over basis, retail sales have fallen from 3.8% growth in November to just .8% growth in February. The market reacted positively to this report because weak numbers could encourage the Federal Reserve to be patient with interest rate hikes.

US import prices are falling at a 9.4% y/y clip, the most since the fall of 2009. A couple of months ago, we would have said falling oil prices are responsible. But now it looks like dollar strength is taking a toll on import prices.

Intel (INTC) stunned investors by reducing its current quarter revenue outlook. Management noted weaker-than-expected demand for PCs and servers and said retailers are keeping less inventory on hand. Consumer spending has shifted away from PCs and toward smart-phones and tablets. Finally, the company cited weakness is Europe sales due to the stronger dollar. First quarter sales are now seen about $12.8bil vs. prior guidance of $13.7bil. The stock is down 4% this morning and the news is dragging down Microsoft (MSFT) and Hewlett-Packard (HPQ).

All US banks fared well in the Federal Reserve’s annual stress test and capital plan assessment. Only Santander’s and Deutsche Bank’s capital plans were rejected. Bank of America will be required to re-submit parts of the plan but the Fed will not forbid it from paying a dividend and buying back stock. The big bank stocks are all up 1-4% this morning.

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.

January 24, 2014

Stocks gapped down at the open. The Dow and SPX are currently off 123 pts & .9%, respectively. Industrials, financials, materials, consumer discretion and energy sectors are all down more than 1%. Commodities are mixed, but I’ll point out that copper is off 3.5% since the beginning of the year. Copper prices are seen as a proxy for economic growth in China. Europe is set to close down about 1%. Asia was down more than that overnight. Bond yields are down again today, benefiting fixed income investors. The 10-year Treasury yield is down to 2.73%. I see some technical support at 2.71%. With the rise in yields temporarily reversed since the beginning of 2013, REITs, utilities and preferred stocks have been allowed to run. We’ll see how long it lasts.

Jim Cramer called yesterday’s slide the “first crisis” of the year and urged his viewers not to panic. Most of the angst among traders was due to China (see my update comments yesterday). But I think any time the market has run so much, just about any bad news can be used as an excuse for selling. My guess is this mini-correction will persist another several percent. By the way, the Dow is now off about 3% so far this year. The Nasdaq and Russell 2000, however, are flat. So we’re seeing a divergence among stocks –tech and smaller caps are faring better at the moment.  

Full year 2013 housing data is in. Median homes prices roses 11.5%. Existing homes sales reached 5.1 million units (compared to 6.5 million in 2006 before the financial crisis). But the market is still dominated by all-cash buyers (i.e. investors). First time buyers are accounting for only about 30% of units sold.

Medical supplies maker Covidien reported a better than expected quarter and the stock s up nearly 4% this morning. The company beat both revenue and earnings expectations and told investors it’s on the prowl for small and mid-size acquisition targets. Microsoft surprised everyone with a significantly better than expected quarter. Xbox & Surface tablet sales were very strong, and even commercial software sales were up 10%. It’s been years since Microsoft posted a quarter this good. Finally, Union Pacific [railroad] reported 7% revenue growth and 13% earnings growth, which outpaced analysts’ forecasts. Shipping volumes were very strong – agricultural up 13%, autos up 10% and industrial goods up 9%. UNP’s results are often seen as an indicator of general economic strength.

Yesterday in a CNBC interview, Scott Minerd, CIO of Guggenheim, said of China: “It‘s really difficult to get the information you need to make an investment decision there.”

October 25, 2013

Stocks opened to the upside this morning. The Dow and SPX are currently up 26 pts & .26%, respectively. Tech and consumer discretion are the best performing sectors in early trading. Commodities are mixed—WTI crude is back up to $97/barrel and copper is lower on the day (and down 12% over the last year, suggesting a soft Chinese economy). Bonds are broadly unchanged with the 10-year Treasury yield at 2.50%. We’ve seen a significant short term rally in bonds due to the government shutdown mess as well as pushed out expectations for Fed tightening. My feeling now is that the 10-year will trade in a range of 2.47% to 2.60% until 1) we get better jobs data, and 2) we get some kind of confirmation that Debt Ceiling Fight III (coming up early next year) won’t be another bitter, high-stakes game of chicken.  

US durable goods orders surged 3.7% m/m in September (before the shutdown) following an upwardly revised .2% gain August. Economists were anticipating something closer to 2.3% orders growth. Now, capital goods orders excluding aircraft and defense equipment (a better proxy for corporate capex spending) actually fell 1.1% in the month, and prior month orders were revised down to .4% from the initially reported 1.5%. Both of those figures are well below expectations. This index attempts to measure the health of the manufacturing sector, which accounts for about 12% of the US economy. The takeaway is that businesses pulled back on spending ahead of the government shutdown and Debt Ceiling Fight II. The only bright spot was commercial aircraft.

US consumer confidence fell to a 10-month low in October. The index posted a 73.2 reading this month vs. economists’ consensus forecast of 75.0. Just to give some perspective, the post-recession high and low for the index are 85 and 56, respectively. So the level of consumer confidence is not nearly as low as it was during Debt Ceiling Fight I back in 2011, but the most recent wrangling in Washington has clearly impacted the economic outlook. It seems painfully clear that political uncertainty is going to—at least temporarily—hold back the momentum of the economic recovery.  

Thankfully, the market is focusing on earnings season, which is turning out pretty well. Amazon and Microsoft just reported very solid quarterly results, and that’s what is driving the tech sector this morning.  About half of the companies in the S&P 500 Index have reported, and 76% of those have beaten Wall Street analysts’ earnings forecasts. Companies within basic material, tech, consumer discretion and healthcare sectors are faring especially well vs. expectations. It looks like overall corporate earnings growth for the third quarter will be close to 7% vs. the roughly 5% analysts were expecting. And now you see why stocks continue to advance.