S&P 500 returns to 2100 level for the first time this year

BY  | FROM  | 2016-04-25 16:31

Overall estimates for Q1 2016 declined a double digit before the season started, so when reality hit in the form of actual Q1 EPS, 77% of the reported issues beat estimates (over a third have reported), even as their year-over-year earnings declined 8.5%.  Similar to my story of going down to the bar and celebrating, the market went down to the Desk and bid up stocks, returning the index level to the 2,100 level (for the first time this year; but closing shy of it), as the index’s cousin, the venerable Dow Jones Industrial Average, closed above 18,000.  Ah, a 77% earnings beat rate (even higher than the historical 2/3s), a price that is within Striking distance of the all-time closing high (set May 21, 2015, at 2,130.84), and the “sun will come out tomorrow” song.  The “sun” in this case is the second half of 2016, with the scenario being that Q1 is at the bottom, Q2 will show upward progress, and Q3 and Q4 will actually set new earnings records—so why not set a new record price?  The crazy “dream” however, does have merit.  Interest rates remain low (and down year-to-date) with the top-side of 2016 having two increases (of 0.25% each), companies having near-record cash and availability to debt markets (be it more in Europe and Asia—partially rates, but more on repatriation issues), cost cutting plans continuing (with the savings also expected to continue), and EPS continuing to have a strong tailwind from buybacks, with the unexpected uptick in Q4 2015 now appearing to continue on into Q1 2016 (I used to joke that managing earnings should be a required MBA course, but it looks like some practitioners are going for their PhD).  On the “crazy dream is crazy” side, uncertainty continues with respect to global interest rates and stimulus, lower import/exports, oil price and market share battles continuing, indications based on Q1 2016 results are that both developed and emerging did contract, as well as the impact of cost cutting on employment and disposable income.  Adding to the list are (relatively) high P/Es, along with an equally rich P/cash-flow, and some predictions, be them few, of a pending recession down the road—with the road being just a year away.  At this point U.S., investors appear to have little choice but to pay attention to Wall Street, since the alternative is to watch U.S. politics.  Personally, I would rather replay the October 1987 market: 10 days up, average 2.03%, 12 days down, average -4.08%, at least I had a chance at winning (with the fun Friday,  10/16/87 return of -5.16%, which made my short-term in the money options worth wallpaper, so the follow-up Monday -20.47% had no impact on me). 
In M&A, internet issue Yahoo! (YHOO; up 2.7% for the week) said it received bids for its specific assets from Verizon (VZ; off 1.6% for the week) and TPG.  Lexmark International (LXK; up 11.8% for the week) said Chinese based Apex Technology would buy them for USD 2.5 billion. 
In economic news, the ECB kept rates and stimulus unchanged, but said it would use “all instruments available” to ensure that inflation returns to its targeted level; European markets declined.  OPEC said it may discuss an oil freeze at its next meeting (June 2, 2016, in Vienna). In the U.S., housing news, the Housing Market Index for April slightly missed (coming in at 58, when a 59 was expected), as Housing Starts for March missed (1,089 million units annualized when 1,167 million was expected) and Permits missed more (1.086 million, when 1.2 million was expected).  Existing Home Sales, which account for the majority of sales, rebounded 5.1% (to 5.33 million units annualized, when 5.268 million was expected), as the FHFA Nome Price Index for February posted a 0.4% increase, as expected.  The weekly new Unemployment Claims Report came in at its lowest level since 1973 (247,000 new claims, when 265,000 was expected).  The March Leading Indicator report posted a 0.2% increase, when a 0.5% gain was expected; February was restated down to a -0.1% decline, from the initial 0.1% gain.  In layoffs, high-end retailer Nordstrom (JWN; down 0.2% for the week) said it was eliminating 400 jobs at its corporate headquarters. Investment manager Morgan Stanley (MS; up 7.5% for the week) said it would lay off 1,440 workers in the first quarter. Semiconductor maker Intel (INTC; up 0.6% for the week) announced it would cut 12,000 workers, 11% of its workforce. 
In other news, the oil producers meeting in Doha, Qatar ended with no agreement to limit or freeze oil production, and little impact on oil prices, as OPEC said the issue may be revised at its next meeting (June 2, 2016).  An oil workers’ strike in Kuwait started and stopped. Argentina planned to return to the public debt, as it sold USD 16.5 billion, in its first offering in 15 years. UnitedHealth (UNH; up 5.3% for the week) said it would end its participation in Obamacare in most states in 2017, as it cited losses in the program.  Japanese auto maker Mitsubishi Motors (MMTOF; off 34.4% for the week) said it improperly manipulated fuel-economy data.  Auto maker Volkswagen (VLKAY; up 9.4% for the week) reported a significant loss, as it took a USD 18.3 billion charge for its recall and “fix” related to its emission scandal; the issue cut its dividend by 97%.
Breadth remained positive, as did the index, as 292 issues gained for the week, down from last week’s 376 issues, but up from the prior week’s 131 issues.  Decliners increased to 212 from last week’s 126 (the prior week to that was 373).  Sixteen issues gained at least 10% (eight did last week and three the week before that) and 71 others were up at least 5% (67 were last week).  Three issues declined at least 10% (one did so last week), as 17 issues lost at least 5% (eight did so in the prior week).  Year-to-date, breadth remained positive, as 330 issues were ahead, up from last week’s 314 issues; 144 issues gained at least 10% (140 last week), compared with 172 down issues, down from last week’s 189, with 53 of them down at least 10% (68 last week).  
For the week, the market closed at 2,091.58, up 0.52% for the week, as it traded above 2,100 mid-week and posted its second consecutive weekly gain (2.15% cumulatively). The year-to-date inched up 2.33% (3.02% with dividends), as the Street continued to eye the May 21, 2015, 2,130.82 closing high, now 1.84% away (which means it comes down to the 167 issues releasing earnings next week).  Five of the ten sectors posted gains, down from last week’s eight.  On the down side was utilities, off 3.24% for the week, as risk was on; the sector remains up 9.26% year-to-date.  Consumer staples was off again, falling 2.18% (after last week’s 0.78% decline), as spending concerns continued.  The sector remains up 2.56% year-to-date, but is under pressure.  Telecommunications again fell, off 1.24% for the week, after last week’s 0.52% decline, though it up 10.23%.  Information technology declined 2.04%, as issue-level data (earnings) had their impact, with Microsoft (MSFT) off 7.0% for the week and Alphabet (GOOG) off 5.3; Apple (AAPL) is next week.  Energy did the best for the week, as oil moved up, with energy adding 5.10%, and the sector is up 11.49% year-to-date – the best of any sector, but still off 14.69% from the close of 2014.  Health care continued to rebound, up 2.61% for the week (up 1.10% last week), as UnitedHealth (UNH; up 5.3% for the week) said it would pull out of Obamacare, with traders appearing to have no difficulties with the decision. Trading volume declined 2%, with volume at the one-year average level.  Measurable volatility (the high-over-low price variance) decreased to 1.80% from last week’s 2.36% and remains well under the 3.02% one-year average.  No day posted at least a 1% change, as one did so last week (up).  The VIX remained low, as it decreased to 13.22 from last week’s 13.62 and the prior week’s 13.82 (18.21 at year-end 2015; the 25-year average at 19.66).  Interest rates moved up, as the 10-year U.S. Treasury closed at 1.89%, up from last week’s 1.75% (and the prior week’s 1.72%).  The 30-year U.S. Treasury closed up at 2.71%, from last week’s 2.56% (and the 2.55% close the week before that).  Oil initially moved down as the oil producers meeting resulted in no action, but it increased after that, closing at USD 43.75, up from last week’s USD 40.40 (year-end 2015 was USD 37.06).  Gold moved a tick down, closing at USD 1,233.70, down from last week’s USD 1,235.80 and the prior week’s 1,240.10.  The euro was little changed, as it closed at 1.1227, down from last week’s 1.1285 (it closed the prior week at 1.1399).  The pound moved down, as it closed at 1.4401, up from last week’s 1.4202 and the prior week’s 1.4128.  The yen (quoted in yen-to-U.S. dollars, so higher is weaker) closing at 111.78, up from last week’s 108.76 (and miles away from year-end’s 2015 120.30).  The yuan closed at 6.5068, down from last week’s 6.4781 (and the prior week’s 6.4627). 
 
Watch or play, Apple is always an event.  Among the other highlights, due to their size, impact, or ability to tell a story of the economy, are: Coach (COH; look for its U.S. and foreign sales), Procter & Gamble (PG), fast-food Mexican restaurant Chipotle Mexican Grill (CMG; look for growth and costs), Ford Motor (F; look for truck sales and any incentives), United Parcel (UPS; look for volume, who is shipping, and expectations for shipping).  On Friday, Exxon Mobil (XOM) will release its earnings.  Exxon has increased its dividend 32 years in a row, with the last nine of them in April, and it is the largest public dividend payer in the world, at USD 12.1 billion annual, as investors (and funds) will be looking at more than their earnings.  Ending the week, after-the-close Friday, will be Berkshire Hathaway (BRK.B)—always an issue to watch, with Warren always a person to listen to.
 
Economic reports will mostly be in the background.  Housing will have New Home Sales, Pending Home Sales, and the S&P/Case-Shiller Home Price Index, as March Durable Goods Orders and Shipments will describe business orders.  The trade report will add the status of imports and exports (generally not doing well globally).  Income and spending data will be reported via the Personal Income, the PCE, and Chain Prices, with investors getting their first look at Q1 2016 GDP (the update will be released May 27, 2016, with the final issued on June 28, 2016).

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