Chips and Salsa Like 1999
Financial Review by Sinclair Noe
DOW + 21 = 18,080
SPX + 4 = 2117
NAS + 36 = 5092
10 YR YLD – .03 = 1.92%
OIL – .58 = 57.16
Yesterday, the Nasdaq closed at 5,056, finally surpassing its tech-boom peak of 5,048 set in March 2000. It only took a little over 15 years to get back to those levels. Today the party continued. The S&P 500 hit a new record high close, but just barely; topping the March 2 record by a fraction. For the week, the Nasdaq surged 3.2% and the S&P 500 jumped 1.8%. The Dow added 1.4%.
WTI crude oil closed down 58 cents at $57.16 a barrel, retreating from Thursday’s 2015 high of $58.41. It rose for a sixth straight week, its longest such stretch since the first quarter of 2014. This week’s gain was 2.5 percent. After a sell-off between June and January driven by oversupply, oil prices seem to have found their footing in the last three months, gaining about 33 percent from a low in March.
In the past year, there’s been an inverse relationship between the price of crude oil and the relative performance of retail stocks. Also, most retailers aren’t hurt by a stronger dollar; rather, it helps because items imported to the US are cheaper. An almost 60 percent decline in oil between June 2014 and mid-March contributed partly to the rally in retailers’ shares as investors anticipated a boost to consumption that would benefit retailers’ profitability. We haven’t seen a big boost; consumers have tended to hold onto a dollar rather than buy baubles. Americans saved 5.8 percent of their disposable personal income in February, the highest since December 2012.
Businesses aren’t spending either. Orders for durable goods rose a seasonally adjusted 4% in March, but the increase was driven almost entirely by higher demand for autos, commercial jets and military hardware. However, a key measure of business investment fell for the seventh straight month to underscore a slowdown in how much companies are spending. So-called core orders excluding aircraft and military goods fell 0.5%. Shipments of core capital goods, a category used to help determine quarterly economic growth, dropped 0.4% in March. Business just aren’t spending much on equipment.
A new Bank of America Merrill Lynch survey finds that U.S. investors pulled $79 billion out of equities YTD – including net outflows in 9 of the past 10 weeks – despite stock prices continuing to break new record highs. The survey says: “Correction risks will grow in the absence of fresh inflows in coming weeks.”
Just a day after clearing a Senate committee, the new Trade Promotion Authority bill has been approved by the House Ways and Means Committee, giving Congress the ability to vote yes or no on trade agreements, but without the ability to make amendments over the next five years. The bill would ease passage of the Trans-Pacific Partnership, which the Obama administration is currently negotiating with Japan and 10 other nations.
After a lengthy delay, Loretta Lynch was confirmed as the new Attorney General. Eric Holder made a farewell address to staff today; as Holder leaves, he takes with him the Holder Doctrine, maybe. The Holder Doctrine is the idea that the Department of Justice and other regulators would not seek criminal prosecution against the big banks because of the potential collateral damage to the economy; it came to be known as “Too Big to Jail.” Lynch is widely believed to possess a better grasp of financial markets and their inner workings than her predecessor, Eric Holder, which some think could make her an even greater threat to big banks. Don’t expect big changes for several reasons; Lynch will only be in office for a maximum of about 18 months, and in that short time she will have plenty of issues on her plate, including: privacy laws and the seizure of phone records by the NSA, criminal justice reform and sentencing standards for nonviolent drug offenders, changing marijuana laws across the nation, revisions to the Patriot Act, civil rights voting rules, and the use of excessive force by police – just to name a few. The Holder Doctrine is gone but don’t expect anything to change.
Deutsche Bank’s supervisory board gathered today to review a sweeping restructuring plan to cut back investment banking operations. Another proposal calls for Deutsche to exit retail banking entirely, to become a pure investment and commercial bank. A few weeks ago, Deutsche was saying they wanted to be a mega-bank like JPMorgan, now they want to scale back and be more like Goldman Sachs. This follows yesterday’s $2.5 billion fine for the bank’s role in rigging Libor benchmark interest rates. The bank also agreed to accept a criminal guilty plea for the British subsidiary at the center of the case, which is a way of insulating a guilty plea away from the parent company. While the deals require Deutsche Bank to dismiss certain employees, no one at the bank has been criminally charged. The deals will not end the bank’s legal problems. It is also ensnared in the foreign exchange investigation. And it is suspected of violating United States sanctions against countries like Iran.
Greece appeared to offer concessions on some key reforms on Friday, ahead of the Eurogroup meeting in Riga today, but it wasn’t enough to appease the Eurozone finance ministers, who are now demanding a list of reforms before they will consider releasing further funds on behalf of Greece. The government in Athens has come up with several reform pledges but it is not enough for the finance ministers, and the mood at the meetings turned ugly today; Greek Finance Minister Yanis Varoufakis described the meeting as “intense.” Mario Drgahi, president of the European Central Bank, said “Time is running out.” Maybe, but the cost of no solution would be enormous, not just for Greece but the entire Eurozone. And that has been the Greek government’s threat; the only problem is that the Eurozone economies have been recovering, all except Greece.
Comcast has dropped its planned acquisition of Time Warner Cable. The news comes after FCC staff recommended a hearing on the deal and a week after another report claimed DOJ antitrust lawyers are leaning against it. Regulators applauded the deal’s demise. Attorney General Eric Holder said the decision was “the best outcome for American consumers,” and Federal Communications Commission Chairman Tom Wheeler called it “in the best interests of consumers.”
Already, Charter Communications has reached out to Time Warner about a possible merger. I don’t see how that would be much better. The FCC appears to be taking their public interest role a bit more seriously of late, and if they had problems with the consequences for consumers of a Comcast-Time Warner merger, a Charter-Time Warner merger could yield the same issues.
Samsung ramped up Galaxy S6 production. Higher-than-expected demand for the company’s new curved-screen S6 Edge prompted it to open a third screen factory sooner than planned, boosting production to 5 million per month from 2 million previously. Meanwhile, Samsung is hinting at a new design for its smartwatch, the same day the Apple Watch becomes available.
The Apple Watch hit the market with a low-key launch. A few high-end fashion boutiques around the world are stocking the watch, though supply is severely limited. But Apple’s own retail stores aren’t yet selling the smartwatch, and most online pre-orders have not yet arrived.
American Airlines posted a record profit in the first quarter of $932 million or $1.30 per share. Passenger revenue per available seat mile is expected to decline 4% to 6% in the second quarter when compared to that period in 2014 due to a variety of factors, including increased competition, and the impact of a strong dollar versus weaker foreign currencies. American Airlines will put off delivery of five Boeing 787 Dreamliners that had been due to arrive next year, a step to curb growth in its long-haul fleet and maintain pricing power.
Biogen reported profits were up 71% for the quarter, but they missed analysts’ estimates.
Yesterday, Amazon, Microsoft, Starbucks, and Google reported earnings and today…
Amazon shares jumped nearly 15% Friday, hitting $445.36 by mid afternoon. That gain made CEO Jeff Bezos just over $4.8 billion, moving him to ninth place on Forbes’ realtime list of the world’s billionaires. He was #15 at the beginning of the year. Just a reminder that Amazon reported a loss yesterday.
Microsoft was up 10.4% at 47.87. It turns out that Amazon and Microsoft are neck and neck in revenue from the cloud. Google climbed almost 18% today. Investors have been looking for Google, Microsoft and Amazon to show promise outside their bread-and-butter businesses. Microsoft cannot solely rely on PC sales to drive its profits, Amazon has very low profit margins on the products it sells and Google is heavily exposed to desktop computer advertising while the world is shifting to mobile. Yesterday’s reports gave us some evidence that these tech companies’ strategies might be working.
The first couple of weeks of earnings brought reports from the banks and the tech companies; we knew those would likely be the strongest sectors and they were. The energy stocks will likely be bad and those reports will come next week.
We’re only about halfway through earnings reporting season. So far, 135 companies in the Standard and Poor’s 500 have reported their earnings, and of those, 100 have beat analysts’ expectations. And while companies have exceeded expectations on profit, only 41% have beat on revenue.
First up next week: Apple, the largest stock in the land, reports after the market closes Monday. Analysts expect $2.14 per share in first-quarter earnings. Tuesday, Twitter will check in, and will use more than 140 characters to do so. Wednesday, MasterCard will show what’s in its wallet. Thursday, ExxonMobil reports, followed by Chevron on Friday; and that is when things will get scary; we know the oil companies faced big challenges in the quarter, we just don’t know how ugly it might be.