October 20, 2015

Stocks open modestly lower this morning but quickly recovered (Dow flat; SPX -.1%; Nasdaq -.45%). Telecoms and industrials are leading way after some encouraging earnings reports. WTI crude oil is unchanged at $45.87/barrel. Bonds are lower as yields rise a bit. The 10-year is trading at 2.07%. By the way, a CNBC reporter correctly identified a wedge pattern in the 10-year chart. That is, volatility is decreasing and technical analysis suggests the 10-year will be trading in a range between 1.85% and 2.3% over the next 2-4 quarters. At some point, the yield will break out of the wedge, either up or down. But that could be a ways off.

Tom Lee of Fundstrat Global Advisors says he expects the stock rally to continue. He says the stronger dollar wiped out $10/share from S&P 500 earnings this year, but that trend will abate next year. In addition, he believes hedge funds are largely to blame for the recent stock correction. Fearful fund managers created a “massive synthetic short position” as they moved to reduce risk in their portfolios. But he thinks this has already run its course.

IBM (IBM) reported a disappointing quarter yesterday. Revenue fell 14% y/y and earnings were down 9% y/y. Currency headwinds clearly cut into growth, as 55% of revenue is generated overseas. Management says (excluding currency effects and planned divestitures) performance was fairly strong, especially in cloud computing. The newer, higher growth business division accounts for about 27% of IBM’s total revenue. But the rest of the company is in secular decline (services, hardware, software). Management cut earnings guidance. By the way, the CFO had a really interesting term to describe selling assets at fire-sale prices. He said the company experienced a “weaker transitional exit” than anticipated. Lastly, a CNBC reporter asked the CFO how China is faring and whether IBM’s business there is up or down. He completely dodged the question. The stock is down 5% this morning.

United technologies (UTX) reported third-quarter results this morning. Despite negative revenue and earnings growth, earnings per share actually beat Wall Street consensus estimates by a wide margin. US dollar strength did cut into overseas sales, but the company reaffirmed its 2015 full-year earnings guidance, which was a modest comfort to investors. The company also increased its stock buyback program by $12bil. That’s good enough to push the stock up 5.5% this morning.

Travelers (TRV) reported a very solid third quarter, with sales & earnings far above estimates. Sales declined 1% y/y, but earnings shot up 12%. Obviously, profit margins expanded. Policy sales, a key metric, rose 2.6% y/y, the best in the past three quarters. The stock is up about 2% in early trading.

Verizon (VZ) also reported better than expected sales and earnings, despite the fact that FiOS TV and high-speed Internet added fewer new subscribers than expected. Wireless services revenue rose 5.4% y/y, which was better than expected. Overall, Verizon posted positive growth for both revenue and earnings, and that’s sort of a rarity in earnings season. The stock is up 1.8%.

US housing starts climbed 6.5% m/m to an annualized rate of 1.2 million units in September. That’s the second-highest level in eight years. Finally, we’re building enough new houses to account for normal population growth.

July 21, 2015

Stocks retreated this morning (Dow -200 pts; SPX -.38%; Nasdaq Composite -.26%). The SPX is shying away from yesterday’s re-test of the all-time high set back in May. The key level to push through is 2134. The Nasdaq Composite Index and Nasdaq 100 Index hit a fresh all-time high yesterday, and CNBC notes investors are “paying up” for anything that has growth. And by the way, Amazon, Google, Apple and Facebook represent about 30% of the total market cap of the Nasdaq 100 Index. These are the types of stocks toward which investors are gravitating. The US dollar is a bit weaker on the day, so commodities are higher. WTI crude oil is trading up toward $51/barrel; remember, oil was over $60/barrel just a month ago. The Bloomberg Commodity Index is down 7.5% year-to-date. Bonds are modestly higher as yields edge lower. The 5-year and 10-year Treasury yields are trading at 1.67% and 2.35%, respectively.

In its latest bid to control the daily gyrations of its casino-like stock market, the Chinese government has created a state-run margin trading firm with $483bil in capital. The China Securities Finance Corp. can even borrow from China’s central bank if it should need more funds. According to Bloomberg, it doesn’t just lend money to investors, but it is cleared (and probably commanded) to invest its own funds. In other words, the company has been charged with artificially propping up stock prices. Perversely, global investors seem to be pleased at this development because it is seen as a hedge against downside volatility.

Verizon Communications (VZ) reported second quarter earnings that beat Wall Street estimates even as revenue came in a bit light. The company signed up 1.1 million new monthly subscribers, most of whom are using tablets. Profit margins for the wireless business rose nicely. Unfortunately, management cut its full-year sales forecast to 3% growth from the prior estimate of 4%. Price competition is still plaguing the industry. The stock is down 2.3% at the moment.

United Technologies (UTX) reported a very disappointing quarter. The CEO said, “…the reality that we’re facing” is lower demand in several end markets. Sales are tracking lower than expected in aftermarket aircraft parts and Otis elevators. He is not yet seeing an economic recovery in Europe, and China is “much weaker than expected.” UTX depends on overseas markets, which generate about two-thirds of the company’s total sales. The stock is currently down 7%.

April 21, 2015

Stocks gapped up at the open but quickly reversed course. The Dow is currently off 32 pts and the SPX is up .11 %. The Nasdaq and biotechs are leading the way with solid gains in early trading. WTI crude oil is trading up modestly around $56.50/barrel this morning but energy stocks are trading lower. Utilities are in the red again today and are the worst performing sector year-to-date. Bonds are lower on the day as yields rise. The 5-year Treasury yield is up to 1.34% and the 10-year is up to 1.91%.

Exxon CEO Rex Tillerson says he forecasts lower oil prices over the next several years, so “people need to settle in.” He wonders if oil will react the same way natural gas prices did after the shale-gas boom greatly increased supply back in 2007-2008. Indeed, we keep hearing about falling rig counts, but production levels in the US aren’t declining yet. The major oil exploration and service companies are still cutting capital spending budgets and headcount. We heard today that Halliburton just completed a 10% reduction of its workforce.

United Technologies (UTX) reported a good quarter, beating Wall Street consensus earnings expectations by a wide margin. Unfortunately, revenue fell short and declined 1.4% y/y. Roughly two-thirds of the business is done outside the US, and that means it was hit hard by the stronger dollar. The CEO called this the “A-number 1 issue,” and said currency “is just such an overwhelming impact.” To be specific, currency headwinds subtracted $.07/share from earnings. Even so, the company fought back by reducing expenses and the net profit margin actually increased. In addition, the core business had some bright spots. Revenue growth in the aerospace division increased to 2.8% and new product orders accelerated for its key brands Carrier and Otis. The stock is up about 1.3% in early trading.

Travelers (TRV) posted similar first quarter results, missing revenue forecasts but surpassing earnings expectations. Overall revenue fell 1% y/y and earnings sank 14% y/y. The strong dollar was also a key theme. Non-US insurance premiums fell due to currency fluctuations. Domestic business fared better, with a price increase, rising retention and better renewal rates. Management noted other headwinds as well. Continued low interest rates hit the company’s investment portfolio. Net investment income fell 20%. And finally, the oil price slump has adversely affected some of the company’s alternative investments. The board boosted Travelers dividend by 11% and the dividend yield is now 2.3%. The stock is down 2.9% after the announcement.

October 22, 2013

Stocks gapped up at the open despite a rather weak jobs report. The Dow and SPX are currently up 55 pts & .31% respectively. The Nasdaq is down modestly. Strangely enough, bonds are broadly higher as well. The 10-year Treasury yield has backed down to 2.53%, the lowest since last July. Art Cashin, director of NYSE floor operations for UBS, said today the bond market “is having an absolute champagne party right now.”

So the SPX reached another all-time high this morning, having risen 23% this year. And after lagging in the early spring, the Nasdaq is now up over 30% year-to-date. Small-cap stocks (using the Russell 2000 as a proxy) are doing even better, up 32%. Despite the fact that many retail investors are still absolutely paralyzed by fear, this is a year for the record books.

The Bureau of Labor Statistics finally released the September Employment Situation Report, commonly known as the jobs report. Non-farm payrolls rose 148,000 in the month compared with economists’ consensus forecast of 180,000. Private payrolls rose 126,000 and public payrolls were up 22,000. About 20,000 of the net new jobs were temporary positions. In addition, August payrolls were upwardly revised to a net gain of 193,000 vs. the original estimate of 169,000. The unemployment rate actually ticked down to 7.2%, the lowest level since late 2008. And the so-called “underemployment rate” edged down to 13.6%, but of course the labor participation rate is hovering around 35 year lows. Average hourly earnings rose .1% during the month following a .3% gain in the prior month. On a year-over-year basis, earnings are rising at a mediocre 2.1% clip. And finally, as expected, the average workweek held steady at 34.5 hours.

So the labor market is very…blah. That is, not strong relative to where we’ve been in past recovery cycles. But from an investor’s point of view, the jobs market is pleasantly Goldilocks-ish—not too hot and not too cold. This report was clearly not strong enough to encourage the Federal Reserve to begin tapping the monetary policy brakes.

Here’s a sampling of companies that reported better than expected third quarter earnings today: Lockheed (LMT), Travelers (TRV), United Technologies (UTX), DuPont (DD). Thus far, about 130 of the S&P 500 Index’s companies have reported, with 73% of them reporting better than expected earnings. That’s a very strong beat rate.