The S&P opened down marginally. Oil traded down hard in volatile early morning, and deteriorated further in the afternoon. Tech was lifted due to strong AVGO earnings and guidance, implying APPL and suppliers' strength will continue. S&P followed oil lower. The USD strength hurt both the S&P and oil. Natural gas took it on the chin. Airlines, which normally go up when oil is down, traded lower on a report fares are dropping on heightened price competition.
S&P -0.3 to flat (2105.93 - 2113.91)
WTI -5.8% to -1.4% ($47.97 - $51.22)
Natural Gas -5.6% to -4.2% ($2.689 - $2.888)
EURUSD -1.4% to -1.2% (1.1198 - 1.1392)
Energy -2.0% to -1.2%
Utilities -0.9% to -0.9%
Tech Hardware and Storage -1.2% to -0.7%
Biotech -0.7% to -0.5%
Energy Equipment & Services -2.5% to -1.4%
Specialty Retail -0.7% to -0.5%
Construction & Engineering -0.6% to -0.6%
Airlines -1.7% to -1.7%
The S&P opened lower led by the utility, tech (hardware, storage & peripherals -1.5%, semiconductors -0.8%) and health care sectors. Oil opened up in early NY morning, but fell into the red shortly after the market open. Airlines down. HPQ took down tech, particularly hardware and semis, on weak guidance blaming strong USD. Oil was hit down to the LOD after 10:30 am when oil inventories (+8.4M est. +7.7M) came out above expectations. Then oil rallied to back into the green before noon. Oil made a HOD and the S&P rallied back to flat around lunchtime. The discretionary sector led the rally as well as internet and catalog retail stocks. PCLN leading the charge. Retail also had a boost from good earnings out of TJX and MGA. In the afternoon trade, WTI pushed up to a new HOD dragging the S&P +0.2%. Then AAPL broke down and tech fell to its LOD; taking the S&P to its LOD just before the final hour. Oil kept charging higher though.
S&P -0.2% to +0.2% (2111.02 - 2119.59)
WTI -0.5% to +3.6% ($48.43 - $51.14)
Discretionary +0.7 to +1.0%
Utilities -1.0% to -0.3%
Tech -0.7% to -0.3%
Health Care -0.3% to -0.2%
Internet & Catalog and Retail +1.6% to +1.6%
Hardware, Storage & Peripherals -1.6% to -1.2%
Independent Power & Renewable Electricity Producers -1.9% to -0.6%
Electric Utilities -1.1% to -0.6%
Energy Equipment & Services -0.9% to -0.5%
Metals & Mining -0.8% to -0.5%
Semiconductors -0.8% to -0.5%
Airlines -1.2% to -0.5%
Health Care Providers & Services -0.6% to -0.6%
Capital Markets -0.4% to -0.4%
Pharmaceuticals -0.3% to -0.3%
Construction & Engineering -0.1% to -0.1%
Another low volatility day. After opening down, the S&P meandered into the green then back into the red with little conviction in either direction. Oil bounced after trading lower overnight and initially weakening further in the early NY morning trade. Oil inventories came out higher than expected, but oil bounced anyway, managing get a stones through from the flat line for the day. S&P opened down, mainly in reaction to oil weakness and Greece / Germany negotiation headlines. Energy led the morning selloff. The crack spread widening further following yesterday's XOM refinery explosion. Gasoline actually turned positive on the day in the afternoon, and led the energy commodities in their rebound. CVRR and NBL reported disappointing results. The USD strengthened marginally, reversing weakness following yesterday's dovish Fed minutes. The mid-day rally was led by the consumer discretionary sector. Names such as BJRI (PT raise), PCLN (earnings beat), DLPH (sold thermal unit), and FL (announced buyback) all outperformed. The materials sector also showed some strength. Oil rallied to its HOD (-0.2%) in late afternoon trading. Equities slide back into the red in the afternoon, after poking above the flatline. Utilities underperformed significantly as bonds sold off marginally.
S&P -0.3% to +0.1%
WTI $49.42 - $52.11 (-5.2% to -0.2%)
Brent $58.17 - $60.40 (-3.9% to -0.3%)
Gasoline $1.5187 - $1.5985 (-3.5% to +1.6%)
EUR-USD 1.1367 - 1.1391 (-0.3% to -0.1%)
Another low volatility day. The S&P closed down by a hair. Energy, telecom, and financials were the worst performing sectors, down -1.5%, -0.9%, and -0.7% respectively. WTI, already down prior to the refinery explosion, closed at the LOD, $51.54 -3.7%. Energy followed oil lower. SSL cut its dividend and the stock was downgraded. CVE down on weak demand for secondary stock offering. DO and RIG down on negative analyst coverage. Downgrades of CTL and ORAN caused the weakness in the telecom sector. The market popped on the release of the dovish Fed minutes, but could not push into the green. Oil fell to the LOD after the XOM refinery explosion, but gasoline rallied to the HOD on news. Headed into the final hour energy weakened further, although the refiners had relative strength on the widening crack spread. Bonds rallied on the dovish fed minutes which marginally cheapened up the banks and asset managers in the financial sector who get hurt by lower yields. Despite weakness in energy, telecom and financials, the S&P clawed its way back to the flat line in the final hour.
S&P 2092.15 - 2099.16 (-0.4% to flat)
Telecom -1.1% to -0.6%
Energy -1.5% to -0.8%
WTI $51.54 - $53.06 (-3.7% to -0.9%)
Brent $59.93 - $61.6 (-4.2% to -1.5%)
Gasoline $1.5504 - $1.5736 (-2.5% to -1.0%)
The low volatility continued today. The very low level of realized volatility in the market is a bullish signal. This week was the lowest volatility week so far this year. Today's intra-day range on the S&P was only flat to +0.4%.
The energy sector (up +2.0%) led the market higher. Oil traded up +2.4%. At an industry level, the energy equipment and services industry was the best performing industry up +2.8%. Energy, health care and tech fueled the late afternoon rally. Biotech and pharmaceutical stocks, which had been underperforming earlier in the day, showed relative strength to rally into the close.
The S&P opened up 0.5% led by Energy. Oil traded in the area of +2.2% to +5.1%. Technology led the rally up 1.3% led by a strong report from CSCO. Materials are also up 1.3%. The S&P is closing in on its all-time intra-day high of 2094, less than 1% away. Airlines are down on oil and talk of increased price competition.
The market volatility was again quite low today. This drop in volatility that occurred this week is bullish for equities in my opinion.
The market seems to see through the drop in earnings as an isolated energy related drop rather than a slowdown across multiple sectors. So although the S&P's valuation is elevated, it is mainly related to energy and not so excessive in the other sectors. The market seems to be pricing in a recovering in energy somewhat. Not a full bounce back, but more of a stabilization which should provide more confidence overall.
Some of the recent market strength has also been attributed to the return of the 'retail' type investors who seem to be back in full force. The 'retail' investor can propel the market higher and for a longer period than most professionals give them credit. Since the average investor seems to have finally shaken of the risk-aversion induced by the financial crisis, the market could have some room to the upside. It is difficult to judge how much the market could run since the valuation is already full. This final phase of the bull market is more a function of confidence than valuation or earnings.
The S&P is down marginally led by loses in the utilities, energy, and telecom sectors. Oil is down in the area of -0.1% to -2.0%. Interest rates are on the rise today. The 10-year treasury is up 7 bps to 2.01%. This is likely one reason for weakness in utilities and telecom. Utilities are really getting hammered down -2.4%.
Greek negotiations are in the headlines again. The greek stocks are down -4.0%, but today reaction by the S&P is fairly muted. The S&P has traded in an extremely tight range today of -0.4% to flat.
The health care sector led the morning rally. The health care providers, pharmaceuticals, and biotech industries all up over 0.7%. Tech is also rallying with semiconductors up +2.0%. The market made a new HOD in the early afternoon on light volume. I am encouraged by tech move into the lead with a +1.1% gain. The health care sector getting back involved in the afternoon rallying +1.3%, again leading the sector advance. Oil is down -4.0% today making the energy sector the laggard -0.8%.
2/10/2015 0 Comments
The positive surprise in Spirit Airline's report is in their adjusted cost per available seat mile (CASM) ex-fuel. The adjusted CASM ex-fuel dropped -2.9% to 5.61 cents in Q4 from 5.78 cents in the year-ago quarter. This lower adjusted CASM ex-fuel is below the guidance Spirit gave in January of adjusted CASM ex-fuel down 2% year-over-year. Spirit guided Q1 CASM down -4% to -6%, and guided full-year 2015 CASM down -6% to -8%. These cost reductions were larger than expected and the stock was goosed higher when these forecasts were announced on the conference call.
The S&P only took 21 minutes to get back to unchanged after opening down -0.3%. The 2 weakest sectors are health care, staples, and utilities. Health care is weakest, but biotech is up +0.2%. The weakness is in all the other health care industries: medical equipment, health care tech, health care providers, and pharma. Energy is the strongest sector riding the strength in oil which is up +2.4%. Coal stocks appear to have a short covering bid. Airlines are weak on oil. The market is having a tough time finding direction today. Intraday volatility has been only 0.4%, compared to some highly volatile sessions over the past few weeks.
Weak import export numbers out of China raises concerns over growth in the world's second largest economy. Europe is a sea of red, down 1-2%. The Greek stock market is down 5.6% on anti-austerity rhetoric from Tsipras. More United Steelworkers strike increasing the amount of refineries effects to 13% of U.S. capacity. Merkel, Putin, and Hollande to meet on Wednesday to try to workout a ceasefire arrangement. U.S. stock futures down -0.5%. More earnings this week, but little macro-economic data out of the U.S. retail sales on Thursday.
The S&P earnings growth for Q4 has turned negative. S&P Q4 earnings have come down to $27.77 which is down -1.7% from $28.25 in Q4 2013. Estimates for Q1 and Q2 2015 have also continued their decent. Q1 earnings growth is estimated down -1.2% and Q2 down -0.3%. Q3 2015 earnings estimates have started coming down as well. Earnings growth in Q3 is now only expected to be up +3.1%.
After the S&P rallied 3.0% mtd and earnings estimates have decreased, the forward pe of the S&P has increased to 17.3x. This is far above the 5-year and 10-year averages of 13.5x and 13.8x. The current valuation is even stretched relative to the long-term 25-year average of 15.6x. The high valuation of the S&P leaves little margin for support if earnings weaken further.
The energy sector has had the largest earnings drop over the past 6 months.
The price of oil may have bottomed, which may signal the downward revisions of earnings estimates in the energy sector may finally come to an end.
So maybe the energy bottom is finally in, we'll have to wait and see. I don't think its wise to be underweight energy at this point. The energy sector will remain volatile, but I think it is safe to buy the high quality names. My preferred energy stocks are FTI and HAL. The earnings estimates better increase in the energy sector because the forward pe is currently 28.3x. This is obviously an unsustainable level. Something has to give; either the earnings come back up or the energy stocks will decrease.
The S&P is expected to grow earnings 4.2% in 2015, contracting in the first half and picking up in the second half. This is the slowest growth in earnings since the Q4 2011 to Q3 2012. The major difference is valuation. During 2011 -2012 the S&P had a forward pe ratio in the 11x - 13x area. Today with such a high valuation, the low level of earnings growth could trigger a market correction.
After energy, what sectors have the weakest earnings growth expectations for 2015 versus 2014: utilities +1.4%, staples +2.9%, and financials +3.7%. What sectors have the highest 2015 earnings growth expectations: health care +23.3%, tech +16.4%, materials +9.4%, discretionary +8.3%, and industrials +8.2%.
How about valuation:
The most attractive sectors relative to valuation and earnings growth are health care and tech. Most other sectors are over-valued with little earnings growth. Dividend yield might not be a support this year with the Fed hikes on the way. The utilities, telecom, and staples sectors which draw much of their price support from dividend yield may become far more dangerous as rate hikes approach than they were last year when bonds rallied. Friday's bond and dividend stock selloff showed there might not be many safe places to hide this year.
The bond market realized the Fed is going to raise rates this year. Most people already knew this, buy the front of the curve was mis-priced. The bond-substitute stocks led the selloff today. This means the utilities (-4.1%) and RIETs (-2.8%) are down. 10 year treasury yield up 14 bps. The selling spread into other sectors late in the day. Biotech (-1.4%) and semiconductors (-1.2%) helped in the last leg down in the last hour. Airlines (-1.1%) were down on oil's rally (+3.1%). Telecom did well on the Verizon asset sales news.
NXP Semiconductor NXPI reported Q4 revenue of $1.537B, at the high end of the consensus range of $1.52B - $1.54B. NXP Semiconductor reported Q4 EPS of $1.35, in-line with consensus, $1.32 - $1.38. The quarter was strong, but the company is still financially levered. With debt to EBITDA at 1.9x, NXP Semiconductor is more highly levered than the average S&P company which is 1.8x, and is much more levered than the average semiconductor stock which has no leverage. NXP Semiconductor gross margin decreased in Q4 and Q1 guidance is for another decrease. NXP Semiconductor states they target EBIT and EBITDA margins not gross margins. Both EBIT and EBITDA margins increased. Valuation is reasonable at 14x EV/EBITDA or 18x multiple to 2015 EPS. Although NXP Semiconductor is performing well, I feel other semiconductor stocks offer a better investment opportunity, top pick is SWKS
Ralph Lauren gives competitive holiday season, currency, geopolitical risks, and macro headwinds for weak sales. Ralph Lauren forecasts revenue to be flat in Q4 including a -5.5% currency headwind. Q3 revenue came in below expectations at $2.033B vs $2.11B - $2.13. Q3 EPS also disappointed, $2.41 vs $2.52 - $2.62. I don't see how management can say they executed well in the quarter. The call makes management seem disconnected from the reality of their results. RL was down -18.2% today.
Service PMIs disappointed today. China, Russia, France and Brazil are the weak reports that stand out.
Disney DIS reported Q1 revenue of $13.391B which beat consensus, $12.85B - $12.9. EPS of $1.27 also beat consensus, $1.08 - $1.10. Strength in movie studio and consumer products (Frozen) segments drove the beat.
Chipotle (CMG) posted Q4 revenue of $1.07B which was on the lower end of expectations, $1.07B - $1.09B. Chipotle's Q4 eps was $3.84, in-line with consensus, $3.79 - $3.87. Comparable store sales came in up 16.9% was in-line with consensus of 14% - 17%. Chipotle took a 6.3% price increase in the summer of 2014. All of Chipotle's store metrics look good, comp store sales up +16.1%, average revenue per store up +14%, throughput increasing.
The guidance of comp store sales up low to mid single digits was the big disappointment. Consensus was looking for comp store sales guidance around 8%. Management did mention a possible targeted beef product price increase in the second half which could goose comp store sales by 1.5%, but management will make the final decision on that at the end of Q2.
I actually like what management is doing here. They are guiding conservatively. Nobody ever got fired for setting the bar low. The analysts on the call got their feathers ruffled, because don't like to be told that management does not make menu price decisions based on the stock price. These guys have proven themselves to be top notch operators. Why would you question them now? The stock is a bit pricey at 38x forward earnings, but it is a quality growth stock, so it won't ever be cheap.
Gilead mentioned on their conference call that their HCV gross to net will increase to 46% from 22% on discounting. Stock hit on this news. Earnings are great though. Beat on revenue, $7.314B vs $6.7B - $6.8B consensus and beat eps, $2.43 vs $2.17-$2.27.
Oil up 19% off the low. That's a pretty serious bounce. Could this be the bottom of the negative earnings estimate revisions. With oil above $53, I have to imagine the downward revisions will end. Maybe the estimates are too low now?! Who knows! This energy volatility is astounding.
Looks like the bottoming in oil has triggered a rotation out of health care (-2.7%) stocks into energy (+2.4%) stocks. Biotech (-2.0%) is particularly weak. The airlines (-2.2%) are again the laggards off the oil strength. The auto (+2.6%) stocks are up on strong January auto sales numbers out today. The 14% rally in oil has completely reversed the market's performance and leader board.
2/3/2015 0 Comments
Oil is up 14% over the past 2 trading sessions. Yesterday the oil rally took up the entire stock market even with negative data on the economy. So my guess is that oil has finally found a bottom. I didn't understand yesterday's rally at first, but now looking back, oil is the only positive thing going on yesterday. At least today there is some positive news on the Greek debt negotiations, so the Greek bond market thinks, rallying 95 bps. The new Greek government appears to have given up it's proposal for a haircut their debt. The ASE Index is up 8.7%. Alls clear to buy stocks again!
2/2/2015 0 Comments
The S&P took 11 minutes to go into the red today. After opening up +0.4% and touching the LOD, 1980 -0.7%, the S&P bounced back to 2010, up +0.8%, before sinking to the unchanged mark. What a yo-yo!. Macro-economic data in the U.S. was disappointing today (Personal Income and Spending, PMI Manufacturing, ISM Manufacturing, and Construction Spending). Although none of the numbers were shockingly low, they all came in below estimates. The S&P has traded in a very wide 1.5% range today. This is a continuation of the high volatility in Jan. I take this level of volatility as a bearish signal.
Michael Grove, CFA