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Even though there's less than a dozen companies that still report monthly retail sales, those that did report April numbers disappointed and confirmed that the spring season is off to a slow start.
L Brands, the maker of Victoria Secret, was especially disappointing—sales at the flagship Victoria Secret brand were down 1 percent, well below expectations of a gain of 4 percent.
What happened? First there's the weather, which this time really has been disappointing—and it's been poor into May. It's been cloudy in New York for a week and a half. I just spoke to an analyst in Atlanta: it's supposed to be 75 degrees, it's 51 and cloudy.
This is in contrast to February and early March, when the weather was fairer and warmer. It's likely some demand was pulled forward.
One thing's for sure: there seems to have been a pickup in promotional activity and clearance markdowns in the second half of April. Wedbush noted this trend on Monday and cut estimates for a number of apparel stores, including Chico's, Express, and Gap, which reports April sales Thursday.
There's also been some discussion on deflation, particularly in food. Susquehanna had a note out Thursday morning saying that athletic shoe prices have been declining for two years but that this has been offset by unit gains.
Then there is the continuing impact of the Amazon juggernaut, which owns the Zappos shoe site and the 6pm.com discount site, as well as its usual portal. One analyst estimated that Amazon will likely sell more than $10 billion in retail this year.
The effort to sell online has been slow and difficult. Some retailers like Williams-Sonoma get roughly 50 percent of sales online, but they are the exception: for most it's 10 to 15 percent.
There's another problem: for most retailers, the move to online is less profitable than store profits, due largely to shipping costs. Once you have the store, if you sell one less item, you are deleveraging the store. Of course, if you are getting new sales online, that would be good news. But for the most part, that's not what's happening: retailers are just cannibalizing in-store sales.
And once you are online, there is tremendous price competition, as companies like Nordstrom are discovering.
The hope now turns to Mother's Day this Sunday, at least it looks like the weather in the Northeast and Midwest is warming up. Let's hope that trend continues.
With Donald Trump now the likely nominee of the Republican Party and Hillary Clinton the likely nominee of the Democratic Party, much of the discussion among traders in the last day has centered on what effect these candidates will have on the stock market and on specific sectors.
So far, there is little obvious impact. The themes moving the market today remain the prevailing themes for the quarter: weak global growth (specifically China), currencies (weak dollar/stronger yen&euro), the extent of the oil rebound, and the effectiveness of central bank policies, particularly in Japan.
One of the reasons investors have not focused on the election's impact is that many of the candidates comments have been fairly vague, so it's been difficult to make a clear call on the impact of many sectors.
UBS' Art Cashin says this will be changing. "I think they are going to have to clarify their positions and there are a lot of areas people care about—health care, pharmaceuticals, what's going to happen in the energy sector," he told me Wednesday morning. "I think all of that will build up as we get closer to the convention and important things get decided."
Investors are likely to focus on the candidates' stand on four areas in particular.
Banks/financial services. While Clinton has been accused of being too close to Wall Street, she is a strong supporter of Dodd-Frank. Trump's position has been more difficult to discern. He has talked about being tougher on banks but has also described Dodd-Frank as "a disaster" that has prevented the banks from loaning money to people who will create jobs.
Energy. Clinton has supported solar and alternative energy (she has set a national goals to have 500 million solar panels installed) and voiced less support for oil and coal. Trump has been generally supportive on fracking, coal and ethanol.
Health care. Clinton supports Obama's Affordable Care Act (ACA) but has implied it needs an overhaul to slow the growth of out-of-pocket expenses. She has been critical of high drug costs and supported a cap on patient drug costs; she has also supported allowing Medicare to negotiate prescription drug prices. Trump has been a consistent opponent of the ACA and wants more competition. He supports modifying existing law that inhibit the sale of health insurance across state lines.
Defense. Clinton has close ties to the military and is generally seen as pro-defense. Trump has often espoused isolationist viewpoints but he has also spoken about building a stronger military at less cost.
Markets Tuesday: certain key trends are reversing, but it's way too early to talk about a correction.
Worries about global deflation are moving the markets Tuesday. You had disappointing manufacturing numbers from China and the UK, then the Reserve Bank of Australia (RBA) surprised everyone by cutting interest rates.
If you doubt that deflation (or at least almost no inflation) is a concern, here is what the RBA said: "Inflation has been quite low for some time and recent data were unexpectedly low. While the quarterly data contain some temporary factors, these results...point to a lower outlook for inflation than previously forecast."
Also not surprisingly, the market leaders this quarter are energy, materials, and financials.
Huh? Remember the trade this quarter that everyone has played: weaker dollar + stabilization in China + bottoming in oil + accomodative Fed = "greenlight" signal to buy cyclicals (energy, materials, industrials, financials).
Hence we have our leadership of materials, energy, and financials, with health care and select industrials also doing well.
There are some cracks that have developed in this thesis: 1) these names have become overbought, with many big industrials trading at roughly 20 times forward earnings, certainly a "full" valuation, 2) the China data has been choppy and difficult to read, and 3) the dollar slide has been so notable that there is talk that it may be bottoming, and Tuesday's notable reversal (the Dollar Index is up after being down notably earlier in the day) certainly lends credence to that idea.
Is this the start of something? Well, if it is, it's pretty modest. As with all market leaders, energy, materials, and industrials are now susceptible should there be even a modest market pullback...and so far that is all we are seeing in the broader market.
Look at it this way: the S&P 500 was at 2,100 at the end of end of April; we're now only 2 percent off that. So far, this is a modest, garden variety pullback, not even a correction. So far.
Stocks are largely sideways in April, but bulls have several problems as we head into May:
1) Sell in May and go away: bad advice. There is a negative psychology associated with May around this hoary chestnut. I recently penned a piece for CNBC Pro on the problem with this whole catchphrase. Simply put, it's true the six-month period from May to October underperforms November to April over very long periods, but it is idiotic to withdraw money from the market for six months. Better to rotate into defensive names in the summer (they tend to outperform) and then back into the S&P 500 in the fall.
2) Markets are complacent and at risk of mild correction. The action in the last 24 hours indicates markets are getting too sleepy: the Volatility Index (VIX) is at its highest level in a month. Somewhat apocalyptic warnings of a "day of reckoning" from Carl Icahn and renewed central bank risk (from Japan's lack of action) are two immediate issues that have arisen.
Still, it seems unlikely we will have a major swoon like we had in January and February. That swoon was largely caused by worry about China melting down and a potential recession in the U.S. Both of these now look unlikely.
3) The big issue is valuation. The market is fully valued, with the big industrials I like to watch at 19 or 20 times 2016 earnings. The Street had been playing with full year earnings for the S&P 500 at roughly $123 earlier in the year; we are now down to $119 (17.3 times forward earnings) and likely heading toward $118, close to the $117.26 for 2015.
This is not a catalyst for a meltdown, but it is a very good reason why stocks are hitting resistance just shy of historic highs.
What we saw in April:
1) Dollar weakness continues, with the dollar index is at its lowest levels since August on some combination of a) belief that the Fed will hike at most once this year, and b) poor first-quarter economic stats.
2) the weak dollar is fueling a recovery in commodities. It's been a huge month for both precious and base metals:
Metals in April
Silver — up 15.9 percent
Nickel — up 11.9 percent
Aluminum — up 10.7 percent
Iron Ore — up 6.9 percent
Copper — up 4.8 percent
3) Oil is firming...oil is up nearly 20 percent this month, 70 percent from its February lows, and we are within earshot of $50.
4) Global equities are mixed for the month. Emerging markets and commodity-based economies are up modestly on the dollar weakness:
South Africa — up 4.9 percent
Vietnam — up 3.3 percent
Nigeria — up 3.1 percent
Emerging Markets ETF — up 0.3 percent
European equities: the Stoxx 600 is up better than 1 percent for the month, but the trend this week is down. Same with the U.S.: the S&P is flat for the month but down 1.4 percent this week.
5) Earnings: Roughly 60 percent through earnings season. After a rough week for earnings, the tone has been better in the last day and a half with strong showings from new tech like Amazon, Expedia, LinkedIn, Pandora, Expedia, and Facebook, that somewhat offset the poor showing from Microsoft, Apple, and Google.
The general trend on guidance is a better tone and reaffirming guidance. Many big Industrials that used terms like "cautious" in Q4 used terms like "stable" or "improving." Those big Industrials generally put up better than expected numbers. Guidance was mostly affirmed, there has been fewer instances of downward guidance. Banks were mostly better on slighly better loan growth, though net interest margins were mostly flat. The big question was Energy and whether Q1 was the trough earnings period. Exxon Mobil put up better than expected numbers and suggested that this is indeed a possibility.
Four years after its proposed creation and six years after the Flash Crash of May 2010, the long-delayed Consolidated Audit Trail is finally showing signs of life.
Here's the amazing thing: If a flash crash happened today, we wouldn't know much more about what caused it than we did when the original Flash Crash occurred. There has been some progress. But there's no real way to quickly examine the trail of the most important market information, like canceled bids and offers, or who executed the trades.
The CAT is supposed to be the ultimate unraveler of the mysteries of the stock market: a vast database that will enable regulators to look at who has been trading what in the sub-second trading world that exists today. And not just trades that take place: every bid and offer that is put into the market, regardless of whether the trade is executed or not.
And so the SEC spoke: The trading community will develop a massive database system that will enable regulators to get at all the important information, and — eventually — be able to analyze it. Fast. Find out what happened for sure. No blaming the Flash Crash on Waddell & Reed, or some knucklehead in London who may or may not be trying to spoof the markets. Real data. Real info.
We're still waiting. But on Wednesday, the SEC is set to publish ground rules on how to build the system. The ground rules will mandate what data has to be collected and within what time frames.
There are three final bidders to build the CAT: 1) FINRA, the market regulator, is teaming with Amazon Web Services, 2) FIS is teaming with Google, and Thesys Technologies (an affiliate of high frequency firm Tradeworkx) is offering to build the database on its own (they have brought in Rosenblatt as an advisor).
The winner will likely not be chosen until the third or fourth quarter, but the bidding has set up a very interesting battle between Google and Amazon. The winner will have bragging rights to having built the biggest database in history, potentially attaining supremacy in cloud computing, and expanding its reach into the lucrative financial services industry.
The whole project, while an exciting technological feat, has big problems.
1) Can it be done? This would be the largest database ever assembled. We are talking about 50 billion to 100 billion pieces of information a day. In a seminar I moderated for the Security Traders Association of New York last month at Google headquarters in New York, Google officials exhibited their usual can-do attitude, insisting that it could be done.
2) Who's going to pay for this? Building the database is an immense and potentially ruinously expensive undertaking, and it's not clear who is going to pay the potentially several billion dollars it may take to create it. The short answer is simple: It will be paid for by those who use it, that is, the broker-dealer community like Goldman Sachs, Merrill Lynch, Morgan Stanley, etc. But it's also likely they will find some way to pass these costs on to consumers. There is already grumbling from the financial community.
3) How to protect privacy? Each trade will be accompanied by Personally Identifiable Information — a code revealing exactly who is making the trade. This is immensely valuable information; we are talking about someone having access not only to every trade Warren Buffett ever makes, but also every bid and offer he or his firm makes. How will the security of this information be protected?
4) Who owns the data, and who has access to it? It's not just creating the database, it's what you do with it once it is created. You could potentially create a computer program that monitors the system for anomalous (fraudulent or illegal) behavior, or you could query it directly on individual events. All this is still in the future: The SEC is expected to issue rules initially just about the creation of the database. But creating rules around how to collect the data, how to query the data, and who would be allowed to query the data are very much on the trading community's mind.
The next step is the rules will be put out for a 180-day comment period, after which the SEC will decide whether the rules should be approved. The SEC will likely choose who will build the database in the third or fourth quarter.
If all this sounds endless, well, it is. The industry needs to bring trading into the 21st century, but the regulatory structure is so oppressive that progress is glacial. It has taken years just to figure out a simple method of running a pilot to trade small-cap stocks in increments other than a penny, just to see if trading in nickles will stimulate more trading.
There's a crying need to develop computer simulation models that enable markets to test new trading methodologies without years — decades even — of proposals.
Now do you see why the industry needs the help of a Google or an Amazon, or both?
Correction: This story was revised to correct that the Flash Crash was in 2010.
Industrials: there is a change in tone. I've been talking this week about watching what the big industrials have to say about the global economy.
The markets have recovered. We are a long way from the worries about a global recession that dominated markets in February.
But is there really any signs of improvement, even modest improvement? Last quarter, conference calls were dominated by phrases like "cautious."
Has the message changed? Yes, modestly.
It started this week with Illinois Tool Works, which reported Wednesday. Management repeatedly stated that conditions were " firm" and "stable" in most end markets, but were "not accelerating."
OK, that's better than "cautious."
General Electric reported today, and reaffirmed full year guidance with respectable organic growth of 2-4 percent. On the conference call, GE CEO Jeff Immelt was blunt in calling the oil & gas business "challenging," but he also said the aviation business was seeing "sustained strength," that healthcare was "rebounding" and that he was seeing "improvements in our business" in China. Overall, Immelt concluded "there's plenty of business out there to achieve our goals."
That is marginally more positive than last quarter.
Even companies that have had a tough time are modestly more optimistic. Take Caterpillar. No one is trying to gild this lily: there were sales declines in all the key businesses, including construction, oil and gas, mining and rail.
But CEO Douglas Oberhelman came on our air and said, "Overall I think we are close to the bottom." He talked about a bounce in China,
good orders in Europe, while acknowledging that Brazil was still bad and mining was flat.
For a company that has seen declining revenues since 2012, saying we are close to a bottom is a definite change in tone.
For Honeywell, each of the segments exceeded the sales guidance they provided earlier in the year. Earnings were up 9 percent year-over-year; HON has been a consistent earnings grower. The two biggest sectors by revenue showed respectable gains: Aerospace had 3 percent organic growth, while automation and control solutions saw organic growth of 4 percent.
On the conference call, Honeywell officials noted that growth "accelerated" in key categories like aerospace. They raised the low end of their 2016 earnings guidance, expecting earnings to grow 7-10 percent. Core organic sales guidance is 2 percent in the second half of the year, better than the 1 percent growth in the first quarter.
In energy, Schlumberger CEO Paul Kibsgaard, on the conference call last night, said that the oversupply in the oil market will narrow to zero by the end of 2016. "So yes, we believe and I think we agree with you that the oil market is in the process of balancing," he said in response to a question.
So what's this mean for the markets? There's a change in tone, however modest, and that's a good sign for earnings in the second half of the year and increases the chances that we can end this earnings recession (four consecutive quarters of earnings decline in the S&P 500).
There's two problems. First, many investors have anticipated a modest uptick in the global economy and started buying these names when they were beaten-up at the end of February at what now looks like a bargain-basement price. As a result, the stocks are not cheap anymore.
(forward P/E ratios)
Illinois Tool Works 18.9
The second problem is that the whole world has become a momentum investor, and will dump stocks with perfectly good earnings reports that have run up in anticipation of a decent report.
This was the problem with Google , Microsoft , Visa and Starbucks all of which are trading down today as growth was just not quite as strong as the most bullish holders of the stocks anticipated. Not surprisingly, none of these are cheap either.
But have you noticed something? Despite big declines from these huge names, the S&P 500 is trading on either side of up or down a half
percent through the morning. There almost two stocks advancing for every one declining on the NYSE.
Surprised? Everyone is looking for some kind of correction due to weakness in those stocks, but it's not happening. Investors want to own stock! The pain trade still appears to be higher.
Utilities and defensive names: is the party over? Utilities are again melting down as Treasury yields rise. The Dow Jones utilities index is down another 2 percent midday after dropping 2.5 percent Wednesday.
What's up? A sudden rise in the 10-year yield yesterday, which is continuing today, is the likely culprit. We went from 1.73 percent to Thursday's 1.87 percent on the 10-year note in 24 hours.
The opposite happened, though over a longer period, in February. As Treasury bond yields dropped in February on recession fears, investors dumped massive amounts of money into Utility ETFs and other defensive sectors like consumer staples.
The prices also rose. The Dow utilities index rose almost 10 percent in February and March, as did select consumer staples like Colgate, which rose in January and February as the broader market declined.
The result: valuations rose rapidly. Many of the big utility names are trading at 17 to 18 times forward earnings, well above their traditional range of 15 to 16 times. Colgate is at almost 25 times forward earnings!
Then there's the final piece of sector-specific news for Utilities: earnings. Electric and gas utilities are beginning to report, and analysts I have spoken with have indicated that the warm winter didn't help any of them.
You can see this in the report today of Unitil Corporation, an electricity distributor that operates in New England. They reported much lower energy usage for heating related purposes due to the unusually warm weather; the stock is trading down over 8 percent Thursday.
Bottom line: with utilities, you have a combination of 1) warm weather hurting earnings, 2) high valuations, and, most importantly, 3) a move up in interest rates, which are causing yield-hungry investors with itchy fingers to pull the trigger and get out early.
Finally, with about one-fifth of the S&P 500 reporting earnings, you can throw in a growing realization that the earnings guidance in general is somewhat more positive than expected. Bingo. Rotation time!
OK, we are not there yet. They are getting out of defensive names without piling into cyclicals. But watch this space for signs of moves into the cyclicals like industrials, materials, and consumer discretionary.
Can earnings from industrials push the markets to historic highs?
Last week, it was bank stocks that moved on earnings. This week, it may be industrials.
Positive commentary from this group may be enough to lift the Dow and the S&P 500 into record territory. We are very close already.
Here's the issues with big global industrials:
1) There's been a huge downturn in their end markets. Spending on energy, mining, power, and infrastructure-related projects got cut all over the world, particularly in emerging markets. Inventories built up dramatically.
2) Earnings for the entire sector got slashed big-time last year, and the stocks fall apart. Analysts predictably overreacted and cut estimates too much. When traders realized this in mid-February, they bought the stocks back, big time. ITW, for example, went to $105 from $80.
3) Investors typically overshoot the mark on the upside, hoping that growth will resume. The recovery in growth tends to last longer and go deeper than anyone expects. Investors fret and have to decide if they want to hold, or buy even more.
The central problem is figuring out much growth there will be.
Take Illinois Tool Works, one of the great industrials of the world. They are in everything: construction, automotive, commercial food equipment, adhesives, sealants, lubricants, welding equipment. They are everywhere: half their revenues are in the U.S., a quarter in Europe/Africa/MiddleEast and a quarter come from Asia.
If there is a sign of a global slowdown, or a global recovery, they will see it.
Oddly, the stock is at an historic high Tuesday. Why?
The key point helping markets is the expectation that rates will indeed remain lower for longer. This means that investors will pay higher multiples for low risk assets that offer any kind of growth — even modest growth. Earlier in the year, ITW's management guided to 1 percent to 3 percent organic growth in 2016. But its 2017 projection of 5 percent growth — along with some margin expansion — is key to investor attention.
And that's it: modest organic growth, some margin expansion. Caution on capital spending.
Not very exciting, but in a world of 2 percent to 2.5 percent GDP growth for the U.S. and flat growth elsewhere, that's what an investment looks like.
The downside is that valuations are pretty full for those that offer any kind of growth. Many of these Industrials are trading at 20 times 2016 earnings. ITW is at more than 19 times 2016 earnings.
Why buy at these inflated prices? One veteran analyst said to me that the only thing worse than buying ITW (or other industrials) at or near its all-time high in this environment is NOT buying it. There are not a lot of alternatives for idle cash, so, you stick with better quality names with modest growth expectations.
Remember: there is a big penalty for underperformance. You are not going to beat your bogey if you carry too much cash.
I know it sounds like pretty thin gruel, but those kinds of modest growth expectations may indeed be enough to get us another leg higher, into record territory.
Remember, this is exactly what happened with banks last week. Very modest commentary on loan growth and the economy was enough to lift bank stocks 4 percent to 6 percent.
And if someone like GE CEO Jeff Immelt on Friday implies the global economy is in better shape than, say, three months ago, that may be enough to get a few percentage points gain in GE and propel the Dow to new highs.
It's a well-worn piece of Wall Street mythology by now: We are in a profits recession.
The S&P 500 has seen four consecutive declines in quarterly earnings. First quarter 2016 earnings are expected to be down roughly 8 percent, following a 3.8 percent decline in the fourth quarter of 2015.
There's a reasonable shot that might be about to change, however, and that may be a motivating factor in the markets march toward historic highs.
That's right — historic highs, because we are very close. The Dow passed 18,000 yesterday, a mere 300 points from the closing high of 18,312 on May 19 of last year. The S&P 500 is less than 40 points from its historic high of 2,131, as well.
Earnings, and more importantly second-quarter guidance, are the key to pushing the markets to new highs. Financials rallied last week as the biggest banks reported modest gains in loan growth, despite flat net interest margins. A little better than expected was enough to move this unloved group up.
Well, this wasn't supposed to happen. Oil was supposed to be down big if there was no Doha agreement, right?
Except it's not. Oil is closing in the regular session down only 1.5% And instead of a selloff in energy stocks, they are leading a modest market rally.
What happened? Blame it on the so-called "smart money," which appears to be wrong again. The smart money bet — correctly — that there would not be any agreement in Doha.
But then a funny thing happened. Oil dropped in early trading but quickly started turning around.
The low print in oil was at the 9:30 a.m. market open, but if you look at oil-related ETFs like USO you can see volume really picked up immediately after that and then again after 11 a.m., when oil started climbing above its earlier lows.
In other words, it looked an awful lot like the smart money was short oil into the Doha meeting. When there was no real selloff, the shorts covered quickly.
And you can see this in energy stocks, which are leading the market to the upside.
What happened? Everyone keeps talking about the strike in Kuwait, and there may be something to this, depending on how long the strike lasts. Kuwait produces about 2.8 million barrels a day, and if half of that could go offline, that's significant.
Also, the market doesn't seem to believe that oil will degenerate into "everyone for themselves" or that this threat is a paper tiger. Maybe countries like Saudi Arabia and Russia are already at peak production, so they can't really bring more crude on line?
But there seems to be something else going on: there's a broad market uptrend still unfolding. The advance/decline line is still in an uptrend. We have not had significant breakouts in indices, nor in the New High list, but the trend seems to be up.
Much of this bullish talk is based on the hope that earnings for the broader market — particularly global Industrials — will be a little better than expected, just as they were for big banks last week.
There's early talk that the Q1 2016 earnings season — four consecutive quarters of declines — may be the bottom of the profits recession. Is there much to support that claim? No. But that's the whisper trade.
Plenty of trading tax proposals have been floated around by politicians, but how effective would they really be?
Blair Effron watched his bank's star rise in a crowded field. His star may rise if Hillary Clinton is elected.
CEO Mark Dunkerley said lower fuel costs and strong demand propelled the strong quarterly results.