Five of 10 S&P sectors are showing negative earnings growth, putting pressure on analysts to revise down estimates.» Read More
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.
Greece called Europe's bluff on Monday as its Prime Minister, Alexis Tsipras, said Greece will not seek an extension of the current bailout and instead try to find a new agreement. Tsipras wants a bridge loan to keep the country afloat until June, when a permanent solution can be crafted. The current bailout program expires February 28.
What's the difference between a "bridge loan" and an extension of aid? Seems like the same thing to me, just a matter of semantics.
Austerity seems to be out the window, as Greece is not making changes in retirement age, and reversing a property tax rise, among other reforms being reversed.
This is a delicate moment, as Tsipras is calling Europe's bluff by arguing that, if Greece is forced out of the euro, other countries will follow, and the entire currency bloc will fall apart.
There may be some truth to this. An article in the Irish Times over the weekend cited Simon Coveney, the Irish minister for agriculture, who insisted any new or improved deal secured by Greece should also apply to Ireland.
Nevertheless, the Greeks need access to additional cash in the short-term, since they are on the verge of running out of money. The total debt in Greece is about 325 billion euros, or $367 billion. Greece has 11 million people. That's $33,363 for every person in the country. That is unsustainable, by anybody's standards.
At the end of the day, though, something will get done. The eurozone negotiators will allow a relaxation of some of the austerity measures. There will be some kind of extension that will bring them into the middle of the year. Call it whatever you want.
Eventually, debt maturities will be extended. But it's highly unlikely that kind of deal will be made this week.
The Greek leadership is scheduled to meet with eurozone Finance Ministers on Wednesday.
Given the excellent jobs report, you might expect the market to have a bit more of an enthusiastic response. But it's not happening: the advance/decline has been even throughout the morning.
But two factors are constraining the rally:
1) an enormous, four day advance (the Dow has rallied more than 800 points since Monday's bottom), and
2) fears of higher rates.
The main issue is rates: fear of the Fed becoming more rigid about raising rates quicker rather than later.
Let's say it's not exactly a big trend, yet.
Where's the panic threshold? No one knows. Some are arguing that an aggressive move over 2.0 percent on the 10-year, currently at 1.93 percent, could be it. But the 10-year has spent so little time below 2.0 percent (other than a brief dip in October, it's really just since the beginning of the year) that it seems unlikely that will do it. 2.2 percent?
Financials are up today on those higher rates.
We should get an indication very quickly about how the Fed feels about the data. Janet Yellen will give her semi-annual monetary policy report to Congress will be February 24th and 25th.
Remember the FOMC statement: "...if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated."
Will she give any nod to "faster progress?" If she does, that will be a market mover.
Meanwhile, it's another tough day for commodities. Gold, silver, platinum, palladium all down two to three percent, copper down 0.5 percent.
That dollar strength, coupled with deflation and adequate supply, is creating some strange moves in commodities. Natural gas at 3-year lows, with a spate of cold weather? Huh?
Let's run through the jobs report: 257,000 jobs created in January, above expectations of 237,000; upward revisions in November (423,000!) and December; wage growth up 0.5 percent; year-over-year growth of 2.2 percent.
Job growth and wage growth? We haven't seen this in a long time.
Even before today's open, we have been in the midst of a powerful rally, largely of a cyclical nature.
Cyclicals this week
Will we see more rate-related selling? There's already some pressure on Treasurys. The iShares 20+ Treasury Bond ETF, after hitting new highs earlier in the week, is now down four days in a row.
Bulls have been arguing that equities should do well in general, as long as the economy is growing. Bears, obviously, have pointed out that equities have had problems in recent years when rates begin to rise, even a little.
The CME's announcement that it is closing several futures trading pits at the CME and the NYMEX is certainly another signpost for the passing of floor-based (open outcry) trading.
However, floor-based options trading continues to hold on, for a simple reason: it's often much more complicated than mere futures trading.
At the New York Stock Exchange, a new trading floor just opened several weeks ago, consisting largely of the options business of the American Stock Exchange (Amex) and Arca. They trade equities options, including major equities like Apple and Google, but also Russell 2000 index options and ETFs.
It's still a vibrant floor: in 2014, nearly 27 percent of the total volume in Amex and Arca options was derived from open outcry trading.
Floor-based options trading is a bit more vital than floor-based futures trading because they are running a more complicated business. They often involve multiple legs: buy this put, sell this call, and floor brokers add a lot of value by executing these complicated trades. And, if something goes wrong, there's also the prospect that the broker can make them whole.
And the deals are usually big: at the NYSE, the average trade size is 2,000 contracts. Since each contract is 100 shares, that's 200,000 shares in an average trade size, with a notional value in the hundreds of thousands of dollars.
Futures traders, by contrast, often just buy and sell single contracts.
Of course, options can be traded electronically, particularly if the deal is simple enough. If someone is going to do a simple trade--three calls on Apple, for example, that could be handled easily electronically.
But for complex trades, there is still a market for floor trading.
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