Strange close in a few ETFs Tuesday: Oil & Gas Exploration and Production ETF, Biotech ETF, Metals and Mining.» Read More
Piper Jaffray has an interesting report out this morning on the effects of the port slowdown in Los Angeles. While much of the discussion has been about the impact on perishable goods, as the dispute drags on, it is now impacting apparel and footwear.
Piper's concern is that even if the dispute is resolved in the next week, it will take six to eight weeks to smooth out the supply chain. This means Easter deliveries will be disrupted, impacting first-half margins.
The firm notes the biggest risks are in furniture, branded footwear, apparel and toys.
Toy companies like Mattel and Hasbro and household and beauty products makers such as Newell Rubbermaid, Jarden, and Williams Sonoma could also get hit. Piper estimates 50 percent of all these inbound products go through the L.A. ports.
Some companies with large order commitments for Easter in early April and licensed movie goods are electing to use air freight, which will produce margin pressures. Coupled with foreign exchange headwinds, the expectation is that guidance will be coming in on the light side.
Not everyone is so exposed, however. PVH Group already ships from the East Coast and is thus more immune to the slowdown.
Some companies have been trying to react proactively. Piper notes that while Target is one of the most exposed retailers, the company "has been bringing in inventory early to help offset these potential slowdowns." As evidence, it notes that the inventory was up 7 percent on the company's last earnings call, well ahead of sales growth of 2 percent.
One potential beneficiary is close-out retailers, like Ross Stores. Piper notes that off-price retailers "are already starting to reduce first-season goods for 2H deliveries in anticipation that they will be the recipient of a lot of excess inventory when the product finally is discharged from the ports."
We've seen a notable breakout, but still no signs of profit taking. It's been one heck of a month for equities. Not only do we have historic highs in the S&P 500, S&P Midcap, and Russell 2000, but every major index is up 5 percent or so.
Major Indices in February:
Not surprisingly, market breadth has been improving as well.
Given these moves up, I kept waiting Tuesday for some modest correction to materialize, particularly given the conflicting headlines on Greece. But nothing happened, and we eked out modest gains again.
Volume wasn't strong, so buying interest wasn't particularly heavy, either.
But the lack of any profit taking is notable. There doesn't appear to be any major concern that: 1) markets are overvalued, or 2) the situations in Greece and Ukraine are any imminent threat to stocks.
This certainly would argue that the trend remains to the upside.
It's been a strange day. There has been little reaction in Europe or the U.S. on word the Eurogroup failed to reach an agreement with Greece. At the same time, there was only a modest reaction midday following a Dow Jones headline, citing an unnamed "official" reporting Greece intends to ask for a bailout extension on Wednesday. Italian and Spanish bond yields are also barely moving.
Why such muted reactions? Because there is an assumption that a deal will be struck and that the politicians will figure a way out.
Alternatively, a surprisingly large proportion of the trading community does not care and do not think it will make a difference if Greece leaves or stays in the euro.
Why assume a deal will be struck? Because the outlines of a deal are so obvious. What the Greeks want most is some kind of relief from austerity. What the Germans want most is not to write off any of the debt, because they can't sell that to the German taxpayers.
The deal is to offer some austerity, lower the coupons and extend the maturities of the debt—to infinity and beyond. A permanent, or at least continuously rolling, bailout.
Simple, right? It's either that or leave the euro.
And that's what worries me: everyone has convinced themselves that a Greece exit is no big deal.
Partly, it's just because the idea of Greece leaving has lost its shock value. he whole world has had four years to think about this, and the shock of an extreme move is a lot more tolerable when we have had four or five years to get used to it. The violent, knock on effects have been fixed, to a certain extent. By that, I mean the banks that owned the debt originally have successfully transferred much of the risk...to governments and taxpayers.
More troublesome is the idea that a lot of people have discounted the domino theory: that Greece leaving will not create a systemic crisis in the eurozone because Greece is not the same as Portugal, Ireland, or Spain.
The other countries are different, traders say. Ireland is a banking problem. Italy is about inflation and bureaucracy.
And the analogy between Greece and Lehman, that was so potent a few years ago? It all sounds a bit, well, stale. Stop worrying, traders argue: there's a counterparty. The ECB is willing to supply almost infinite liquidity should there be any shocks to the system.
Never mind we heard these same arguments in 2008. And the one thing all of us learned then is that stuff is connected in ways none of us ever thought about.
Look, I get it. The argument is that when countries grow at dramatically unequal rates, as Greece and Germany have done, something needs to be done to relieve that pressure. The Greeks are demonstrating that one method—austerity—is not going to work much longer, and the Germans are trying to keep a straightjacket on them.
So the best option, the thinking goes, may be an exit.
Finally, an additional factor working in favor of a Greek exit may be the twisted world of European politics.
Over the weekend, some traders noted media reports that Span's Prime Minister, Mariano Rajoy, was opposed to having Greece get cuts in its debt obligations. The thinking is that if Syriza wins concessions, that will strengthen the opposition parties in Spain, and weaken Rajoy's grip on power. The failure of Syriza in Greece would help Rajoy's conservative party.
And you thought it was hard to understand U.S. politics.
Trend followers are happy, despite plenty of problems.
Lousy weather in the Midwest and Northeast, a port slowdown in California, a cease-fire that never was in Ukraine and protracted negotiating difficulties between Greece and the European Union.
You'd never think it, but despite these problems we are at new highs on big caps (S&P 500), midcaps (S&P Midcap) and small caps (Russell 2000). Even the broadest measure of the market—the Wilshire 5000—set a record on Friday.
Following relative strength is a time-honored tradition on Wall Street, but as the fundamentals have gotten more confusing since the financial crisis many more have turned to technical analysis to try to figure out when to get in and out of the market.
Piper Jaffray wrote, "The wait for a directional move seems to be over," noting not just new highs in the major indexes but also the recent improvement in breadth.
Even Europe is looking better. The Europe STOXX 600, a basket of the 600 largest stocks traded on the major exchanges of 18 European countries, is sitting near its highest levels since 2007.
I have no problem with trend following, as long as there is something fundamental behind it. But I have been troubled by the trend in earnings for several months, and it is spilling over into Q1 2015 from Q4 2014.
Do any stocks move around Valentine's Day? It may be a cliche, but chocolate sales, which spike around Valentine's, are good news for chocolate giant Hershey's.
Since 1999, in the three days before and the seven days after Valentine's, Hershey's has traded up 94 percent of the time, according to our partners at Kensho. The average return was 3.9 percent. This is significant since the S&P 500 rose merely 0.3 percent on average during the same period.
It's also the time when the stock goes ex-dividend, so this may also be a factor in the stock rise.
Unfortunately, the relationship with other obvious Valentine plays is not very strong. My first guess was that jewelry plays like Tiffany and Zale would outperform in the days before and after Valentine's, but it turns out the performance of the jewelers is more random and often a function of the state of the economy.
Zale, for example, which was bought last year by Signet, was up only 37 percent of the time and exhibited no particular trading pattern.
Tiffany was better and rose 68 percent of the time but had only modest average gains of 0.9 percent. It was down 11 percent in the 10-day period in 2000 and down another 9 percent in 2009, which were also both difficult periods of time for the market.
I noted on Thursday the S&P 500 had broken out of the trading range it had been stuck in all year and is only two points away from its historic closing high of 2,090 it hit at the end of December.
The NASDAQ is also at a 15-year high.
Whether it's better earnings, or hope for a Greek deal, or a truce in the Ukraine, or oil over $50, there has definitely been a "growth bid" to big-cap U.S. stocks this week, while more defensive names like Utilities, Telecom and Healthcare are lagging.
Here are some sectors that are up this week:
Greece and the euro zone may be in a temporary stalemate, but you wouldn't know that looking at Europe.
The Greece ATHEX Composition has risen 6 percent, and a somewhat vague declaration on a cease-fire in Ukraine is animating the rest of Europe, with all major bourses up.
European banks are especially strong after a terrible January, with Credit Suisse performing especially well on the back of a strong earnings report and additional cost-cutting measures. The bank's earnings results cover a period before the Swiss National Bank cut the peg between the Swiss franc and the euro.
How expensive is it to live and work in Switzerland? The Credit Suisse CFO said as part of a series of cost-cutting initiatives, the bank would be moving employees out of Switzerland to lower-cost locations.
There's a bid under oil as well. How quickly are companies adjusting to the drop in oil prices? Apache (APA), which reported an earnings beat and a revenue miss this morning, said "We have reduced our rig count from an average of 91 rigs in the third quarter of 2014 to an estimated 27 rigs by the end of this month." Their fracking crews have also been reduced by about 50 percent.
The point is that U.S. oil business, particularly those involved in the fracking business, are able to ramp production up and down much more quickly than other oil exploration and production ventures elsewhere in the world. It means that supply and demand is likely to get closer to equilibrium—and more stable prices--sooner than many expected.
Elsewhere, semiconductors are rallying. The S&P Semiconductor ETF, a basket of the largest semiconductor companies, hit a historic high on Wednesday. It's been moving up since the markets began calming down at the end of January, and a number of companies have been notably strong:
It's been quiet in the IPO business in 2015, but it's starting to heat up. Some 13 companies are scheduled to price this week, including four holdovers from last week. The majority are biotech related.
There's one fairly large deal scheduled to price tonight on the Nasdaq involving Inovalon. Simply put, they help healthcare companies manage costs. Seventeen of the top 25 healthcare plans use their data. They hit all the right "buttons" for IPO investors, which are big data analytics, cloud computing, healthcare. They're also profitable and growing at 20 percent a year.
They're looking to price 22.2 million shares between $24 and $26, which is a bump up from the previous range of $21 and $24. At the midpoint, that's $555 million. With a market cap of roughly $3.9 billion, that's roughly a 14-percent float.
A smaller deal also looking to price tonight is Sol-Wind Renewable Power, seeking to raise 8.7 m shares between $19 and $21. This is obviously a solar company, but it's a fairly complex financing structure: it involves taking solar assets and putting them in a vehicle to take advantage of investment tax credits.
Still, it's definitely been a slow start to the IPO business, as the number of deals so far is half what it was at this time last year, according to Renaissance Capital.
The main reason is that energy IPOs, specifically Master Limited Partnerships, have virtually disappeared. There's also a lack of any large deals of other types. Last year, for example, we already had vehicle financing firm Santander Consumer go public.
Still, IPOs have recovered since the markets began calming down at the end of January. The Renaissance Capital IPO ETF, a basket of about 60 recent IPOs, has risen roughly 6 percent this month.
Where is oil going? Even the International Energy Agency is having trouble figuring it out.
Oil has had a tremendous three-day rally, going from a low of almost $47 last Thursday to almost $54 yesterday, a nearly 15 percent move.
Given that kind of volatility, it may not be surprising that it dropped nearly 6 percent from its high to its low today, currently trading just north of $51.
Energy stocks, not surprisingly, are the laggards in the S&P 500.
While there is no fundamental issues moving oil today, traders have pointed to the International Energy Agency (IEA) Oil Market Report that a rebalancing of supply and demand "can take months, if not years, to be felt."
Gee, that's encouraging. In the meantime, we all know the issues: production is still growing, despite talk of cuts, and there is a significant inventory overhang.
Bulls have pushed the idea that cap ex spending is coming down fast. On Monday, OPEC hinted of a drop in non-OPEC production, one of the factors in yesterday's rally.
The IEA does not dispute this, but notes that "it will take time for investment cuts to make more than a relatively small dent on production. In the meantime, inventories are likely to build further."
Wait, it gets more complicated. The IEA published a separate report today, called the Medium-Term Oil Market Report (MTOMR) where they distinguished between U.S. oil production (specifically shale production) and production elsewhere in the world, and concluded that "the lag of the latest market response might in fact be shorter than usual."
Why? Because the U.S. shale business has the ability to open up and shut down production much faster than in almost any other part of the world. They ramp up fast, they ramp down fast.
The swiftness of U.S. supply cuts "will help put a floor under prices, just as their reversal when prices rebound in earnest might put a ceiling over them, the IEA says.
S&P futures moved almost 10 points at 7 a.m. ET on reports the EU Commission will offer a 6-month extension of its current bailout program to the Greek government.
Greek newspapers are reporting that the Greek government will be presenting a plan for a bridge program (despite denials by euro zone officials that they don't do bridge programs) linked to a "new deal" that would begin in September. It would involve a change in the arrangement with creditors, and some change to the austerity mix. The Greek Finance Minister said Monday they will adhere to 70 percent of the austerity measures previously agreed.
In short, we seem to be moving toward some kind of agreement, and not a day too soon, as the meeting with Eurozone Finance Ministers is tomorrow.
Money flows: out of bonds, into stocks?
Meanwhile, U.S. long-bond yields have risen for a fourth day in a row; 10-year yields are now back over two percent, up 40 basis points since the start of the month.
This is good news for banks, which would benefit from any increase in rates. After the close Monday, Deutsche Bank upgraded Citigroup to a "buy" and increased the price target to $54 from $51.
1) Dean Foods reported earnings and revenues slightly below estimates, but more importantly, first quarter guidance of 12 cents a share to 22 cents a share was below expectations of 22 cents a share. The problem is milk: the company is the largest seller of milk in the U.S, and they have been raising prices. This may now be an issue: in addition to talking about "record high dairy commodity costs" and hinted that retailers (their customers) may make deals to do private label milk, which would impact their full year 2015 results. As a result, they are only provide guidance for the upcoming quarter.
2) Looking for cheaper hotel rooms in 2015? Not likely. Starwood reported a strong beat on earnings, and included this comment: "The U.S. economy looks set to continue its growth, and in the U.S. hotel business, limited new supply points to rising rates for some time to come." Revenue Per Available Room (RevPAR, the key industry metric) was up 7 percent in North America in constant dollars last year, a healthy increase. They expect worldwide RevPAR to be up 5 to 7 percent.
Wyndham also reported a beat, and raised their dividend. Domestic RevPAR was also up 8.6 percent.
3) Teen retailers better? A lot of traders had given up teen retailers for dead, but Aeropostale and Urban Outfitters both reported Q4 sales better than expected. ARO earnings guidance of a loss of 6 cents to a share to a loss of a penny share is also much better than prior guidance of a loss of 25 cents a share to 31 cents a share. Sales and margins were both better than expected. Naturally, there's now talk the whole group will be better, including American Eagle and Abercrombie and Fitch.
While the Bacon Cheeseburger Index is intended as a lighthearted look at the economy, for the Fed inflation is serious.
Strange close in a few ETFs Tuesday: Oil & Gas Exploration and Production ETF, Biotech ETF, Metals and Mining.
Nobody outside Tesla knows what its new mystery product will be. But there's reason to believe it's a battery.