End of week, end of month, no inflation, dollar soft, Exxon and Chevron get ugly, Woodstock for Capitalists and a dying breed.
Financial Review by Sinclair Noe for 04-29-2016
DOW – 57 = 17,773
SPX – 10 = 2065
NAS – 29 = 4775
10 Y – .02 = 1.82
OIL – .11 = 45.92
GOLD + 26.00 = 1293.40
SILV+ .29 = 17.92
Stocks fell for the second straight day, though the averages closed well off their lows. For the week, the Dow lost 1.2%, the S&P 500 down1.2%, and the Nasdaq down 2.6%. The Dow and the S&P 500 ended with month with modest gains while the Nasdaq slipped about 2%. Crude futures closed 11 cents lower at $45.92 a barrel, after hitting a year-to-date high at $46.78. It gained 20 percent in April, the biggest monthly gain in a year.
Sell in May and go away is a well-known trading adage that warns investors to sell their stock holdings in May to avoid a seasonal decline in equity markets. The “sell in May and go away” strategy is that an investor who sells his or her stock holdings in May and gets back into the equity market in November – thereby avoiding the typically volatile May-October period. This idea is based on probabilities, not guarantees, but the probabilities are high. We’ll probably have more on this next week.
Inflation barely rose in March. The Commerce Department said the personal consumption expenditures (PCE) price index, Core PCE, which excludes volatile food and gas costs, gained 0.1% month-on-month, and 1.6% year-on-year, a drop from 1.7% in the prior month. Including these costs, the PCE deflator was at 0.1% month-on-month, and 0.8% year-on-year. All this was in line with forecasts. Following its latest policy meeting, the Fed said on Wednesday it was continuing to “closely” monitor inflation. It left its benchmark overnight interest rate unchanged and suggested it was in no hurry to tighten monetary policy further. Certainly inflation is still below the Fed’s target. Personal income rose 0.4% in March (a little better than expected), while personal spending climbed 0.1% (not as much as expected). People are holding dollars so tight the eagle is starting to grin.
The employment cost index came in as expected in the first quarter of 2016. ECI rose by 0.6%, in line with economists’ expectations. Wages and salaries, which make up 70% of the index, rose by 0.7%. Meanwhile, benefits, which make up the other 30%, rose by 0.5%. The ECI report is a more comprehensive measure of wage growth than the average hourly earnings figure released with the monthly jobs report as it takes into account benefits in addition to wages and salaries.
Consumer confidence tumbled in April as Americans’ views of the economy in the future darkened. The University of Michigan’s sentiment index fell to 89.0 from 91.0. The index is now 7.2% lower than its level a year ago.
With 311 of the S&P 500 companies having posted earnings results through Friday, 74.6 percent have topped earnings expectations, well above the 63 percent average since 1994 and 68.5 percent for the past four quarters. This doesn’t mean earnings are good, just that expectations were really, really low. Earnings are currently on track for a 5.7 percent decline for the quarter, but that is an improvement from the 7.8 percent fall seen as recently as two weeks ago. If there is any reason for optimism, it might be that the dollar has weakened and oil prices have moved higher, which should help multinationals and energy companies.
The dollar spot index is at its lowest level since August 2015 with low economic growth in the US backing the Federal Reserve’s dovish stance. After a two-year, 20 percent rally, the greenback has declined 5.4 percent this year. The falling currency is boosting commodities, with crude oil jumping 20 percent this month. The dollar under pressure is also pushing precious metals prices higher. Gold is back to January 2015 levels, up 4.8% for the month. Divergence in favor of the dollar isn’t going to come from the BOJ or European Central Bank easing. It’s going to have to come from a Fed hike, but there’s no clear indication yet that it’s on the horizon.
Exxon Mobil posted net earnings of $1.8 billion, or 43 cents share, in the first quarter, down sharply from $4.9 billion, or $1.17 a share, in the year-earlier period. Revenues slid to $48.7 billion from $67.6 billion. Despite the sharp drops, Exxon beat estimates for revenue and profit. Sharply lower commodity prices and weaker refining margins were partly offset by strong results from the company’s chemicals business, where earnings rose 38%.
Chevron swung to a loss of $725 million, or 39 cents a share, from a profit of $2.6 billion, or $1.37 a year earlier. The loss was double analysts’ estimates. The last time the world’s third-largest oil explorer by market value posted a first-quarter loss was 1992, when crude traded for about $18 a barrel.
The French government ordered eight automakers to develop plans to cut emission levels for models that failed testing, including: Renault, Fiat Chrysler, Mercedes-Benz, Volkswagen, Peugeot Citroen, Nissan, Opel, and Ford. The French Environment Ministry warned that auto sales could be suspended if the emissions improvements aren’t adequate.
Apollo Education Group disclosed that it doesn’t have enough votes on the books yet to approve the company’s planned sale to a consortium of investors. So far, 58% of the Class A votes are in favor of the deal. A special shareholder meeting was adjourned until May 6 to give shareholders more time to vote. Earlier this week, Apollo warned it could face “serious consequences” if the merger doesn’t go through.
Unionized workers at Freeport-McMoRan’s El Abra copper mine in Chile say they have accepted a wage contract offered by the company. Tensions between Freeport-McMoRan and the union have been high since the company scaled back El Abra’s operations last year and laid off 650 workers.
Caterpillar said it would close five plants in the U.S. and cut about 820 jobs, the latest in its moves to trim production. Last fall, Caterpillar outlined a strategy to cut its workforce by some 10,000 positions and shutter 20 facilities over the next three years; it’s cut about 5,300 positions so far.
Anheuser-Busch InBev has offered to sell more of SABMiller’s European brands to appease European Commission regulators. The sale of Anheuser-Busch beer assets in Hungary, Romania, the Czech Republic, Slovakia, and Poland could generate as much as $5 billion. The rights to Pilsner Urquell outside of the U.S. are included in the offloading. Potential buyers include Carlsberg and Heineken.
Rovi Corp, a provider of digital entertainment guides, said it will buy digital-video recorder pioneer TiVo in a deal valued at about $1.1 billion. The $10.70 per-share cash-and-stock offer represents a premium of 13.6 percent to TiVo’s Thursday closing. TiVo’s shares have shot up about 23 percent since the New York Times first reported about a potential deal on March 24.
The U.S. Air Force awarded an $82 million contract to Elon Musk’s SpaceX to launch a satellite in 2018 to support the Global Positioning System used by the military and consumers for navigation. The head of the Space and Missile Systems Center says the Air Force will save 40% compared with what United Launch Alliance has been charging, as SpaceX’s most significant military contract yet breaks the monopoly that ULA partners Lockheed Martin and Boeing have held on military space launches for more than a decade.
This weekend is Woodstock for Capitalists, the annual Berkshire Hathaway shareholders’ meeting. Last year, 40,000 people descended on Nebraska to listen to the wit and wisdom of Warren Buffett, the third richest man in the world, and at age 85, the oldest CEO of a Fortune 500 company. Warren has run Berkshire Hathaway for 51 years. The event takes place at a convention center in Omaha, not on Yasgur’s farm, and the attractions include exhibits from most of the 90 companies that form Berkshire Hathaway, while the star of the show is the Oracle of Omaha, Warren Buffet. This year will be a little different. Warren is slowing down just a bit. Starting in 2012, citing time constraints, he and Vice Chairman Charlie Munger, age 92, ended their Sunday press conferences. Buffet is ending one-on-one media interview, opting instead for live streaming on Yahoo. Buffett has also simplified his day job, turning over control to protégés groomed for varying roles within the company. Two lieutenants, Gregory Abel and Tracy Britt Cool, now sit on the board of Kraft Heinz. In 2011 and 2012, Todd Combs and Ted Weschler came aboard to help Buffett invest Berkshire’s money. This month, for example, Berkshire’s General Re unit said its next chief will report not to Buffett, as the departing Tad Montross does, but to Ajit Jain. It’s a changing of the guard, so enjoy while you can.
If you actually know what Yasgur’s Farm is and if you have actually visited that vintage website known as Yahoo, you are part of the old guard, which is no longer the largest generation. The Pew Research Center recently analyzed US Census Bureau population estimates of America’s population as of July 1, 2015, and they found that last year, millennials outnumbered baby boomers for the first time ever. Identifying generations is tricky; the exact dates of a generation are not officially listed, but Pew Research has identified 5 major living generations and they peg the boomers as those born between 1946 and 1964, while the Millennials were born between 1981 and 1997. Using those definitions, Pew estimated that as of last year, there were about 75.4 million millennials, outnumbering the approximately 74.9 million baby boomers. The millennial population continues to grow in size because of young immigrants moving to the US, while the boomers are…. well you know.