From a pure benchmark perspective, we will have to give the market the benefit of the doubt and call it “positive” for the week. However, except for technology and healthcare stocks, all other sectors were in the red. The Dow Industrial Average was virtually flat and the S&P 500 moved higher by only 0.2%. But the tech (and biotechnology) laden NASDAQ was ahead nearly 2%, as traders rotated into those two sectors with gusto. Oil continues to find new low ground in what is now a bear market for energy. Crude fell another $1.73/bbl. or 4.4% to $43.01 taking energy stocks down by 2.7% and 14% so far this year. High inventories for oil persist and Libya and the U.S. are producing more oil than needed. Telecom and utility stocks also found more sellers than buyers this week.
But the bull marches on, with the first half of the year finishing on a sufficiently positive note for the leading averages to likely begin the third quarter holding solid cumulative gains. This impressive performance reflects expectations that the Administration will seek a major tax cut before year-end. And healthcare reform is also back on the table with a new version of a Republican bill to repeal the Affordable Care Act.
As the second quarter winds down, earning’s season will provide more insight into how well corporate America is growing and becoming more productive. Generally supportive economic data and a relatively accommodative Federal Reserve are a tough combination for the bears to contest. And if this backdrop persists, the accumulation of quality equities paying increasingly higher dividends would seem a logical course. With sector rotation moving wildly from week-to-week, however, there will be major winners and losers, so diversification – as always – is key.
Here is the answer to last week’s trivia question: Bandag, now part of Japan’s Bridgestone: Operates of a nation-wide chain of tire stores, manufactures tires for the aircraft industry, recycles tire and rubber products or provides truck tire re-treading services? Answer: Provides truck tire re-treading services.
Today’s Trivia Question: The Federal Reserve recently hiked the short-term fed funds rate (the interest rate at which banks and credit unions lend reserve balances to other depository institutions overnight) to a range of 1.0% – 1.25%. What is the current “prime rate” (the rate banks charge their most credit-worthy customers)? 2.5%, 3.0%, 4.25% or 5.0%.
Software and cloud computing giant Oracle Corp. (NYSE: ORCL – $50.78) beat Wall Street expectations with its fiscal fourth-quarter earnings report, posting annual earnings and revenue growth for the first time since the 2014 fiscal year and sending shares toward record highs. The software giant reported net income of $3.23 billion on sales of $10.89 billion for the final quarter in its 2017 fiscal year, higher by 3%. After adjusting for special items, Oracle reported a profit of $.89 a share. Analysts on average expected the company to report adjusted earnings of $0.78 a share on revenue of $10.46 billion. SaaS (Software as a Service) cloud revenues were up 67% to $964 million and Cloud PaaS (Platform as a Service) plus IaaS (Infrastructure as a Service) revenues were up 40% to $397 million. “Our fourth quarter results were very strong as revenue growth and earnings per share both substantially exceeded the high-end of guidance,” said Oracle CEO, Safra Catz. “We continue to experience rapid adoption of the Oracle Cloud led by the 75% growth in our SaaS business in Q4. This cloud hyper-growth is expanding our operating margins, and we expect earnings per share growth to accelerate in fiscal 2018.”
For the full year ended in May, Redwood City, California-based Oracle earned $2.74 per share vs. $2.61 in fiscal 2016. Early estimates for the upcoming year is for $2.90. The shares of ORCL jumped nearly 10% in early trading on the news. Positions can continue to be held in a well-diversified conservative account for further upside.
Equities edged mostly higher this past week, despite economic data that was less than predicted. But technology stocks continued to lag, although at a lesser pace than last week. The NASDAQ was the sole looser of the major benchmarks, shedding nearly 1% as the tech sector fell another 1.3%, on average. The Dow rose to a new record high, closing at 21,384, positive by 0.5%, while the S&P 500 was virtually flat. Along with technology, basic material stocks were in the red by 1.5%, but interest-sensitive utilities continued to make headway moving higher by 1.6%, despite a Federal Reserve rate hike of one-quarter of one percent. And strangely, the more cyclical industrial sector, which tends to move in the opposite direction of safe-haven utility stocks, wasn’t far behind at 1.2%.
Inflation continued to fall, which is a major Fed indicator for future rate moves, and housing starts fell to a rate that is lower than the same time last year. The central bank also indicated that it is planning to unwind its balance sheet from the quantitative easing put in place during the great-recession. Treasuries jumped on the soft economic data and oil continued to ebb, with a loss of $1.09/bbl. to $44.74. In other news, Amazon.com’s intention to buy Whole Foods Market sent traders to the sell side of the food retailing industry that spilled over to drugstore chains with large grocery businesses in their front-of-store operations. Conservative choice CVS Health, fell $4.59 to $75.46, before recovering to $77.06 on the day. Kroger fell 9% on the news and Walgreen-Boots 5%.
The broader market continues to do reasonably well despite political uncertainty in Washington, rising interest rates and valuations that seem stretched in many cases. Indeed, many of the major averages are near their 52-week highs, a situation that is mystifying Wall Street’s bears. Investors expect things to work out, which explains the market’s high P/Es. And while there are risks at these levels, it’s hard to bet against the tape, so selective accumulation of equities is still in order.
Here is the answer to last week’s trivia question: Delta Air Lines became the second largest air carrier by revenue and the largest by passengers carried with its 2008 acquisition of what airline? Northwest Airlines, Pan American World Airways, U.S. Airways or Trans World Airlines. Answer: Northwest Airlines.
Today’s Trivia Question: Bandag, now part of Japan’s Bridgestone: Operates a nation-wide chain of tire stores, manufactures tires for the aircraft industry, recycles tire and rubber products or provides truck tire re-treading services?
Dow Chemical Co. (NYSE: DOW – $64.39) and DuPont confirmed they reached an agreement for approval from the U.S. Department of Justice’s antitrust division for their proposed merger. Under the deal, and consistent with commitments already made to obtain the European Commission’s regulatory approval, DuPont will divest certain parts of its crop protection portfolio and Dow will divest its global ethylene acrylic acid copolymers and ionomers business. The companies said the proposed agreement with the DoJ, which remains subject to court approval, does not need the companies to make any additional divestitures. “With this agreement, no further approvals are required in the U.S. for the merger to close,” the companies said. The combination is expected to generate cost savings of approximately $3 billion and growth synergies of about $1 billion. The merger is expected to close in August with the intended spin-offs to occur within 18 months of closing.
Midland, Michigan-based Dow has decent total return potential, which should improve post-merger and is helped by a generous dividend yield of nearly 3%. I envision healthy growth from the company’s diversified portfolio over the pull to early next decade, but will re-evaluate the newly combined operations once the divestitures are made clearer.
Markets were indeed a mixed bag this past week, with the Dow Industrials scoring a record and closing up 0.3% to 21,272. But the S&P 500 moved lower by the same percentage and the tech-heavy NASDAQ was negative by 1.6%. A sudden reversal of technology stocks on Friday sent shockwaves to holders of the headline names such as Facebook, Apple, Alphabet (Google), Netflix and Amazon.com and took the rest of the sector along with it. Technology shares were in the red by an average of 2.4% for the week. Given the rise in technology stocks over the past year, a pause was not only in the cards, but probably a long-term positive.
In all, half of the major market sectors were in the negative column, with consumer services not far behind tech with a nearly 2% fall off. On the plus side, financials and energy moved higher by 2.4% and 1.8%, respectively. Oil and gas stocks showed some strength despite crude oil falling to $45.83/bbl. as traders viewed the group as undervalued. Declining stocks edged out advancing issues on the NYSE by a small margin and the transports were virtually flat.
Markets shrugged off Congressional testimony by former FBI director James Comey and the election in the U.K., but investors still preferred safety on weaker-than-expected economic data. The yield on the benchmark 10-year Treasury fell it its lowest level since November, but late selling in Treasuries managed the yield to close higher at 2.2%. Wednesday, the Federal Reserve is expected to raise the short-term interest rate by a quarter of a percentage point. All eyes will focus on any follow through in the tech reversal, but if Fed Chair Janet Yellen provides positive clues for a strengthening economy, stocks should continue to move higher.
Today’s Trivia Question: Delta Air Lines became the second largest air carrier by revenue and the largest by passengers carried with its 2008 acquisition of what airline? Northwest Airlines, Pan American World Airways, U.S. Airways or Trans World Airlines.
Harris Corp. (NYSE: HRS – $110.90) said it has been awarded a five-year, $500 million ceiling, single-award IDIQ contract from the National Geospatial-Intelligence Agency (NGA) to develop software that will enable NGA analysts and customers to search and retrieve data from intelligence systems faster and more efficiently than ever before. The contract was received during the third quarter of Harris’ fiscal 2017. The software will process content held within the NGA and other intelligence-community agencies and will allow intelligence officials to provide more timely and accurate support to warfighters and the national security community. Harris has partnered with the NGA for almost 20 years to provide automated geospatial data processing, content data management and geospatial systems design and development. Harris currently provides high-resolution geospatial data content and products under NGA’s Foundation GEOINT Content Management program.
I am optimistic that an increase in military spending will be beneficial to Harris. With the Trump Administration’s intentions to increase defense spending, Harris is well positioned to capitalize on bigger government budgets, particularly with its line of Falcon radios and other tactical equipment that are well suited for the military. Thus, I believe earnings will resume their growth trajectory in fiscal year 2018 ending in June following a bit of a pause this year. The shares also yield investors nearly 2% at current levels, and further dividend growth is in the cards.
Despite a weak employment report, all three major averages hit new all-time highs. The Dow inched up 0.6%, the S&P 500 a healthy 1% and the NASDAQ 1.5%. U.S. non-farm payrolls rose by 138,000 in May, less than the 185,000 expected and the prior two months were revised downward. The unemployment rate, however, fell to its lowest level in 16 years to 4.3%.
With the exception of energy stocks, losing about 2.5% on average, all other market sectors had up arrows led by telecom, healthcare and utilities. Treasury prices and gold also strengthened. The Dow Transportation Average was again a star performer with a gain of 1.7% on the week. But oil fell 4.3% to end at $47.66 per barrel. Oil analysts cut the price forecast for crude for the first time in eight months, citing doubts that OPEC will extend an output ceiling through March of next year.
In an otherwise quiet week ahead on the economic front, there should not be too much volatility, except for news out of the White House on its plans for tax reform. Meanwhile, the bulls continue to show their determination, coming back quickly from a brief, but sharp, mid-May selloff. But, such ongoing support is pivotal, as valuations remain at levels that leave little margin for error.
Here is the answer to last week’s trivia question: Eastman Kodak Co., established in 1888, fell into bankruptcy in January 2012. Today, Kodak is? A division of Shutterfly, Inc., privately held by Elliot Management Corp., defunct or publicly traded on the NYSE. Answer: Publicly traded on the NYSE (KODK). Kodak directly – and through partnerships with others – provides products, software and services to customers in graphic arts, commercial print, publishing, packaging, electronic display, entertainment and commercial films and consumer products markets.
Today’s Trivia Question: The CAC 40 is a market index for equities of what country? Canada, France, China or Brazil.
Most of the news the past few weeks has focused more on geopolitical events than financial. Nonetheless, the market has been quite resilient despite problems in Washington, missile launches by North Korea and terror attacks abroad. OPEC’s decision to extend its six-month production cap by nine months was met with disappointment. While the accord was modestly successful at addressing the global inventory glut, traders hoped for a longer expansion. U.S. crude oil tumbled 5% after the cartel announced their move. While oil prices firmed at week’s end, the West Texas benchmark remains below $50/bbl.
For the week, the S&P 500 and NASDAQ continued to move into record territory with gains of 1.4% and 2.1%, respectively. The Dow finished the week 275 points higher or 1.3% at 21,080, some 35 points from its record high set in March. Except for energy stocks, virtually all other sectors were positive, led by utilities, consumer goods and technology. Transportation stocks were particularly strong, advancing 3.4%, on average.
First quarter GDP growth was revised up to 1.2% with a projected 3% advance in the cards for the current quarter. A rise in household spending, higher incomes, strength in employment, further durability in home building, accelerating increases in industrial production and asset appreciation (from rising home prices and a higher stock market), bode well for a second half expansion in GDP, as well to somewhere in the 2.5% – 3.0% range. A probable rebuilding of inventories should also contribute. With this positive news, so comes higher interest rates, with two or three more hikes likely this year. One should continue to be somewhat cautious regarding the stock market as valuations remain high and stocks seem priced for near perfection. Still, the fundamentals are strong and the bull market should remain alive and well for now.
Markets will be closed tomorrow in observance of Memorial Day. Enjoy the rest of holiday the weekend.
Here is the answer to last week’s trivia question: The largest “pure play” pharmaceutical company by revenue is? Pfizer, Inc., Novartis, Merck or Roche Holdings. Answer: Pfizer, Inc. (Johnson & Johnson has about twice the revenue of Pfizer, but its Jansen Pharmaceutical Unit is smaller than all the other “pure play” drug companies).
Today’s Trivia Question: Eastman Kodak Co., established in 1888, fell into bankruptcy in January 2012. Today, Kodak is? A division of Shutterfly, Inc., privately held by Elliot Management Corp., defunct or publicly traded on the NYSE.
Citing its favorable position for growth, a solid balance sheet and expected strong cash flow, health information technology provider Cerner Corp. (NASDAQ: CERN – $64.95) said its Board of Directors approved a stock repurchase program up to $500 million. The company plans to repurchase shares from time-to-time in the open market, by block purchase or possibly through other transactions managed by broker-dealers and no time limit was set for completion of the program. Approximately 7.8 million shares, or 2.3% of the company’s outstanding shares, could be repurchased. The program will be funded from working capital. There is about $100 million remaining under the previous stock repurchase program approved by Cerner in November 2016. I believe Cerner stock, up 18% over the past twelve months, should continue to fare well over time.
Introduction to the Stock Market:
Fundamentals of investing. Basic Terminology, evaluating and minimizing risk through diversification, market news and financial information. Each student will learn through an individual case study. Three – 2 hour sessions.
Course Number: N9711 OA
Wednesdays – 6/21-7/5 7-9pm $35
Middletown Campus – Rowley Center for Science & Engineering – Room 118
Instructor: Robert Alcaro
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