S&P 500 posted the sixth consecutive week of gains

BY  | FROM  | 2015-11-09 10:02

“Bring it on” was this week’s slogan.  At least it was the one still standing Friday after the bell, as a blowout employment report made a December interest rate increase of 0.25% the hands-on favorite.  For those of you who are statistically inclined, Fed Funds Futures put the chances (actually the interest rates) at a 70% probability.  Of course, for those who are less numerically inclined and more trading oriented, to paraphrase Shakespeare (“O, swear not by the moon, the inconstant moon,” Romeo and Juliet, Act 2, Scene 2), “trade not by the inconstant futures” might be more appropriate.  Adding to the ring of excitement before the December 15-16, 2015, meeting are a host of reports, including another employment release, as well as many others, both domestically and internationally—so this bout is not over, even if the result, a rate increase, is an eventual sure thing. 

This round (the week), however, was over, and it went (if not solidly) to the Bulls, as the market posted its sixth week of gains, making for a sixth weekend of grins.  Going forward, for those of “us” who can look beyond a month (or three), after that first “inevitable” interest rate increase occurs, we’ll all then be inundated with “there’s another one just behind that one,” with the debate turning again to the word “when.”  Of course, if there is no rate increase, the focus will be on why and if the Fed is saying the economy is not in good shape (sometimes it’s hard to win, regardless of the outcome).  In global news, Chinese and Taiwanese leaders will meet over the weekend for the first time in 70 years.  Volkswagen said there were 800,000 additional emission related units, as it estimated the additional cost at USD 2 billion; the shares lost 11% for the week and are 40% from their pre-emission difficulties (September 18, 2015). 

Japanese’s SoftBank missed earnings expectations, as it said it would cut thousands of jobs.  The Shanghai market continued its roller coaster ride, as it rose 6.1% for the week and was up 22% from its August low, off 28% from its recent June high, and up 11% year-to-date. In economic news, Chinese Premier Li Keqiang hinted at a five-year growth rate of “at least” 6.5%.  TransCanada requested the U.S. to suspend its permit request for the Keystone XL Pipeline. 

Most saw the action as an attempt to postpone the U.S. decision until after the U.S. election in 2016, since it appeared that the current administration would reject the pipeline. On Friday the U.S. government came out and rejected the entire pipeline proposal – ending a seven year effect.  The September Trade report declined 15% for August, as Exports were up 1.6% and Imports were off 1.8%.  Over the year, the deficit with China increased 8.4%, as the deficit with the EU increased 8.3% and increased 2.4% for Japan. In her congressional testimony, Chair Yellen said the economy was growing at “sufficient” pace and that banks were healthier but that problems remain with compliance and risk.

The preliminary Q3 2015 Productivity Report showed a 1.6% gain, when a much lower 0.1% gain was expected, with Labor Costs up 1.4%, when a higher 2.2% increase was expected. The big news for the week, as expected, was on Friday, as the employment report came in at anything but what was expected.  The report came in with a significantly more optimistic result, as 271,000 net new jobs were created for October, when a much lower 180,000 were expected.  The unemployment rate fell to 5.0%, when it was expected to be unchanged at 5.1% and was the lowest since April 2008, but the labor participation rate remained unchanged (at 62.4%, which was the lowest since 1977).  Just as positive as the jobs gain were hourly wages, which came in much higher, up 0.4% (to USD 25.20) for the month, double the 0.2% expected increase, as the year-over-year gain was up 2.5%.  Hours worked remained unchanged at 34.5.  The market takeaway was a significant increase in the probability for a December interest rate increase (70% based on the futures for Federal Funds). 

In M&A, U.K. biopharmaceutical issue Shire Plc (SHPG; off 4.9% for the week) said it would buy disease specialty issue Dyax (DYAX; up 25.4% for the week) for USD 5.9 billion.  Video game maker Activision Blizzard (ATVI; up 0.7% for the week) said it would buy digital game maker King Digital Entertainment (KING; up 19.1% for the week) for USD 5.9 billion.  On an issue level, Volkswagen (VOW3; 11.1% lower for the week) said there were 800,000 additional emission related units, and it estimated the additional cost at USD 2 billion. Generic drug seller Valeant Pharmaceutical International (VRX) fell 12.8%, as concern grew over an investigation over its practices; the issue is now off 43% over the month. Earnings continued, although at a slower rate (releases and results), but they still dominated the direct issue trades.  To date, 88% of the issues have reported, with third quarter earnings coming in 15.8% lower than the third quarter of last year. The decline is due to energy, which went into the red for the third consecutive quarter. Excluding energy, the third quarter posted a 0.2% gain year-over-year. The forward Q4 2015 estimate is now expected to show a 10.5% ahead of the fourth quarter of 2014 (which was hurt by pension costs, which are not expected this year). The market posted its sixth week of gains (cumulatively 8.69%), as it posted a 0.95% gain to close at 2,099.20, as it moved closer to an expected December interest rate hike.  The market’s early gains (Monday and Tuesday were up 1.46%) outpaced the later declines (Wednesday through Friday’s 0.50% decline). 

Year-to-date, the index is up 1.96% and is 1.48% away from its May 21, 2015, closing high (of 2,130.82).  Breadth was again positive, as 291 issues were up, showing a stronger position from last week’s 281 gainers (the prior week was 344 issues), and 213 issues declined, down from last week’s 247 (but up from 160 issues the prior week).  Thirteen issues gained at least 10% (seven did last week), and another 48 issues were up at least 5% (29 last week).  Two issues declined at least 10% [only one if I exclude the impact of HP’s (HPQ) stock distribution], while four declined last week), and another 29 issues lost at least 5% (33 last week).  Seven of the ten sectors gained for the week, up from five last week (but down from eight the week before that).  Financials did the best, up 2.68%, as they gained 1.05% on Friday, when higher interest rates appeared to be coming sooner. Energy was right behind, as it added 2.44%, even as oil remained volatile, with the growing forward belief was that oil prices would only moderately increase (or rebound, depending on your view) over the next year.  The sector remains off 12.34% year-to-date, the worst of any sector. Utilities did the worst, off 3.60%, as it fell 3.64% on Friday, as higher interest rates, and an acceptance on risk (and growth) increased; the sector is off 10.83% year-to-date.

Consumer staples also posted a loss, off 1.51%, as higher interest rates were seen as dampening sales and concern over margins continued.  Trading was mostly flat, as Friday picked up due to the employment report.  Trading moved away from issue-related (due to earnings and forecasts), to groups and sector re-allocations (due to reactions to currencies and expected interest rate increases).  Trading remained 12% higher than the one-year average. 

Measurable volatility (the high-over-low price variance) was flat, at 1.72%, a far distance from the 6.7% levels posted in late August.  It remains lower than the one-year 2.62% average. VIX traded in a range from 13.96 to 15.88, as it closed down for the week, at 14.33, from last week’s 15.07 (and the prior week was 15.05).  Interest rates moved up, as the likelihood of a December interest rate hike by the Fed grew, with the 10-year U.S. Treasury closing at 2.32%, up from the prior week’s 2.14%, and the 30-year U.S. Treasury closed at 3.09%, up from last week’s 2.92%. Oil continued in the mid-to-high USD 40s, closing down at 44.52, from last week’s 46.39, which was up from the prior week’s USD 44.73.  Gold continued to decline, closing at USD 1,088.90, down from last week’s USD 1,141.70 and the prior week’s USD 1,164.00.  The dollar increased, as the euro closed at 1.0742, down from the prior week’s 1.1007.  The pound was at 1.5049, down from the previous week’s 1.5427, and the yen (quoted in yen-to-U.S. dollar, so higher is weaker) was at 123.16, which was down from the prior week’s 120.62.

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