DJIA 12,646.22 +52.19 (+0.41%)
Nasdaq 2,508.32 +21.62 (+0.87%)
S&P 500 1,398.26 +7.42 (+0.53%)
NYSE Composite Volume 1.21 bln
2-Yr Bond 2.67% +0.23
10-Yr Bond 4.08% +0.05
30-Yr Bond 4.76% +0.05
DJIA 12,594.03 +45.68 (+0.36%)
Nasdaq 2,486.70 +5.46 (+0.22%)
S&P 500 1,390.84 +5.49 (+0.40)
NYSE Composite Volume 1.19 bln
2-Yr Bond 2.34% -0.21
10-Yr Bond 4.03% +0.10
30-Yr Bond 4.71% +0.06
What has been moving the market lately? Crude oil prices and that is pretty much it. Crude oil has been very volatile of late (+/- 3% swings) and I have been asking myself: Knowing that crude oil moves the market, how do I take advantage of this?
Try a hedge…sounds complicated, but it’s not. Here, we won’t short any stocks; rather, we will be long two stocks. One that you expect to go up when oil goes up and one you expect to go up when oil goes down.
Typically, when oil goes up, all the agriculture and materials/minerals names move up as well. Retailers and other stocks dependent on consumer spending are the laggards. The reverse is true when oil sells off.
Here are the hedges to try:
Buy Apple (AAPL) or Research in Motion (RIMM) and Mosaic (MOS) or Potash (POT). All these stocks are high growth, high momentum for the more aggressive investor.
If you don’t like the agriculture stocks, substitute them for a natural gas/oil stock such as Anadarko (APC), Apache (APA), or Petrobras (PRB). I'd definitely use put protection if you select a natural gas/oil stock (see below for explanation).
If you are a more conservative investor, then try buying Monsanto (MON) or Deere (DE) - probably Monsanto given that Deere is in the dog house after sub-par guidance last quarter - and CostCo (COST) or Wal-Mart (WMT). Monsanto and Deere are both agriculture-related plays and usually trade with oil, but they are much less volatile. CostCo and Wal-Mart are direct consumer spending plays and both stocks are best-of-breed.
As long as oil remains volatile (not necessarily going higher) you should be able to limit your losses when the market sells off and maximize your profits when oil rallies. For someone who might like to try an aggressive strategy, consider buying a put option on the U.S. Oil Fund ETF (USO) which mimics the price of crude oil. The put option will increase in value when crude oil declines and decrease in value when crude oil rallies.
Right now, the path of least resistance for crude oil (in the near term) is lower so the put option might be a good idea. However, my long term view of oil remains intact (bullish) and this pull-back is merely a correction, a very much needed one.
"First, coverage. Perhaps the most obvious lesson is the dangers of regulatory arbitrage: if the rules required certain capital requirements, institutions shifted activities into off-balance-sheet vehicles; if rules operated restrictively in one jurisdiction, activities were shifted elsewhere; and if certain institutions were more tightly regulated, then activities shifted to others. Regulatory coverage must be complete. All leveraged institutions above a certain size must be inside the net."This is a definite concern, but difficult to put into practice, as it really gets deep into the accounting and legal mumbo-jumbo and jibber-jabber. The principles-based GAAP the US will soon be adopting should help some, by ceasing the expensive-to-audit proliferation of rules designed to box in companies to restricted accounting practices. However, I imagine that this will continue to be a constant struggle between regulators and accounting/legal teams at CPA firms who are going to keep wriggling free (for competitive reasons - you have to convince customers to buy your services somehow). Just as there is no perfect contract, there is also no perfect accounting standard.
"Second, cushions. Equity capital is the most important cushion in the financial system. Also helpful is subordinated debt. If Bear Stearns had had larger equity capital, the authorities might not have needed to rescue it. Capital requirements must be the same across the entire financial system, against any given class of risks. But there must also be greater attention to the adequacy of that other cushion: liquidity."We can probably put legal limits on how levered a company can be, can't we? This sounds like a good, old fashioned no-brainer.
"Third, commitment. The originate-and-distribute model has, it is now clear, a huge drawback: originators do not care sufficiently about the quality of loans they plan to offload on to others. They do not, in Warren Buffett’s phrase, have “skin in the game”. That makes for sloppy, if not irresponsible or even fraudulent lending. Originators should be required, therefore, to hold equity portions of securitised loans."I personally see this at the biggest reason why everything went to hell in the first place. I heard a great NPR report on the drive home from school about mortgage lenders, and how these 'no documentation' loans kept getting fed to wall street in tranches because markets were so hungry for any type of asset backed security. If the jerks writing these loans had some skin in the game, things wouldn't have gotten so bad. This is another no-brainer for me.
Fourth, cyclicality. Existing rules are pro-cyclical. Capital evaporates in bad times, as a result of write-offs, thereby forcing contraction of lending, worsening the economic slowdown and further impairing assets. Mark-to-market accounting, though inherently desirable, has a similar effect. One solution could be to differentiate between target levels of capital and a lower minimum level. Institutions that have minimum capital in bad times would only be required to aim for the higher target level over an extended period.Considering how psychological markets are, I doubt cyclicality can be conquered. Admittedly, I don't quite understand how Mr. Wolf's solution works, beyond trying to convince stakeholders that their efforts to increase their target level of capital is the acceptable... Any insights?
Fifth, clarity. Lack of information, asymmetric information and uncertainty are inherent in financial activities. These are why they are vulnerable to swings in collective mood. The transactions-orientated financial system is particularly vulnerable, because information has to flow freely across arms-length markets. So a big challenge is to generate as much clarity as is possible. One issue is the calamitous recent role of the rating agencies and the conflicts of interest under which they operate.I don't know how Marty expects this to happen. Admittedly, much can be done to clean up 10ks and 10qs which "disclose" everything they have to, but go about in a very convoluted fashion, blending up information, and spreading it across dozens of pages and footnotes. Some things are just really tough to value, and nobody has a very good idea about how to best do this, aside from mark-to-market, which adds to volatility, and feeds issue #4: cyclicality, when markets devalue assets.
Sixth, complexity. Excessive complexity is a significant source of lack of clarity. It is particularly damaging, as we have seen, to the originate-and-distribute model, because markets in complex securitised products may, at times, seize up, forcing central banks to become “market makers of last resort”, with all the difficulties this entails. One possibility then is to insist that all derivatives be traded on exchanges.The originate-and-distribute model is the practice of financially-inclined companies taking all of their income-generating financial assets (like car loans, credit card receivables, etc.) and selling it all to a Special Purpose Vehicle (aka an SPV, which is supposed to be a different company), which finances the purchase of these assets by selling bonds to other financial institutions (e.g. pension funds, banks, etc.). The assets that these SPVs buy off of the original company have varied levels of risk (they bought a car loan from a doctor and a homeless guy, say, so one will be more likely to pay back the car debt, and is therefore less risky). These assets, of varied risk, are smashed together and then chopped up into tranches and sold or re-tranched, making it very complicated to understand their risk, because of their complexity. I don't know how insisting that all derivatives should be traded on exchanges, though. How is a marketplace of people who probably don't understand them going to help? I don't think collective intelligence surpasses collective greed...
Seventh, compensation. On this I can do no better than quote Mr Volcker: “In the name of properly aligning incentives, there are enormous rewards for successful trades and for loan originators. The mantra of aligning incentives seems to be lost in the failure to impose symmetrical losses – or frequently any loss at all – when failures ensue.” Whether regulators can do anything effective is unclear. That this is a challenge is not.'Nuff said.
Dollar Index 71.888 -0.389
Crude Oil (July) 132.19 +1.38
Nat Gas (June) 11.857 +0.160
Gold (June) 925.8 +7.50
2-Yr Bond 2.56% +0.15
10-Yr Bond 3.92% +0.11
30-Yr Bond 4.63% +0.08
Dollar Index 72.277 +0.339
Crude Oil (July) 130.81 -2.36
Nat Gas (June) 11.697 +0.057
Gold (June) 918.30 -10.30
Every single stock on my watch list was red today. The culprits were crude oil’s march to $133 per barrel and the release of the Fed minutes. Also, adding to the selling pressure was bad news from the airlines. There was basically no good news that crossed the wire. Bonds even sold-off. We have finally gotten the pull back that I have been anticipating and I’m looking for stocks to come in a little bit more before I start buying.
Crude oil was flying high all morning and it got an added boost from a very bullish inventory report. The Energy Department reported that crude oil inventories fell 5.32M barrels last week. The consensus estimate was for an increase of 300K barrels.
American Airlines announced it will reduce its fourth quarter domestic capacity by 11-12% because of record fuel prices. The company also plans to eliminate “thousands” of jobs and retire about 85 jets. It will also begin charging $15 for customers’ first checked bag. AMR, the parent company of American Airlines, and UAUA, United Airlines, were off about 24% on the day.
Stocks were trading about 0.5% lower until 1pm when the Fed minutes were released. Investors then sold the heck out of stocks and the major indices finished the day down about 1.5%. Why all the selling? Here is the excerpt that frightened investors:
“Most members viewed the decision to reduce interest rates at this meeting as a close call…Several members noted that it was unlikely to be appropriate to ease policy in response to information suggesting that the economy was slowing further or even contracting slightly in the near term.”
Basically, it looks as if the Fed is done cutting interest rates. Inflation is a key concern and reducing rates any further will hurt the dollar and commodity prices will continue to rise. The Fed looks as if it is out of bullets - I expect rates to remain at 2% for a while.
From Briefing.com, “The Fed expects 2008 real GDP growth of between 0.3% and 1.2%, which is down about 1% from their previous forecast. The 2008 inflation outlook was increased, as was the unemployment rate forecast.” With oil at such high levels, economic growth will be stagnant as consumer spending slows.
DJIA 12,601.19 -227.49 (-1.81%)
Nasdaq 2,448.27 -43.99 (-1.80%)
S&P 500 1,390.71 -22.69 (-1.63%)
NYSE Volume N/A
2-Yr Bond 2.41% +0.07
10-Yr Bond 3.81% +0.03
30-Yr Bond 4.55% +0.02
The markets sold off hard as crude oil rallied to record prices once again. Adding to the sell-off was a worse-than-expected Core Producer Price Index report.
Why are stocks selling off as crude oil rallies? Here’s the thesis many are using, including myself: as oil goes up, gasoline also goes up and the consumer will get pinched (it is much more psychological than anything else). This increase in prices will cause the consumer (consumer spending makes up about 2/3 of GDP) to stop spending and the economy will slow. The slowing economy will also cause the dollar to decline further. The Fed will not be able to raise interest rates until crude oil prices stabilize.
The other side of this argument is that as the economy slows, demand and therefore prices for oil will decrease. However, the global demand for oil is far too great to be affected by the slowing American economy. Everyone is worried about the future supply of oil, not what is available today. People want to get their hands on oil now because it might not be available in a few years. This is why we see crude futures for 2016 delivery exceeding $140/barrel.
Now, back to the rally in crude oil fueled by predictions. Boone Pickens, a billionaire oil mogul, said in a CNBC interview he expects to see oil at $150 by the end of the year. Also, Societe Generale and Credit Suisse both increased their price targets for oil. Everyone seems to be following Goldman Sachs’ lead. Just the other day Goldman raised its target for crude to $141. I’m also following their lead because in April 2005 when crude was $50 per barrel Goldman said prices were going to $105 per barrel. They have been right all along and I do not see a reason to go against them.
Keep an eye on the dollar. It is quickly approaching its all-time lows once again. Everyone is talking about the dollar stabilizing and possibly rebounding as the Fed raises interest rates, but as long as crude continues to rally don’t look for a rebound anytime soon.
From Briefing.com, “The April Producer Price Index rose 0.2%, while [the] core-PPI, which excludes food and energy costs rose 0.4%. Economists expected the opposite, forecasting a 0.4% rise in PPI and a 0.2% rise in core-PPI. The difference in total PPI and core-PPI is largely due to a 0.2% drop in energy costs on a seasonally adjusted basis. On a non-adjusted basis, energy prices are up 2.9%.”
Today, the financials were weak again…
- AIG announced it will raise $20B worth of new capital; Merrill Lynch cut its earnings estimates for AIG; shares fell to a 10-year low
- Oppenheimer’s Meredith Whitney said, “the real harrowing days of the credit crisis are still in front of us and will prove more widespread in effect than anything yet seen.” Whitney cut earnings estimates for Bank of America, Citigroup, JPMorgan Chase, Wachovia, and Wells Fargo.
- Lehman Brothers cuts earnings estimates for Goldman Sachs and Morgan Stanley.
- Bank of America plans to sell $2.7B in preferred stock.
In earnings news…
- Hewlett-Packard reported earnings that matched its pre-announcement on May 13.
- Home Depot’s Q1 net income fell 66%, but was less than analysts predicted. However, shares of HD were down 5.5% on the day.
- Staples reported earnings that met analysts’ expectations. Its Q1 profit increased 1.5% while its revenue increased 6.4%.
- Target reported earnings that topped analysts’ expectations, but income was down from the same period a year ago.
- Saks missed analysts’ expectations and the CEO said the consumer is acting as if there is a recession even if there isn’t one.
In today’s down market, there were a few bright spots. The winners were the stocks/sectors that have a strong long-term theme. Oil and gas, infrastructure, minerals, agriculture were all relative winners as the market sold-off. Some of the material names – Alcoa and Freeport McMoRan – were off in the morning after a downgrade, but managed to recover as the day progressed. These sectors have been the market leaders the last 12 months and they will continue to be the relative winners.
DJIA 12,828.68 -199.48 (-1.53%)
Nasdaq 2,492.26 -23.83 (-0.95%)
S&P 500 1,413.40 -13.23 (-0.94%)
NYSE Volume 3,861,710,000
2-Yr Bond 2.34% -0.08
10-Yr Bond 3.78% -0.05
30-Yr Bond 4.53% -0.03
Stocks got off to a great start today thanks to a better-than-expected leading indicators reading. The leading index increased 0.1%, better than the flat reading analysts were expecting. I wouldn’t read too much into this piece of data, though, because it is pretty much a compilation of previously announced data. For some reason, CNBC kept highlighting it and said stocks were trading higher because of it.
The main reason stocks were higher in the morning was upgrades to technology stocks. Amazon.com was added to Goldman Sachs’ “conviction buy” list and had its price target increased to $98. AMZN was up about 10% midday. Goldman also upgraded the entire chip sector. Texas Instruments was upgraded to “buy” from “hold” at Citigroup and it was also added to Citi’s top picks list. Merrill Lynch also named technology as its top sector. All the tech names got a big boost from this news, but don’t chase these names. The NASDAQ has had a huge run up lately and these big banks are just a little late to the game. The easy money has already been made.
At about 12:30 pm, the market began to sell-off after the SanDisk CEO said sales were “soft” last month. Shares of SanDisk finished the day down 7.5%. Technology stocks went from market leader to market laggard. The CEO blamed rising gas prices as the reason why consumers have tightened their budgets. This news caused a large sell-off that caused stocks to finish mixed. The major indices were up about 1% midday.
Financials were also weak on the day after Citigroup cut earnings estimates at Goldman Sachs, Morgan Stanley, and Lehman Brothers.
Crude oil was once again in the news. OPEC President Chakib Khelil said “there is no shortage (of supply).” Also,
The Microsoft-Yahoo deal was back in the news. Microsoft proposed a new deal that would not involve buying Yahoo outright. Instead, Yahoo would just carry search ads from Microsoft.
In other news:
- Lowe’s reported earnings that beat analysts’ expectations, but the company offered very cautious guidance.
- Union Pacific was upgraded to “buy” from “hold.” This upgrade caused the transports to rally and hit a new all-time high.
- Take a look at Solar Fun. This stock has been up 50% the last few trading days.
- The Senate announced a $300B housing bill that will be sponsored by Fannie Mae and Freddie Mac to help troubled home owners.
Talk on the street:
- Why are the transports rallying to record highs with crude oil approaching $130 per barrel? Usually, the transports are a leading indicator for the economy and with them rallying to record prices is the economy in better shape than some think? Railroads are moving this index higher because there is high demand to ship commodities across the country.
- Is Cisco going to buy EMC?
- The economy is ready to rebound. The recent Fed rate cuts will soon be felt by big businesses and the tax rebates will stimulate consumer spending. Too many people are bearish right now and the market continues to rally. Just wait until these bears turn into bulls. Then the market will really take off higher.
DJIA 13,028.16 +41.36 (+0.32%)
Nasdaq 2,516.09 -12.76 (-0.50%)
S&P 500 1,426.63 +1.28 (+0.09%)
NYSE Volume 3,718,190,000
2-Yr Bond 2.42% -0.05
10-Yr Bond 3.83% -0.02
30-Yr Bond 4.56% -0.02
Commodities were off and running thanks to weakness in the U.S. Dollar. Crude oil hit another record near $128 per barrel after Goldman Sachs said the average price for a barrel of crude oil in the second half of the year will average $141. Goldman’s previous target was $101. Also, President Bush traveled to
Oil will remain at these elevated levels for three reasons: First, the earthquake in
Housing data also dragged the markets lower. Constructions starts for single family homes for April hit an annualized rate of 692,000 which is the lowest level since January 1991. However, total housing starts and building permits increased from the previous month’s levels.
Financial stocks were the main laggards on the day because of downgrades at two regional banks, KeyCorp and Regions Financial. Merrill Lynch downgraded these two stocks to “sell” from “neutral.”
The Consumer Confidence Index for May was 59.5 – the lowest level in 26 years. Last month’s reading was 62.6 (Source: Briefing.com).
Apple announced it will begin selling iPhones in the Middle East,
DJIA 12,986.80 -5.86 (-0.05%)
Nasdaq 2,528.85 -4.88 (-0.19%)
S&P 500 1,425.35 +1.78 (+0.13%)
NYSE Volume 3,817,609,000
2-Yr Bond 2.47% +0.02
10-Yr Bond 3.85% +0.02
30-Yr Bond 4.58% +0.02
Stocks had fairly little news to trade off today, but the markets continued their upward trend. Big-cap tech stocks were the relative winners; EMC, Amazon.com, Cisco, and Hewlett-Packard were all up over 2%.
Crude oil was also in the news after a very volatile session. Prices finished the day basically unchanged, but traded in a $6 range. Natural gas fell on a very bearish inventory report.
In economic news, last week’s initial jobless claims came in at 371,000, up 6,000 from the previous week. This number was pretty much in-line with expectations. This weekly piece of data has not shown signs of deterioration amidst recessionary talks and is a very bullish indicator. Industrial production for April decreased 0.7%, which was below the expected 0.3% decrease. The Manufacturing Index (
GE announced it is looking to sell or spin-off its appliance unit. The company is looking to divest its low margin, underperforming businesses. GE is looking for $5-8B for this business segment.
Retailers got a boost today because JC Penney, Kohl’s, and Nordstrom all beat analysts estimates. Retailers, specifically Costco and Wal-Mart, have significantly outperformed the market this year.
Transocean and many other offshore drillers were up big after UBS upgraded them to “buy.”
CBS announced it will buy CNET Networks for $1.8B, or $11.50 per share – a 45% premium.
DJIA 12,992.66 +94.28 (+0.73%)
Nasdaq 2,533.73 +37.03 (+1.48%)
S&P 500 1,423.57 +14.91 (+1.06%)
NYSE Volume 3,811,331,000
2-Yr Bond 2.45% -0.08
10-Yr Bond 3.83% -0.09
30-Yr Bond 4.56% -0.07
I had a lot of trouble trying to figure out why the stock market was up today. All the headlines read something like “Tame Inflation Boosts Stocks,” but inflation has been anything but tame lately. However, the Labor Department’s monthly report showed that the Consumer Price Index (CPI) only increased 0.2% and the core reading, which removes food and energy, only increased 0.1%. The average estimate was for a 0.3% increase.
The part that is really confusing to me is the break down of the report. “Energy expenses were unchanged after a 1.9 percent increase in March as gasoline prices dropped 2 percent. Fuel oil costs jumped 4.4 percent and natural gas prices climbed 4.8 percent.” How did gasoline prices drop? Prices at the pump have gone up nearly everyday. Here’s a sweet website that tracks local and national gas prices. According to gasbuddy.com, the average national price of gas was $3.778 today and one month ago it was only $3.386.
So why did the report say gasoline prices decreased? It is because the government tries to adjust the numbers for the different seasons. This CNBC.com article explains things very well. “Typically, gasoline prices rise sharply in April as the arrival of warmer weather encourages people to drive more. The government data is adjusted to reflect that pattern so that it can highlight variations from the trend. Because gas prices did not rise as much last month as they typically do in April, the seasonal adjustment showed that prices fell.”
Off of this report stocks rallied, but in reality, they should not have. People were just looking at the numbers and not what they meant. I was glad to see a pull back at the close.
At about 1:30 pm, stocks started to sell-off. Names like Apple, Research in Motion, and Google led the way lower. I’m not too sure why this happened because there was no news for these names. It was probably a combination of profit-taking because these stocks have been the relative winners lately and some sellers coming into the market realizing the rally off the CPI was not legitimate.
In earnings news, shares of Deere got crushed after its guidance missed analysts’ expectations. It ended the day down 10%. Caterpillar was also down off of this news. Deere said it expects Q3 profit to be no more than $575M which is well below the $654.6M estimate by analysts because of higher material prices, specifically steel.
Some big news came in after the bell regarding Carl Icahn’s proxy fight with Yahoo. He will attempt to get himself and other individuals elected to Yahoo’s board of directors at their next shareholder meeting. In the end, he’s looking to get the deal done with Microsoft.
Other news:
- Hewlett-Packard was up big after being slammed the last two days after announcing its buy out of EDS
- Macy’s beat earnings estimates and gave the retailers a boost
- Freddie Mac reported a much better than expected earnings report and shares were up about 10%. Freddie Mac plans on raising $5.5B worth of capital.
DJIA 12,898.38 +66.20 (+0.52%)
Nasdaq 2,496.70 +1.58 (+0.06%)
S&P 500 1,408.66 +5.62 (+0.40%)
NYSE Volume 3,957,674,000
2-Yr Bond 2.53% +0.06
10-Yr Bond 3.92% +0.02
30-Yr Bond 4.63% +0.01
The rail car leasing business is growing rapidly as TRN recently entered this segment. The leasing business brings the highest margins of any of Trinity’s businesses, allowing this growth to translate more directly into bottom line results.
The major area of growth, however, is in wind power. Trinity’s segment that manufactures wind towers has grown very well, from $11M in revenue in 2004 to an expected $400M in 2008. From Dec. '07 to March '08, backlog in the wind business grew from roughly $750M to $1.6BN. Operating margins to date on the wind business have been about 20%, and if these margins are maintained, $400M in wind revenue would translate to a 15.6% in operating income all else held constant. However, the company has been making their towers domestically, in places like
I recognize that the rail, barge, and construction have some significant cyclicality to them. However, the growth TRN is experiencing in higher margin businesses is more than sufficient to offset the cyclical effects. If you have doubts about the demand for rail cars, read any railroad’s conference call to see that the demand is strong, and factor in 41% of rail cars in the
The construction business is really more of a highway business. They make concrete and asphalt highway guard rails and beams and girders used for building highway and railway bridges. Given the state of transportation infrastructure in the
Trinity currently trades at 8.3 times trailing twelve months (TTM) earnings. Consensus estimates on the street have 2008 EPS declining by 10% and 2009 EPS growing by only 2.1%. If these estimates prove to be accurate, the management of this company will have been a true disaster. There is no reason why this company cannot earn at least $4.25 a share in 2009. If it were to trade at 12 times those '09 earnings, it’s a $50 stock. Trinity broke some resistance today and is up over 3% to about $35.50 - you can calculate that return.
Full disclosure: I am long TRN
Stocks sold-off early in the day but managed to almost make it back to the unchanged mark.
Before the market opened, April retail sales came in much better than expected. Excluding auto sales, the April reading was up 0.5% while the market was only looking for a 0.2% increase. Including auto sales, the number was in-line at -0.2% (Source: Briefing.com). This data gave the futures a bump higher.
However, stocks began to slide when Wal-Mart reported its earnings. Although WMT beat analysts’ estimates by one cent, its guidance was slightly below expectations. The company’s CEO said that “There are still uncertainties about the rest of the year.” WMT gave Q2 guidance of $0.78-0.81, which was just below the average estimate of $0.81. However, shares of WMT are up 20% year-to-date, significantly out-performing the major indices (see chart). Everyone is trying to figure out how the tax rebates are going to affect Wal-Mart’s sales the next two quarters, but I bet this is already priced into the stock.
Stocks also felt pressure from crude oil’s rally back to record levels. Energy and material stocks were the winners on the day. Crude traded as high as $126.98, but finished the day at $125.80 because the Senate voted by a veto-proof margin (97 to 1) to halt additions (~70,000 barrels per day) to the Strategic Petroleum Reserve until crude prices are below $75 per barrel. The House voted 385 to 25. 700,000 barrels is “less than 0.1% of global demand of 87 million barrels.”
Hewlett-Packard was in the news after it announced it was going to buy Electronic Data Systems for $13.9B. With this acquisition, HPQ will challenge IBM in computer services. The Wall Street Journal broke this news late Monday and shares of HPQ got hammered late Monday and it continued today (see chart).
HPQ also pre-announced its Q2 earnings of $0.87 per share, above the average estimate of $0.84. It raised its full-year EPS estimate by four cents (to $3.54 from $3.50) and it raised its revenue guidance to $114.2B, up from $113.5B.
Other noteworthy news:
- Fluor, an engineering company, soared 15% after beating analysts’ estimates by 24 cents ($1.50 vs. $1.24 per share). The company also raised its full year guidance about 21%.
- Treasuries sold-off big on the better-than-expected retail sales data; the dollar was also up off of this report
- The decoupling between oil and the dollar was evident again today as both oil and the dollar were up.
- Meredith Whitney cut earnings estimates at Goldman, Merrill, Lehman, and Morgan Stanley. She said these companies’ outlooks are “far more bleak than that reflected in the market.”
DJIA 12,832.18 -44.13 (-0.34%)
Nasdaq 2,495.12 +6.63 (+0.27%)
S&P 500 1,403.04 -0.54 (-0.04%)
NYSE Volume N/A
2-Yr Bond 2.47% +0.17
10-Yr Bond 3.90% +0.12
30-Yr Bond 4.62% +0.09
Stocks rallied today because oil dipped about $2. I’m not too surprised, though, that oil took a breather given last week’s huge rally.
The NASDAQ was the relative winner on the day (seems like this has been the case for the last few weeks) thanks to strength in Apple and Research in Motion. Apple announced that its online store is out of iPhones and this was taken as a very bullish sign by investors. RIMM unveiled its new BlackBerry called the BlackBerry Bold. It will have faster Web browsing and more video and music storage. The competition between RIMM and Apple will be interesting to follow this summer; Apple is expected to release its new 3G iPhone in June.
MBIA dragged the markets down in the morning, but the stock was able to recover by mid-afternoon. MBIA reported a Q1 loss of $2.4B or $3.01 per share. Analysts were looking for a loss of $1.21 per share. What caused the stock to recover? The CEO said “we have ample liquidity, our balance sheet is built to withstand credit stress levels many multiples of what we’re experiencing now.” Basically, MBIA does not need to raise more capital and that made investors happy.
JPMorgan’s CEO, Jamie Dimon said “the capital markets crisis sparked by last year’s collapse of the sub-prime mortgage market is about 75 percent over” (Source: Bloomberg.com).
Wal-Mart had its price target raised to $67 from $57 by Citigroup. Apple also had its price target lifted at BMO Capital and Amtech (Source: Briefing.com).
DJIA 12,876.31 +130.43 (+1.02%)
Nasdaq 2,488.49 +42.97 (+1.76%)
S&P 500 1,403.58 +15.30 (+1.10%)
NYSE Volume 3,352,633,000
2-Yr Bond 2.30% +0.05
10-Yr Bond 3.78% +0.01
30-Yr Bond 4.53% unch
Stocks are beginning to run out of steam thanks to oil hitting records nearly every day. Everyone thought, including me for a while, that the dollar’s rally (thanks to the Federal Reserve’s intervention March 17th with Bear Stearns) would cause crude prices to slip, but that hasn’t been the case. For the longest time, the dollar’s decline fueled crude’s rally. However, oil has become completely decoupled (independent) from the dollar trade.
Everyday last week crude oil – and prices at the pump – hit another new all-time high. Everyone is now concerned that the consumer is going to stop spending with gas at $4 and expected to increase. You know when stock prices are overextended and people are worried when the major oil service stocks sold-off towards the end of the week. These are the companies that directly benefit from higher oil prices so they should not have gone down.
Some analysts on CNBC were saying that high prices will be the cure for high prices; that is, as oil goes higher demand will decrease driving prices down – or at least stabilizing them. But that analysis is flawed. People need to drive and they will pay for gas. Yes, people may cut back on the road trips and vacations and other amenities, but it won’t slow down oil’s run to $150 and beyond. What’s going to get hurt from higher oil prices besides everyone’s wallet? It will be the retailers and other big ticket item makers.
If you think oil is going higher, which I think it is, then one possible trade for the next few months is to go long oil (USO) or the oil service stocks and short the stock market (SPY). Another trade is to look at natural gas or the natural gas exploration/drilling companies. As crude prices continue to skyrocket, companies are looking for alternative energy sources and natural gas is an already proven source that is becoming more and more popular.
Many experts think oil prices will decline soon – back to about $100 by the end of the year. There is the argument that the fundamentals (global supply and demand) don’t support the current prices levels and that speculators are driving up prices. This has been the argument for the last 9 months and if you went with this thesis, you would have lost tons of money as oil went from $50 (Jan ’07) to $125. This last week everyone has become extremely cautious about oil and I wouldn’t chase crude here. I’d wait for the broad-based market sell-off (which we are in the middle of) to drag the price of crude and other oil-related stocks down before going in and buying.
If you miss the oil trade because prices don’t pull back, there are other options. Crude’s march to $150 and beyond will create value in some very good stocks. For the long term investor, look at Boeing. Demand continues to rise for their fuel-efficient 787 Dreamliner because airlines are trying to offset their rising costs. Don’t think you have to be in oil-related stocks to benefit from the rise in oil prices. There are other safer ways to play this trade.
Stocks have hit a wall, but it shouldn’t be a surprise to you. Since March 17th’s market bottom, the Dow has rallied about 1,500 points (13%). A ton of shorts (those betting stock prices will go down) were forced out of their positions when the Federal Reserve stepped in and this “short squeeze” helped stock prices rebound. Also, the dollar has strengthened against the other major foreign currencies. However, the one thing that has not reversed course is crude oil and this has caused many investors to become wary about the health of the consumer.
Oil hit another new record, but the energy-related stocks were surprisingly down. There was definitely some profit-taking in these names as they have seen a huge run up the last few weeks. Everyone is concerned about $120+ oil and how it will affect the consumer and that is why we saw stocks sell-off today.
Financial stocks were another laggard on the day. Citi announced a plan that calls for $400B worth of divestitures over the next three years. Basically, Citi will be selling many of its less profitable assets in order to improve its cash position. Also, AIG reported a quarterly net loss of $7.81B because of $15B+ in write-downs. AIG reported a loss of $1.41 per share while analysts were only looking for a $0.34 loss. The company also announced it needs to raise $12.5B in additional capital to improve its balance sheet. However, in a surprising move, AIG also raised its dividend 10% to $0.22 per share.
After the bell, FedEx said it will miss its Q4 profit forecast by $100M because of higher than expected fuel costs. The earnings per share estimate was lowered to $1.45-1.50 from $1.60-1.80. This news from FedEx is just another example of how rising gas and oil prices are negatively affecting the economy. If oil stays at its current levels, look for other companies to lowers profit estimates too.
DJIA 12,745.88 -120.90 (-0.94%)
Nasdaq 2,445.52 -5.72 (-0.23%)
S&P 500 1,388.28 -9.40 (-0.67%)
NYSE Volume 3,495,811,000
2-Yr Bond 2.25% unch
10-Yr Bond 3.77% -0.02
30-Yr Bond 4.53% +0.03
DJIA 13,020.83 +51.29 (+0.40%)
Nasdaq 2,483.31 +19.19 (+0.78%)
S&P 500 1,418.26 +10.77 (+0.77%)
NYSE Volume 3,398,281,000
2-Yr Bond 2.38% -0.04
10-Yr Bond 3.93% +0.05
30-Yr Bond 4.64% +0.06
"If you think about the Dust Bowl in the U.S., and you think 'Well there was a decade where you had on the average of maybe five percent reduction in precipitation, you know, for the growing season,'" he says. "Southern California, the Caribbean, Southern Europe, Northern Africa, Central Asia, all these places, 100 years from now, will typically experience on average 20 to 30 percent reduction in precipitation, right? So that’s five times the Dust Bowl."Thankfully, millions and millions of dollars of research is being put into combating this growing problem. A side note for investors, this is why Jack Welch keeps harping that biotechnology still remains a sector with incredible growth opportunity.
Two main stories moved the market today: crude oil rallied to $120/barrel after an attack on a Nigerian oil-pumping station over the weekend and the Microsoft-Yahoo! deal fell threw after Yahoo! turned down a $33/share offer.
Yahoo! traded down to $23 this morning and closed at $24.50. These levels are well above the $19 price level prior to Microsoft’s initial offer because there is speculation that a hostile take-over by the shareholders could occur. Basically, Yahoo!’s investors are upset that Jerry Yang, the company’s CEO, did not accept Microsoft’s offer and there is talk they might vote to replace the current board of directors in order to get a deal done.
Off of the record oil prices, all of the energy names were strong as well as the agriculture and materials names; retailers (RTN) and airlines were laggards. Oil and retailers have an inverse relationship. The thinking is: as oil goes up, gasoline also goes up, so consumers then have less to spend at the stores.
Off of the Yahoo! news, almost all of tech was weaker except for Google and Apple. Google showed strength because the company will not be threatened with additional competition that could have arose from a Microsoft-Yahoo! merger. Apple was stronger off an upgrade. Tech’s litmus test will be tomorrow after the bell when Cisco Systems reports earnings. Tech’s recent rally will need support from a strong earnings report and positive guidance from Cisco tomorrow.
Financials were also weaker on the day because there were talks that Bank of America might walk away from its deal with Countrywide Financial. The analyst that broke this news also lowered his price target on Countrywide to $2 from $7. “He added that Bank of America will likely renegotiate the transaction down to the $0 to $2 level.” Talks of big layoffs at investment banks also weighed on the financials.
Some other news…
- Sprint may sell its Nextel unit to Deutsche Telekom AG.
- Service sector data was better than expected; showed expansion last month
What’s the buzz on the street? Basically, what are people on CNBC saying?
There is talk that this recent run-up is a sucker’s rally. Take a step back and look at the current levels. The major indices are only about 8-11% off their highs from last summer. The stock market is not pricing in a recession but everyone thinks one is coming (or is here). The economic data is not great and indicators point to further deterioration of the economy. It will be interesting to see where we go from here. Somehow, consumer spending is not slowing as much as people thought with gas and food prices at an all-time high. Is the stock market wrong? Only time will tell.
DJIA 12,969.54 -88.66 (-0.68%)
Nasdaq 2,464.12 -12.87 (-0.52%)
S&P 500 1,407.49 -6.41 (-0.45%)
NYSE Volume 3,388,910,000
2-Yr Bond 2.42% -0.05
10-Yr Bond 3.88% -0.01
30-Yr Bond 4.58% +0.01
