By: Bob Pisani
Friday is set to be the year's heaviest volume day as the Russell indexes get rebalanced, meaning some stocks will be added and others demoted. » Read More
By: Bob Pisani
Stocks in China take a hit after regulators tighten their grip on buying activity and video services. » Read More
My colleague Juan Aruego, who has been tracking earnings at CNBC for many years, this morning called my attention to a little-noticed item on Apple's earnings call: the company's share count fell 66.3 million shares during the quarter. At Tuesday's closing price, Juan told me, that is a $9.8 billion drop in market cap.
It's a very important point. Apple is part of an elite group I call "buyback monsters," companies that have been aggressively buying back stock for years. Apple's shares outstanding topped out in 2013 at roughly 6.6 billion shares. Since then it has been down every year and now stands at 5.2 billion.
That is a reduction of 21 percent in shares outstanding since 2013. What's that mean? It means all other things being equal, the company's earnings per share are 21 percent higher than they would have been had it not done the buybacks.
But that's only since 2013 ... there are companies that have been doing this much longer. IBM's shares outstanding topped out at 2.3 billion way back in 1995, it's been going down almost every year since then, and now stands at 939 million shares.
Think about that. That's a 60 percent reduction in shares outstanding in a little more than 20 years.
Same with Exxon Mobil. After the Mobil acquisition in 1999, shares outstanding topped out at just shy of 7 billion in 2000 and have been going almost steadily downhill since. There's now 4.2 billion shares outstanding, a reduction of 40 percent since 2000.
Other big names have gotten more aggressive only recently. General Electric, for example, dramatically cut its shares outstanding from 10.0 billion shares to 8.7 billion in 2016, a 13 percent reduction.
I could go on, but you get the point.
Is there anything wrong with this? No, but it does lead to charges that companies are spending more money on "financial engineering" than on capital spending. It certainly does indicate that companies are at a loss on how to improve their top line, which is what will ultimately improve the bottom line. It leads to frequent complaints by analysts about the "quality" of earnings.
One final point: while all this "financial engineering" helps boost earnings and stock prices, it also serves to reduce the weight in the various indexes, particularly the S&P 500. In an era where indexing rules, it means Exxon Mobil and IBM are not nearly as influential as they used to be.
For fund flows, April came in like a lion, and went out... like a lion.
ETF flows, which have been strong all year, continued strong in April. Roughly $42 billion in net new money came in, which is roughly the same inflow we have seen every month this year. The four month total is now $170 billion, the highest level for inflows in the first four months we have ever seen.
At this pace, we could have a $500 billion dollar year for inflows, which would be a record. It also works out to roughly $1.3 billion a day for ETFs so far in 2017.
"As has been the case the last few months, this was a rising tide lifting all ships. Pretty much all risk on asset classes had strong flows," said Dave Nadig, CEO of ETF.com.
Three sectors saw particularly strong inflows:
It's that time again: May. Springtime, and time to revisit that old adage — sell in May and go away.
I've written many times about this, probably the most famous of Wall Street saws, so I'll keep this short.
You can argue about exactly why this seems to work, but over long periods there does appear to be something to it. Since 1950, the S&P 500 has had an average return of only 0.4 percent during the May-to-October period, compared with an average gain of 7.4 percent during the November-to-April period. This is according to Yale and Jeff Hirsch, who first brought this connection to light in 1986.
Sounds good, but in the past 10 years, they have refined this call by layering in two additional factors: a technical signal (MACD) and a signal based on presidential cycles.
The technical signal would get you in earlier than November 1 and keep you in longer than May 1 if the market was trending up. If the market was trending down, it would delay getting you in past November 1, and you might sell before May 1.
The other signal involves the presidential cycle: Don't sell in May in the third and fourth year of the presidential election cycle, when markets tend to outperform. The Hirsches claim that this means you only need to make four trades every four years, greatly simplifying the process.
Combining these two signals, the Hirsches' claim produces turbocharged results: an average return of a loss of 0.8 percent per year for the S&P 500 since 1950 during the May-to-October period, compared with an average gain of 9.6 percent during the November-to-April period.
For those of you who don't get the power of compounded interest, let me make it simpler. A $10,000 investment made in 1949 from simply the May 1-October 31 period would now have $4,550, a LOSS of $5,450. The same $10,000 invested in just the period November 1-April 30 would have produced a profit of $2,166,331.
That is not a typo. $2,166,331.
You can see why this hoary saw has such staying power on Wall Street.
The markets are near historic highs, and earnings are rebounding nicely. There is one fly in the ointment: Energy stocks, which as a group are down more than 10 percent this year. This, while the S&P 500 is up almost 7 percent.
It wasn't supposed to be this way. This was supposed to be the "Year of the Turnaround" for big oil, but it's not turning out like that.
The spoiler are the commodities: oil down 9 percent year-to-date, and natural gas down 12 percent. The global energy market is undergoing a massive transition, from a Middle East focus to a North American focus. It's a huge help to consumers, and a headache for big oil.
The result: the investor love affair with Energy, so evident toward the end of last year, is over. Oil stocks don't just lose on a fundamental level, they lose as a relative value play. Think about it: you have the rest of the market at or near historic highs, with energy stocks the worst performing group year to date.
Take ExxonMobil, which reported earnings this morning. The good news: they beat earnings expectations, and overall earnings more than doubled, from $1.8 billion a year ago to $4.0 billion in the first quarter of this year.
They doubled largely because oil prices improved, from roughly $31 a barrel average in the first quarter of 2016 to roughly $51 a barrel in the first quarter of 2017.
Here's the bad news:
1. The price of oil is trending down.
2. Capital and exploration expenditures are down 19 percent from a year ago.
3. Production is down: on an oil-equivalent basis, production decreased 4 percent from the first quarter of 2016.
Bottom line: they are getting less for oil than the first quarter, and they are producing less of it.
This is one of several reasons oil stocks are trading near their lows for the year.
Is it any surprise oil stocks have been for sale for months? Any surprise that every major oil index (XLE, OIH, XOP) are sitting at or near lows for the year? Any surprise investors are now asking, why should I be in oil stocks when the broader market is screaming?
Any surprise that only 3 of 25 analysts tracked by CFRA have a Buy recommendation on ExxonMobil?
How did this happen? Toward the end of last year, the analyst community bought into two ideas: 1) the reflation trade, the idea that global commodity prices would rise as the global economy improved, a bet that looked pretty good when the Trump victory turbocharged the whole idea, and 2) that oil would gradually recover due to OPEC collaboration to cut production and the relentless cutting of capital spending by big oil.
This magic combination was supposed to drive oil to $60 and beyond. With this in hand, analysts handily modeled a turnaround in oil company profits, particularly big oil. Chevron, for example, was going to go from $1.07 in profits in 2016 to $4.72 in 2017, according to Factset.
And Chevron was one of the lucky ones that still made money: most of the smaller companies were still losing money. Lots of it.
In theory, these were not crazy ideas. The global economy was getting better, and commodity prices were rising. And OPEC did cut production, and big oil did indeed cut capital expenditures. A lot: ExxonMobil went from $34 billion in capital spending in 2012 to a projected $18 billion this year.
What screwed the whole thing up, of course, was shale production. Even if OPEC continues to cut, how can oil move up when you have the enormous open faucet that is North American shale?
Here's the irony: big oil is seeing reduced production, but the shale producers are seeing increased production. Big oil is still marginally profitable, but the shale producers, for the most part, are not. Look at Whiting Petroleum: they had good operating results. But they lost money!
So why don't the shale producers just stop producing? You'll notice the rig counts keep going up. Are they just stupid?
No, they are desperate. Here's my old friend Fadel Gheit, oil analyst at Oppenheimer: "Their attitude is, 'We can't control the price, so we might as well keep producing because we desperately need the cash flow.'"
The result? Slow but steady haircuts for big oil. Chevron's expected profits of $4.61 in 2017 have now been whittled down to $4.42, and are still dropping. ExxonMobil, which was expected to make $4.21 in 2017, was at $3.88 last night and still dropping.
Expect them to drop even more.
Is there any hope at all? Sure, the bulls never go away. The big hope is that eventually oil prices will rise again, partly because capital spending keeps lagging. The decline rate requires you to invest large amounts of money to get new oil. No money investing, less production.
What about some good old fashioned M&A play? You notice we are not seeing any of that either? Here's Fadel again: "The bids and asks [between buyers and sellers] have never been wider, because a few years ago we had $110 oil, and last year we had $27 oil. Which is the real price? They can't agree."
First banks, then industrials, now big tech names like Amazon, Microsoft, Alphabet, Baidu and Intel report after the bell. I checked in with David Aurelio, who tracks earnings for Thomson Reuters, and asked what key metrics will matter. His thoughts:
Stocks have rallied this week on a combination of lower geopolitical worries (French election), long-awaited tax cuts now in play and — perhaps most importantly — earnings guidance that has generally been better than anticipated.
I am talking about full-year earnings guidance, not just first-quarter earnings reports. That guidance has been strong so far, particularly in industrials. The largest names have not only beaten guidance, but they also raised full-year estimates, including: Caterpillar, 3M, Illinois Tool Works, Honeywell, Stanley Black & Decker, Dover, Sherwin Williams, Boeing and Rockwell Automation. Other big companies like General Electric and United Technologies reaffirmed their full-year guidance.
This is a HUGE relief to the markets. Traders have been concerned because the market is expensive by historic standards (better than 18 times 2017 earnings). Analysts have been modelling notable increases in earnings for the rest of the year, based not on the Trump tax cuts but on a synchronous global economic expansion:
Why the rally? This is a tricky one to call, because volume is average (it's been weak for a month) and volatility isn't spiking, either up or down. Instead of one answer, this is one of those days where several factors have combined to create a rally:
Bottom line: there has not been a lot of movement in the markets because there haven't been a lot of reasons to sell. It's hard to make a case for a big drop unless you believe: 1) France is pulling out of the European Union; 2) the tax cut program Trump has been pushing is dead; or 3) the U.S. economic data continues to worsen into the second and third quarter, and bond yields keep moving down.
For the moment, the markets seem to be saying that these prospects are unlikely.
It's not like there's a panic. There has not been any intense selling pressure, but there has also been no buying interest. There's just been no real interest in the market, and you can see it in the volume: many days it has been 10-20 percent below normal levels.
What's going on? Several factors have combined to create a dangerous "stew" of uncertainty for stocks. There is not one issue, but throw them all together and you get a slow-motion, low-volume drift downward:
1) Fiscal reforms pushed out. Did you notice Trump, while in Milwaukee Tuesday, made a point of saying that, "[W]e're in very good shape on tax
2) Weaker "hard" economic data. From retail sales to the Consumer Price Index to the Producer Price Index, economic data has been weaker than anticipated. As a result, the odds for a Federal Reserve rate hike in June are now down to 44 percent, from close to 60 percent a little more than a week ago.
4) Bond yields trending downward. This wasn't supposed to happen. The core principle of the "reflation trade" was, well, reflation. Commodity prices up. Bond yields up. Not now: after hitting multi-year highs of roughly 2.6 percent in December and March, 10-year yields dropped below 2.20 percent yesterday. True, shorter term rates have not dropped as much, but that has only flattened the yield curve, a big problem for banks who profit when the yield curve steepens. The cause is hotly debated, but it certainly reflects concerns about weaker data and geopolitical issues, and weaker bond yields in Europe have also put downward pressure on our yields as well.
5) Earnings. This is the most recent risk. Here's why: stocks are expensive. Valuations are high. The risk is to the downside. This leaves stocks very vulnerable to a selloff, particularly if there is even the slightest hint of an issue. If you don't believe me, look at what happened to Goldman Sachs yesterday, and to IBM today. IBM beat on the bottom
I have nothing against Goldman, but I am primarily interested in how the U.S. economy is doing through the eyes of banks. Goldman is not a good candidate for this. The company gets 40 percent of its revenue outside the U.S., and it relies on trading for a large part of its revenues.
Regional banks do not have trading operations and operate solely in the U.S.
Regions has a huge retail operation: nearly 60 percent of their revenues are on the consumer side. Comerica is slightly more focused on corporate lending. Both have substantial wealth management divisions — they manage money for wealthy people. It's more than 10 percent of revenues for both companies.
Both beat on the top and bottom line, but the full year guidance for both is very similar — and very telling.
Let's start with Regions Financial. What we care about is guidance. What matters about these banks are: 1) loan growth, both consumer and commercial, 2) net interest income and net interest margin, which is how much money the banks are making between what they are paying out on deposits and lending out in the form of loans, and 3) how well the loans are performing (credit conditions). To a lesser extent, fee income is also important — it's been growing as a percentage of bank revenues — but it tells you more about how much banks can charge for things like bank withdrawals than it does about the state of the economy.
Banks made it through the latest round of stress testing relatively unscathed, setting investors up for news of payouts.
Friday is set to be the heaviest volume day of the year as the Russell indexes get rebalanced.
Harvey Schwartz replaced Gary Cohn as Goldman Sachs' president and co-COO when Cohn became the White House's chief economic advisor.