“Nothing gives a fearful man more courage than another's fear.” –Umberto Eco
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Hindsight
Major market indices finished higher last week. The DJIA rose 1.68%, and S&P 500 advanced 2.11%, and the Nasdaq rose 1.97%. Value stocks outperformed growth stocks. And the small cap index gained 3.82%. The 10-Treasury yield added 5 basis point on the week, closing at 3.82%.
Of the 172 companies in the S&P 500 that have reported 1Q earnings, 83% have reported results above analyst expectations according to Thomson Reuters. If the trend continues, and the quarter ends with 83% of companies beating estimates, it will mark the best quarter for the S&P 500 since at least 1994. Overall, companies are reporting earnings that are an average of 21% above estimates -- well above the long-term surprise factor of 2%. The revenue picture also looks good: 69% of the S&P 500 companies that have reported to date have beat revenue expectations; 31% reported revenues below expectations. Overall, revenues are beating expectations by 3%. The forward four-quarter price-to-earnings ratio for the S&P 500 stands at 13.8 -- below the average of 14.7 seen over the last 52 weeks. This rally appears, more than ever, to be justified based on the fundamentals.
But not all news is good. Our Modern Greek Tragedy continued to unfold Thursday, as Moody’s cut Greece’s credit rating another notch when more problems came to light. This increased Greece’s cost of borrowing, and forced the country’s yield curve to invert—usually a sign of financial doom as investors expect more problems in the short run than the long. Greece now faces a combination of draconian spending cuts and a reliance on a joint EU/IMF bailout. And, like most great stage plays, the outcome of this next act could be dramatic.
Bears continue to blunt the Bull’s enthusiasm to rocket well past the 1200 level in the S&P. But, that could be short lived. As Bulls, attempting to hold the index above this putative line in the sand for a week, would then force bears to cover short positions and retreat to the next line of defense. That week-long barometer comes tomorrow. Either way, the next move could be big. Stay tuned…
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Equity Markets Review
* Seasonally adjusted U.S. Unemployment claims the week ending April 17 were down 24,000 from the previous week to 456,000, according to data from the U.S. Department of Labor released April 22. The four-week moving average increased 2,750 from the previous week to 460,250.
* Orders for durable goods excluding transportation surged in March by the most since the recession began in December 2007, adding to evidence the U.S. recovery is broadening and strengthening. The 2.8 percent increase in bookings for goods meant to last at least three years, excluding cars and aircraft, was four times larger than the median forecast of economists surveyed by Bloomberg News.
* ABC's Consumer Comfort Index dropped 3 points to -50, matching a 2010 low and not far above its all-time low of -54. Positive ratings of the national economy held steady at 8%, but those who think it's a good time to buy things slipped to 24% and positive ratings of personal finances slipped to 43% from 47%.
* In March, purchases of new homes surged 27%, the most in almost five decades, and sales of previously owned homes rose for the first time in four months, climbing 6.8%, as buyers rushed to qualify for a government tax credit.
* The government is reportedly considering a two-year plan to offload its nearly 80% stake in AIG. The proposal would involve converting preferred shares into common shares for open market sales, and could be announced as soon as the fourth quarter.
* A congressional panel concluded that ratings agencies Moody's and S&P were improperly influenced by the banks that paid them fees, and willfully ignored signs of fraud in the lending industry prior to the financial crisis. Once the crisis became apparent, the ratings agencies failed to respond quickly enough, leading to mass downgrades on billions of dollars in investments and causing trauma to the financial system.
* Germany’s loans to Greece will likely exceed 30 billion euros ($40 billion) by the end of 2012, Bloomberg reported April 23, citing a Bild interview with Frank Schaeffler, a member of the German parliament’s finance committee. He said more loans may be extended after 2012. Germany had previously said that as much as 16.8 billion euros would have to be provided, Bild reported.
* Britain's inflation rate rose sharply to 3.4 percent in March from 3 percent the month before, according to official figures, the BBC reported April 20.
* Questions about the fraud lawsuit filed against Goldman Sachs overshadowed the company's announcement that its profits soared 91% in the first quarter. The gain was the second-highest quarterly profit in the company's 141-year history and was powered by the strongest net revenue ever in Goldman's fixed-income, currency, and commodities operations.
* Apple, having recently released its new iPad, released excellent 1Q numbers. Investors keep waiting for Apple to misstep, but Jobs and Co. simply keeps trucking. Apple’s profit rose to $3.07 billion, or $3.33 a share, compared with $1.62 billion, or $1.79 a share for the same span last year. Revenue climbed a stunning 49% to $13.5 billion, and the company reported that it sold 8.75 million iPhones in the January-March period -- about 1.75 million more than analysts expected. Mac computers and iPod music devices also surprised with big upside.
* Microsoft posted a better-than-expected quarterly profit thanks to sales of Windows 7, but its shares fell around 5% as investors expected more from a recovering tech sector.
* Amazon beat earnings expectations but forecast lower earnings for the second quarter. The company estimates operating profit in Q2 will be $220M-320M, shy of the $327.8M analysts have been expecting.
* Lions Gate Entertainment rejected another bid from Carl Icahn, calling his sweetened offer "opportunistic and coercive" and still too low. The board urged shareholders not to tender their shares. Icahn, who is trying to buy the 81% of the studio he doesn't already own, had raised his offer last Thursday to $7 per share from $6 per share.
* Simon Property Group gave General Growth Properties a revised recapitalization offer late yesterday, ahead of a presentation before GGP's board later today. The revised offer features a group of new investors contributing $1.1B in capital in addition to Simon's planned $2.5B investment (which includes an existing $1B commitment from hedge fund Paulson & Co.).
* Moody's lowered Toyota's credit rating Thursday to AA2 from AA1, saying it expects Toyota's low profitability to continue and recall-related litigation costs could be significant.
* General Motors announced yesterday that it had fully repaid $6.7B in loans from the U.S. government and $1.4B in loans from Canada, ahead of its already-accelerated June timetable. The Treasury still holds $2.1B in preferred stock and owns 61% of GM's common equity.
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Weekly Sector Review
The sectors of the U.S. economy, as well as the S&P 500, have performed as follows:
Last Week’s Returns:
Information Technology… 1.74%
Materials… 2.34
Consumer Staples… 0.18
Utilities… 2.67
Consumer Discretionary… 4.12
Financials… 2.86
S&P 500… 2.11
Industrials… 3.03
Healthcare… (0.91)
Telecommunications… 0.28
Energy… 4.20
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Enough Already!
The following data is taken from a recent document created by the Republican Study Committee on the current course of spending abuse in the U.S. And no, we’re not saying Republicans have been any less profligate than Democrats.
-$13.5 Trillion of New Debt: The president’s budget proposes to increase the national debt from today’s level of $12.3 trillion to $25.8 trillion in FY 2020 – an increase of $13.5 trillion or 109.8%. The amount of new debt proposed by this budget is larger than the total amount of debt accumulated by the federal government from 1789 to today (even including the $3.6 trillion of new debt over the last three years).
-$2.8 Trillion Tax Increase: The president’s budget submission increases taxes by $2.8 trillion over ten years. This includes allowing many of the 2001 and 2003 tax cuts to expire at the end of this year, such as allowing the top rate (which is often paid by small businesses) to increase from 35% to 39.6%, and allowing the top capital gains tax rate to return to 20%. These tax increases would take effect in an economy that, according to many economists, will still have an unemployment rate around 10%.
-Mandatory Spending: Increases from last year’s level of $2.1 trillion to $3.4 trillion in 2020, an increase of $1.3 trillion or 59.4%. Within that amount: Medicare spending increases from $425 billion in 2009 to $953 billion in 2020 – an increase of $528 billion or 124.2%; Social Security spending increases from $678 billion in 2009 to $1.20 trillion in 2020 – an increase of $523 billion or 77.1%; and Medicaid spending increases from $251 billion in 2009 to $487 billion in 2020 – an increase of $236 billion or 94.0%.
-Interest Payments on the Debt: Increases from $187 billion in FY 2009 to $840 billion in FY 2020 – an increase of $653 billion or 349.2%.
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Sports, Culture & Politics
* Ousted Kyrgyz President Kurmanbek Bakiyev said on April 23 that Russian leaders' anger over his decision to extend the lease on the United States' Manas air base played a factor in his overthrow on April 7, Reuters reported. He was speaking from the Belarusian capital of Minsk.
* South Korea's military believes a torpedo fired from a North Korean submarine sank its navy ship last month, based on intelligence gathered jointly with the United States, Reuters reported April 22. The military's intelligence arm sent the report of "certain" North Korean involvement to the presidential Blue House soon after the incident, Yonhap quoted a high-ranking military source as saying. North Korean submarines are all armed with heavy torpedoes with 200 kg (441 lb) warheads, according to the military source. It is the military intelligence's assessment that North Korea attacked with a heavy torpedo.
* North Korea warned South Korea and the United States on April 24 that it will employ "all means, including the nuclear deterrent" if they intrude into the North's territory, AP reported, citing the official Korean Central News Agency. The chief of the General Staff of the Korean People's Army said North Korea's armed forces are ready to counter any provocation by aggressors. North Korea on April 21 demanded to be recognized as an official nuclear weapons state, saying it would build nuclear weapons as it deemed necessary, Reuters reported, citing a North Korea Foreign Ministry memo. The memo repeated calls for a permanent peace treaty with the United States, and said the United States persistently compelled North Korea to have access to nukes. This is why, the memo explains, North Korea was exercising its last and only option by reacting to "nukes with nukes."
The weekend’s top-five box office performers as reported by The New York Times were:
1) How To Train Your Dragon, Paramount, $15,025,000
2) The Back-Up Plan, CBS Films, $12,250,000
3) Date Night, Twentieth Century Fox, $10,600,000
4) The Losers, Warner Bros., $9,605,000
5) Kick-Ass, Lionsgate, $9,500,000