Early Gains Fall Flat

Charles Schwab: On the Market

Posted: 9/19/2016 4:15 PM ET

Early Gains Fall Flat

U.S. equities finished mixed and near the unchanged mark, as early strength amid a rebound in crude oil prices lost steam along with the commodity, while global conviction continued, and will likely remain hamstrung, ahead of the mid-week monetary policy decisions from the Fed and Bank of Japan. News on the equity front again surrounded M&A activity, while shares of Sarepta Therapeutic surged after an FDA approval of its muscular dystrophy drug. Treasuries were nearly flat, despite a jump in home builder sentiment, and gold gained ground, while the U.S. dollar was lower.

The Dow Jones Industrial Average (DJIA) fell 4 points to 18,120, the S&P 500 Index was unchanged at 2,139, and the Nasdaq Composite declined 10 points (0.2%) to 5,235. In moderate volume, 764 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil inched $0.24 higher to $43.62 per barrel, wholesale gasoline lost $0.04 to $1.42 per gallon and the Bloomberg gold spot rose $2.92 to $1,313.27 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 95.84.

Tech Data Corp. (TECD $85) announced an agreement to acquire the technology solutions unit of Avnet Inc. (AVT $42) for stock and cash valued at about $2.6 billion. Under the terms of the deal, AVT will receive $2.4 billion in cash and 2.8 million shares of TECD. TECD rallied over 20% and shares of AVT gained solid ground.

Isle of Capri Casinos Inc. (ISLE $22) announced an agreement to be acquired by Eldorado Resorts Inc. (ERI $14) for $23.00 per share in cash, in a deal with a total consideration of about $1.7 billion, including debt. The deal will create a combined company that owns and operates 20 regional gaming facilities in 10 states. ERI closed slightly lower, while ISLE was up nearly 30%.

Sarepta Therapeutics Inc. (SRPT $49) surged nearly 75% after the U.S. Food & Drug Administration (FDA) granted accelerated approval of its drug to treat Duchenne muscular dystrophy.

Homebuilder sentiment jumps

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month jumped to 65 from August's downwardly revised 59 figure, and versus the Bloomberg estimate of 60. Builder confidence moved further above the key 50 mark, which separates good and poor conditions, reaching the highest level since October 2015. The NAHB said as household incomes rise, builders in many markets across the nation are reporting they are seeing more serious buyers, a positive sign that the housing market continues to move forward.

Today's report kicks off an economic week that will bring a plethora of key reports to digest tilted toward the housing sector, headlined by the releases of August housing starts and building permits and existing home sales. Tomorrow, housing starts are projected to decline 1.7% month-over-month (m/m) to an annual rate of 1,190,000 units, while building permits are expected to rise 1.8% to an annual rate of 1,165,000 units. For a look at investing in the housing market, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, article, Real Estate Sector: Marketperform at www.schwab.com/marketinsight.

However, the attention of the global markets will likely be undivided as the Bank of Japan (BoJ) will deliver its monetary policy decision early Wednesday, hours before the Federal Open Market Committee (FOMC) will announce their policy stance. Uncertainty regarding if the BoJ will deploy further stimulus measures and/or move further into negative interest rate territory remains, while odds of a FOMC rate hike have diminished in the wake of the aforementioned economic data. However, odds of a December FOMC rate hike remain near 50%, per Bloomberg, and the markets will be dissecting its statement, which will be followed by the customary press conference from Chairwoman Janet Yellen and accompanying updated economic projections looking for clues to whether a rate hike this year is in the cards.

As noted in the Schwab Market Perspective: Round and Round We Go…, after August’s all-time highs followed by a stall, stocks were once again jolted into action by mixed messages from the Federal Reserve (Fed). We continue to believe the bull market is intact but near term risks are elevated. Economic data continues to have a groundhog day quality to it—perking up some before then pulling back again. The Fed isn’t the only game in town and other global central banks have added to the uncertainty, with many catalysts this fall potentially adding to the monetary mashup. Read the whole perspective at www.schwab.com/marketinsight.

Treasuries finished nearly unchanged, as the yield on the 2-year note ticked 1 basis point (bp) higher to 0.78%, while the yields on the 10-year note and the 30-year bond were flat at 1.70% and 2.45%, respectively. For a timely discussion of the recent ramp up in market volatility see the video from Schwab's Vice President of Trading and Derivatives, Randy Frederick and Chief Global Investment Strategist, Jeffrey Kleintop, CFA, titled Is the Bear Back: What's Behind the Renewed Volatility? at www.schwab.com/insights and follow Randy and Jeff on Twitter: @randyafrederick and @jeffreykleintop.

Europe rebounds as energy and miners rally, Asia mostly higher 

European equities traded higher, with the Stoxx Europe 600 Index recovering from recent weakness as oil & gas issues gained solid ground amid a rebound in crude oil prices, while a rally in mining stocks boosted the basic materials sector. However, the political landscape garnered attention following weekend elections in Germany and Russia, while global caution remained ahead of this week's key monetary policy decisions in the U.S. and Japan. Amid the backdrop of heightened global volatility as of late, Schwab's Jeffrey Kleintop, CFA, reminds investors, Three Reasons Why Now is Not the Time to Retreat from Global Diversification and why Your portfolio may be less diversified than you think at www.schwab.com/oninternational. The euro and the British pound gained ground on the U.S. dollar, while bond yields in the region finished mixed. In economic news, eurozone construction output rebounded in July.

Stocks in Asia finished mostly to the upside, with markets in China and South Korea returning to action following last week's holiday, while volume was muted as Japanese markets took the day off for a holiday and Australian markets were halted for the day due to a technical glitch that disrupted the trading session. The yen has shown some strength as the global markets await this week's monetary policy decision, which will precede the policy announcement from the Fed. Uncertainty remains regarding what the BoJ will announce, while the central bank is expected to release its comprehensive review of the efficacy of its policy measures thus far. For more on Japan's monetary policy, see Schwab's Jeffrey Kleintop's, CFA, article, What investors need to know about helicopter moneyat www.schwab.com/oninternational. Mainland Chinese stocks and those listed in Hong Kong advanced amid ramped up mainland buying of Hong Kong shares via the trading link between the two exchanges, while a read on August property prices rose the most in more than six years, per Bloomberg. Meanwhile equities traded in South Korea and India finished to the upside.

Economic news abroad will be sparse tomorrow, with the only reports of note being housing prices from Australia and PPI from Germany.

Uncertainty Continues

Charles Schwab: On the Market

Posted: 8/18/2016 4:15 PM ET

Uncertainty Continues

U.S. equities traded in a narrow range and finished modestly higher with investors nervously weighing yesterday's seemingly dovish July Fed meeting minutes, mixed earnings results from Dow member's Wal-Mart and Cisco Systems, and upbeat economic data. Energy issues got a boost from a rally in crude oil prices, while Treasuries and gold also gained ground, but the U.S. dollar was lower.

The Dow Jones Industrial Average (DJIA) increased 24 points (0.1%) to 18,598, the S&P 500 Index gained 5 points (0.2%) to 2,187 and the Nasdaq Composite added 11 points (0.2%) to close at 5,240. In moderate volume, 744 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.47 to $48.22 per barrel, wholesale gasoline added $0.04 to $1.49 per gallon and the Bloomberg gold spot price gained $3.96 to $1,352.69 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.6% lower at 94.11.

Dow member Wal-Mart Stores Inc. (WMT $74) reported 2Q earnings-per-share (EPS) ex-items of $1.07, above the $1.02 FactSet estimate, as revenues increased 0.5% year-over-year (y/y) to $120.9 billion, topping the expected $120.2 billion. 2Q U.S. same-store sales at Walmart rose 1.6% y/y, exceeding the forecasted 1.0% gain. WMT raised its full-year adjusted EPS guidance. Shares were nicely higher.

Dow component Cisco Systems Inc. (CSCO $30) posted fiscal 4Q EPS of $0.63, north of the estimated $0.60, with revenues rising 2.0% y/y to $12.6 billion, roughly in line with forecasts. The company issued slightly softer-than-expected 1Q guidance. CSCO announced a restructuring, which will eliminate up to 5,500 positions from its global workforce. CSCO finished lower.

L Brands Inc. (LB $78) announced 2Q profits of $0.70 per share, above the $0.62 expectation, on previously reported revenues of $2.9 billion. Despite reporting 3Q EPS guidance that came in below forecasts, the retailer raised its full-year earnings outlook. L Brands traded solidly higher.

NetApp Inc. (NTAP $34) reported fiscal 1Q EPS ex-items of $0.46, above the forecasted $0.36, as revenues declined 3.1% y/y to $1.3 billion, roughly in line with expectations. NTAP issued 2Q guidance that was mostly in line with estimates. NTAP rallied over 17%.

With 2Q earnings season wrapping up, Schwab's Chief Investment Strategist, Liz Ann Sonders discusses in her latest commentary, With a Little Help From My Friends: On Africa, Economy and Earnings whether earnings growth can squeak its way back into the green in the third quarter, at www.schwab.com/marketinsight. Follow Liz Ann on Twitter: @lizannsonders.

Jobless claims decline, leading indicators top forecasts 

Weekly initial jobless claims (chart) decreased 4,000 to 262,000 last week, versus the Bloomberg estimate of a dip to 265,000, with the prior week's figure unrevised at 266,000. The four-week moving average rose 2,500 to 265,250, while continuing claims gained 15,000 to 2,175,000, north of the estimated level of 2,145,000.

The Philly Fed Manufacturing Index (chart) in August moved back to at a level depicting expansion (a reading above zero) after rising to 2.0 from -2.9 in July, in line with estimates.

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) increased 0.4% month-over-month (m/m) in July, above projections calling for it to match June's unrevised 0.3% gain. Support came from the components pertaining to jobless claims, average workweek, stock prices and the yield curve.

Treasuries finished higher in choppy action, as the yields on the 2-year and 10-year notes declined 2 basis points (bps) to 0.71% and 1.53%, respectively, while the 30-year bond rate ticked 1 bp lower to 2.25%. Bond yields declined yesterday after the release of the Fed's July policy meeting minutes that showed members remained divided and continued to be data dependent regarding the timing of the next rate increase. For analysis on the fixed income markets see the video from Schwab's Managing Director of Trading and Derivatives, Randy Frederick and Collin Martin, CFA, titled Tempered Expectations for Bond Returns: Why Hold Bonds?, at www.schwab.com/insights. Follow Randy and Schwab on Twitter: @randyafrederick and @schwabresearch.

Tomorrow’s economic calendar will take a break, as no notable reports are scheduled for release.

Europe higher, Asia mixed following data and Fed minutes

European equities finished to the upside, with the Stoxx Europe 600 Index gaining ground for the first time in five sessions, amid a plethora of mixed earnings reports, while mining issues continued a string of gains to lift the basic materials sector. Oil & gas issues led the way, with crude oil prices adding to a recent rally. The global markets digested yesterday's look at the U.S. Fed's July meeting that appeared to dampen imminent rate hike expectations as the Central Bank noted that it remains data dependent. The euro moved higher on the U.S. dollar, which saw pressure following the Fed's report, while bond yields in the region were mostly lower. The British pound rallied versus the greenback on the heels of a much larger-than-expected rise in U.K. July retail sales. The report joins separate releases this week that have shown jobless claims unexpectedly fell and inflation surprisingly rose in July. The data is offering the first glimpses at the impact of the late-June vote in the U.K. to leave the European Union, known as a Brexit, and likely easing concerns. For more on the potential impact of the Brexit vote, see the Schwab Center for Financial Research's article, Brexit: What Investors Should Know, at www.schwab.com/marketinsight.

Stocks in Asia finished mixed with the global markets digesting yesterday's U.S. Fed July meeting minutes that showed policymakers remain in wait-and-see mode regarding the timing of the next rate hike. The U.S. dollar saw some pressure, boosting the Japanese yen, which weighed on Japanese stocks along with the nation's July trade report that showed exports and imports fell more than expected. Mainland Chinese equities declined on the heels of the country's home price report for July, which showed prices gained in fewer cities m/m. However, some stronger-than-expected earnings reports helped lift stocks in Hong Kong. Australia's markets decreased following a rally in the Australian dollar on the nation's employment report that showed job growth was much stronger than anticipated for last month. Indian securities advanced, as emerging markets found support from the weaker U.S. dollar as rate hike expectations were dampened. Finally, South Korean equities moved slightly higher. Amid the elevated uncertainty in the markets, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers Three Reasons Why Now is Not the Time to Retreat from Global Diversification at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop.

Unlike the U.S., the international economic docket will be somewhat busy, with reports slated for release to include PPI from South Korea, Japan’s All Industry Index, PPI from Germany, Spain’s trade balance, and public sector net borrowing from the U.K.

Financial Review

Honey for Bears

Sinclair Noe — February 8, 2016

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

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DOW – 177 = 16,027
SPX – 26 = 1853
NAS – 79 = 4283
10 Y – .11 = 1.74%
OIL – .80 = 30.09
GOLD + 15.50 = 1190.00

This was just an ugly session from the start. The Dow opened about 200 points down and then trickled lower; at one point down more than 300 points. The S&P 500 index broke down through the key level of support at 1860 that I warned you about in January and again last week, taking out the August 2015 lows and the October 2014 lows.

The S&P 500 not only took out support from January, but now we look to minor support at 1815, and then, well there isn’t really any support. In other words, the charts look very dangerous here.

And if you prefer fundamentals over technicals; this is what FactSet had to say in its recent report: “For Q4 2015, the blended earnings decline is -3.8%. If the index reports a decline in earnings for Q4, it will mark the first time the index has seen three consecutive quarters of year-over-year declines in earnings since Q1 2009 through Q3 2009.”

The difference this time versus 2009 is that valuations are much higher. FactSet data show expectations for first-quarter per-share earnings have collapsed to a decline of 5.5% as of today. Back in September, that forecast was for growth of 4.8%. By the end of December, it had fallen to growth of just 0.8%.

Chinese stock markets are closed for trade all week to celebrate the Lunar New Year, providing little direction for European stocks at the open. However, data out over the weekend showed China’s foreign-exchange reserves fell to the lowest level in more than three years last month, in another sign of capital flight as the yuan weakens.

European stocks opened lower, extending last week’s losses. The Stoxx Europe 600 index had its lowest close in more than 15 months; banks in the Stoxx Europe 600 Index have dropped about 39 percent since a peak in July. Their slump this year is the worst of any other industry group.

Oil prices kicked off the week in the red. Data on oil demand in the world’s two largest markets, the U.S. and China, has taken a sharp turn lower. U.S. demand for oil products in January fell 3.9% compared with January 2015. In China, although overall oil demand was flat in December and an improvement on November’s outright decline, it still represented the second weakest reading for the year.

Meanwhile, hopes about an agreement between producers within and outside of the Organization of the Petroleum Exporting Countries to cut output and support prices have also faded in recent days. A meeting between Saudi Arabia and Venezuela on Sunday ended without any plans for a production cut. Iran plans to sell 300,000 barrels of crude oil a day to European customers now that Western sanctions are lifted. And within the next few months, Iran wants to ramp up production to 500,000 barrels a day, with the remainder going to Asia.

Chesapeake Energy, the natural gas driller that’s been cutting jobs and investor payouts to conserve dwindling cash flows, lost more than half it stock market value today after a report that it hired a restructuring law firm. The company’s bonds led losses among high-yield debt. Chesapeake’s notes due March 2016 (about $500 million in bonds) tumbled to a record to 74.5 cents, from 95 cents last week, while its bonds maturing in 2017 fell to an all-time low at 34 cents.

Exchange-traded funds that hold US junk bonds slid to their lowest levels in almost seven years. BlackRock’s iShares iBoxx High Yield Corporate Bond exchange-traded fund and SPDR Barclays High Yield Bond ETF both fell to the lowest levels since 2009. In high yield, energy, communications and health care fared the worst. Banks and insurers in Europe led a surge in the cost of insuring corporate bonds to the highest levels since 2013.

European financial firms are taking a beating amid fears of “a chronic profitability crisis that makes it impossible for banks to build up barely-adequate capital bases. None of the fresh wave of selling stems from new news, but the list of negatives is long. Fears surrounding non-performing loans and other deep-rooted issues in the Italian banking sector have driven nerves, while a slew of weak earnings from large banks such as Credit Suisse and Deutsche Bank have added to concerns. The worst of the lot is Deutsche Bank, Germany’s biggest, down about 10% today, and down 40% year-to-date, as its credit default swaps spiked to their highest levels since 2012.

Bank credit default swaps, or contracts that offer protection against the risk of a bond defaulting, have also surged in price, indicating intensifying fears for financial groups’ credit. Deutsche bank’s 5-year senior CDS has jumped 11bps today to a three-and-a-half-year high of 212bps, up from 134bps just over a week ago. The cost of protecting the company’s subordinated debt from default for five years using credit-default swaps has more than doubled since the end of 2015, rising to 438 basis points, a four-year high, from 187. That is just a very, very big selloff.

And what makes it crazier still, is that it looks like Deutsche Bank has more than sufficient reserves set aside for its debt and the interest on its debt, exclusive of operating results. But for now that doesn’t matter; share price has dropped, which increases expectations for more turmoil, which pushes the cost of hedging, which frightens shareholders, who then sell, pushing prices even lower. If it all sounds a bit over-done, it is, but it still demands we pay attention.

And the situation is not unique to Deutsche Bank, which is just one of the extreme examples. Basically all the banks are seeing their credit default swaps trading at the highs of the year. And here in the US, the large cap financials are down almost 12% year-to-date. That means there has been some panic selling. Today, the mega-banks, including Bank of America, Citi, and Wells Fargo all moved to new lows intraday or at the close.

The KBW Bank Index, which consists of 24 banks, is approaching 2008 and 2011 lows relative to the S&P 500. So, the question of the day is: Are the large cap financials cheap or is the rest of the market still overpriced? We may need more time to answer that one, but for now the big banks distress is honey for the bears.

If Congress does not act soon, Puerto Rican officials say major defaults are likely this spring. They are trying to make their case for a law that would allow a broad restructuring of the territory’s multibillion-dollar debt. The officials also said they knew that any legislative help would come at a stiff price: Puerto Rico would have to submit to a federal control board, something viewed by some on the island as colonialist-style interference.

Argentina has offered to pay about $6.5 billion in cash to U.S. holdouts that refused debt restructurings after its 2001 default, implying a haircut of about 25% on the amount bondholders say they are owed. If accepted by all the holdouts, which are led by billionaire Paul Singer’s Elliott Management, the deal would clear the way for Argentina’s return to the international capital markets.

Washington is vowing to ensure the United Nations Security Council imposes serious consequences on North Korea after it launched a space rocket in a purported satellite program widely considered to be a cover for developing ICBMs. The latest launch, which follows North Korea’s Jan. 6 nuclear test, may kick off a rapid buildup of American missile defenses in Asia.

Apollo Education Group, the parent company of the University of Phoenix, will be taken private as it is acquired by a group of investors for $1.1 billion. The investors will pay $9.50 in cash per share, which is 30% above the company’s trailing 30-day volume weighted average stock price. Tony Miller, chief executive of The Vistria Group, one of the investors, will become chairman of the board for the Apollo Education Group once the transaction is completed. The other investors included Apollo Global Management, LLC and Najafi Companies.

The agreement arrives weeks after the company reported a decline in revenue and another round of layoffs at the for-profit college. Phoenix, like other for-profit schools, has been battered by poor enrollment, government investigations and heightened federal regulation.

Chipotle closed its more than 2,000 restaurants today for a few hours to address employees about the food-borne illnesses that have led to lawsuits and a federal investigation. Chipotle used the event to review new food safety protocols and explain the steps the company is taking to improve food safety.

Ford is planning to build a new assembly plant in Mexico to sharply increase output from the country, representing the latest shift of investment abroad by a Detroit automaker following the signing of a costly new labor deal. Ford expects to add 500,000 units of annual Mexican capacity starting in 2018 (more than double what it built in 2015), by constructing a new assembly complex in San Luis Potosí and expanding an existing factory near Mexico City.

You don’t see this every day…Credit Suisse CEO Tidjane Thiam has asked the company’s board to reduce his bonus, days after the Swiss bank reported a fourth-quarter multibillion-dollar loss that sent its share price tumbling. Thiam, who joined the bank in July, did not indicate the size of the cutback, but said his was the largest bonus reduction within the management team.