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Market Commentary
By Fred Dickson, Chief Investment Strategist
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Written by Fred Dickson | Chief Investment Strategist
D.A. Davidson & Co. Lake Oswego, OR. Email: fdickson@dadco.com |
| Market Summary | End of Market May 22, 2013 DAD99: 12/31/2003=100.00 |
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|---|---|---|---|---|
| Index | Current | Chg | YTD Chg | YTD % |
| DOW | 15245.87 | -61.30 | +2141.73 | + 16.34% |
| NASDAQ | 3452.65 | -10.65 | + 433.14 | + 14.34% |
| S&P 500 | 1644.97 | -10.38 | + 218.78 | + 15.34% |
| Davidson 99 Regional Index ® (DAD 99) | 208.06 | - 2.87 | + 26.24 | + 14.43% |
Morning Market Comment - May 23, 7:31:34 AM MDT
Overview: Stock prices tumbled mid-day on Wall Street yesterday in the wake of a surprise embedded in the minutes from the May 1st Federal Open Market Committee (FOMC) meeting and comments made by Fed Chairman Dr. Bernanke during the Q&A portion of his Congressional testimony. After trading up by as much as 150 points yesterday morning, traders hit the sell button in the stock and bond markets when they discovered that the Fed governors had an extensive discussion about tapering down their QE3 $85 billion per month bond-buying program in June. Traders knew there was some dissent regarding sending a signal about tapering down QE3, but seemed surprised at the extent of the discussion revealed in the FOMC minutes regarding the possibility of Fed action to taper down the program in June. In his testimony to the Joint Economic Committee of Congress, Fed Chairman Dr. Bernanke said the Fed could wind down its bond-buying program in the next few meetings of the FOMC, if the economic data continues to improve. The Fed is apparently trying to assess the impact of the program on the labor market, as the unemployment rate remains high at 7.5 percent. Bernanke said the Fed remains undecided as to when the Fed will pull the trigger with its next move, but has a plan. On the corporate front, Staples (SPLS), Target (TGT), and Lowe’s (LOW) each delivered first quarter earnings that fell short of analysts’ estimates yesterday. Market Recap: After a dramatic early session rally, stock prices suddenly reversed on the Fed news and fell just as dramatically for the duration of Wednesday’s trading day, leaving the major market indices with losses for the day. Trading volume on the NYSE and the NASDAQ expanded to 2.9 billion shares. Market breadth on the NYSE turned negative with declining issues outnumbering advancing issues 2,381 versus 658. The bond market also sold off on the Fed news, sending the yield on the 10-year Treasury back above 2 percent to close at 2.03%. The euro fell sharply versus the dollar, closing at $1.2738. The trade-weighted U.S. dollar moved slightly higher, closing at $84.352. The near-term West Texas Intermediate crude oil futures contract fell, closing at $94.28/barrel. Gold closed higher at $1,408.50/ounce. Sector Recap: All ten S&P 500 sectors closed Wednesday to the downside. Utilities (-1.64%), Materials (-1.27%), and Energy (-1.23%) saw the heaviest selling pressure. Health Care (-0.04%) closed almost unchanged on the day. Each of the four investment styles sold off, with small cap issues seeing the heaviest selling pressure, as shown below:| Investment Style | % Change |
| Large Cap Value | -0.64% |
| Large Cap Growth | -0.91% |
| Small Cap Value | -1.72% |
| Small Cap Growth | -1.73% |
| Source: Morningstar |
|
Wednesday's Lagging Industry Groups: Education Services (-4.04%), Real Estate Services (-3.39%), Electronic Components (-3.02%), Industrial REITs (-2.84%), General Merchandise Stores (-2.83%) Companies in the News this morning: Blackstone Group (BX) and Prologis (PLD) are acquiring a portfolio of 17 million square feet of warehouse and distribution center space in Nevada and Pennsylvania from Lehman Brothers in a $960 million deal. Clearwire (CLWR) approved Sprint Nextel’s (S) elevated buyout offer to buy the nearly 50 percent of Clearwire that it does not already own for $3.40 per share. Ford Motor Co. (F) said that it intends to stop production in Australia in October 2016. Freeport McMoRan Copper & Gold’s (FCX) Indonesian copper mine remains closed as the investigation regarding the cause of a May 14 tunnel collapse at its mine killing 26 workers progresses. Britain’s Financial Conduct Authority fined a unit of JPMorgan Chase’s (JPM) wealth management group 3.08 million pounds for being unable to show it was giving clients the right advice. The FCA said JPM’s deficiencies were not corrected until the FCA brought them to the attention of management as part of its review of JPM’s practices. An advisory panel of medical experts concluded that Merck’s (MRK) experimental insomnia drug suvorexant is safe and effective at lower doses. The FDA must decide whether to approve this new drug class of sedatives designed to block chemicals in the brain that keep people awake. J.C. Penney Co. (JCP) announced it has secured a 5-year $2.25 billion loan, $500 million above its previous announcement made on April 29. Tesla Motors (TSLA) paid off a $451 million government loan nine years early from funds raised last week through its stock and debt offering. Companies reporting earnings above forecast: ALKS, BONT, CATO, PLCE, CMCO, DLTR, KIRK, PERY, SIG
Companies reporting earnings in line with forecast: AINV, VOYA, PACT, PDCO, TD
Companies reporting earnings lower than forecast: BKE, HRL, QSII Companies raising earnings or revenue guidance: PLCE, KIRK, ALKS
Companies maintaining earnings or revenue guidance: DLTR, SIG
Companies lowering earnings or revenue guidance: PACT Analyst Upgrades (from Thomson, Briefing.com, Marketwatch.com): STI, SCM, DL, CLI, RSG, PSUN, DWRE, ATW, DO, STX, TRI, FDS
Analyst Downgrades (from Thomson, Briefing.com, Marketwatch.com): DVN, SOL, PB, O, AAUKY, FLEX, FN, RSHYY, KGFHY, ARMH Looking Ahead: Fed Chairman Dr. Bernanke shook up the global financial markets with what appears to be a hypothetical answer to a question during yesterday’s appearance before a Joint Economic Committee in Congress. His comment that the Fed may consider easing back on its bond-buying program during “the next few FOMC meetings” if warranted by economic conditions triggered a massive reaction in global stock and bond markets. While current conditions do not appear to warrant a change in the QE3 program, as discussed at length in recent speeches by Fed governors and by Bernanke’s formal testimony to Congress, yesterday’s instantaneous market reaction points to current trader sensitivity to even discussion of the topic. Market nervousness at what might appear to be “bad news” at current high price levels for stocks and low Treasury yields is not a surprise. Clearly, the bond and stock markets are nervous, as traders may regard change in tone of the Fed’s language as a near-term risk factor to bond yields and stock prices with both markets sitting close to record high price levels. Our sense is that both the bond and stock market overreacted to yesterday’s FOMC minutes and Dr. Bernanke’s comments. While we believe that the Fed will eventually taper back its rate of QE3 bond purchases, the timing of the moves most likely will come later this year or early next year following a clear announcement of the Fed’s plan to slow purchases in a post-FOMC meeting policy statement or press conference, possibly around Labor Day. While tapering the QE3 program points to higher Treasury yields and widening spreads between higher-risk fixed income assets, it also would send a message that the Fed believes the economy has improved to be self-sustaining and risks of either deflation or recession has decreased. We see a Fed move to taper QE3 as a positive for stocks, negative for bonds. Today’s Market Outlook: The stock market appears poised for a lower market opening, as the major market index futures are trading below fair value an hour ahead of the opening bell. Global stock markets sold off overnight reacting to Dr. Bernanke’s testimony to Congress yesterday. Stock prices closed lower in the Asian equity markets last night. The Tokyo Nikkei 225 dropped 7.32%. The Hong Kong Hang Seng Index fell 2.54%. The Shanghai CSI 300 Index fell 1.16%. Stock prices are trading lower in the European stock markets at mid-session. The London FTSE is off 1.17%. The STOXX 50 Index is off 1.97%. The near-term contract of West Texas Intermediate light sweet crude oil is trading at $92.85/barrel. Natural gas futures are trading at $4.17/mcf. Gold is trading at $1,393.60/ounce. Silver is trading at $22.545/ounce. The euro is trading at $1.2898. The 10-year Treasury note is yielding 2.012%. The 2-year Treasury note is trading to yield 0.251%. 3-month Treasury bills are trading to yield 0.043%. The Fed Funds Target range remains 0% to ¼%. Longer-Term Major Stock Market Outlook Factors:
Fundamental (Growth) Outlook: Slightly positive, projected 2Q 2013 EPS growth at 4.5% Y/Y for the S&P 500
Valuation (P/E relative to interest rates): Equities in the “fair value” zone at 15x estimated 2013 S&P 500 EPS
Cyclical Economic/Market Position: Late-middle stage of a multi-year expansion
Near-Term Technical Market Trend: Up-but consolidating on moderate trading volume – overdue for a correction
Long-Term Technical Market Trend: Up
Investor Sentiment: Mixed; P/E expansion (positive); VIX volatility (ultra-low) – indicating too much complacency
Next Major Market Problems/Risk: Syria, 2Q 2013 earnings/revenues estimate revisions Today’s Earnings Releases:
40 companies reporting, including Dollar Tree (DLTR), GameStop (GME), Gap (GPS), Hormel Foods (HRL), Marvell Technology Group (MRVL), Mentor Graphics (MENT), Patterson Cos. (PDCO), Ralph Lauren (RL), Ross Stores (ROST), salesforce.com (CRM), and Zumiez (ZUMZ) Economic Releases/Events:
Initial Claims (-23,000 to 340,000), Continuing Claims (2.912 million), FHFA Housing Market Index, New Home Sales, 10-Year TIPS auction Corporate Analyst Meetings, Conference Calls, and Investor Meetings:
KKR Investor Day, LOGI Analyst/Investor Day, RGA Investor Day, SSYS Analyst/Investor Day This Week’s Institutional Investor Conferences:
B. Riley & Co. Investor Conference, Barclays Global Technology, Media & Telecommunications Conference, Barclays High Yield & Syndicated Loan Conference, Bloom Burton & Co. Healthcare Investor Conference, BofA Merrill Lynch Services Conference, Brean Capital Global Resources & Infrastructure Conference, CIBC World Markets Small Cap Retail Conference, Goldman Sachs Basic Materials Conference, J.P. Morgan Homebuilding & Building Products Conference, Johnson Rice Energy Infrastructure Conference, Longbow Research Consumer Investor Conference, NAPTP MLP Investor Conference, Stifel Nicolaus Internet, Media & Technology Conference, SunTrust Robinson Financial Services Unconference, UBS Global Healthcare Conference, UBS Global Oil & Gas Conference, Wells Fargo Gaming & Hospitality Conference, Wolfe Trahan Global Transportation Conference, Wunderlich Investor Summit
| Technical Overview (updated 5/23/2013) | |||
Short-Term Trend | Intermediate Trend | Long-Term Trend | |
| DJ Industrial Average | Up | Up | Extended-Up |
| NASDAQ Composite | Up | Extended-Up | Extended-Up |
| MSCI EAFE (EFA) | Up | Extended-Up | Extended-Up |
| Gold (GC/Z3) | Down | Extended-Down | Oversold-Down |
| Euro (FXE) | Down | Down | In Transition-Up |
| Trade-Weighted USD | Up | Up | Extended-Up |
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Near-Term Support | Near-Term Resistance | Current Price | |
| DJ Industrial Average | 14,600 | 15,400 | |
| S&P 500 | 1,560 | 1,680 | |
| NASDAQ Composite | 3,150 | 3,500 | |
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50-day Moving Avg. | 200-day Moving Avg. | Current Price | |
| DJ Industrial Average | 14,780 (up) | 13,764 (up) | |
| S&P 500 | 1,588 (up) | 1,484 (up) | |
| NASDAQ Composite | 3,307 (up) | 3,135 (up) | |
| Upcoming Office Visits and Client Event Appearances/Speeches: | |
| May 23: | Seattle, WA – Foster Pepper Banking Conference; Speech (PM) |
| May 28-29: | Los Angeles, CA – Davidson-Crowell Weedon Meeting Luncheon Presentation |
| May 30: | Newport Beach, CA – Davidson-Crowell Weedon Meeting Luncheon Presentation |
| May 30-June 2: | Laguna Beach, CA – Davidson’s President’s Club Meeting-Presentation (May 31-AM) |
| June 11-13: | Great Falls, MT – Corporate Meetings; FC/Intern Presentation (June 12) |
| June 18-19: | Port Angeles, WA – Client Luncheon Presentation-June 18/Client Meetings |
| June 20: | Aberdeen, WA – Office Visit/Client Presentation |
| July 1-3: | Cannon Beach, OR – Working Vacation |
| July 25-Aug. 7: | Bethany, DE/Cooperstown, NY – Working Vacation |
| Aug. 27-29: | Denver, CO – Fixed Income Lunch Speech at Coors Field (Aug 29) |
| Sept. 13: | Travel to New York City |
| Sept. 16-17: | Philadelphia, PA – Wharton-SIFMA Securities Institute Trustee Meeting |
| Sept. 18-19: | New York City Media Tour-Institutional Marketing |
| Sept. 30-Oct. 1: | Great Falls, MT – Corporate Meetings |
| Oct. 2-3: | Bozeman, MT – Client Events |
| Oct. 4: | Return to Lake Oswego |
| Oct. 8-11: | Lewiston/Sandpoint/Coeur d’Alene, ID – Client Events |
| Nov. 6: | Eugene, OR – Office Visit/Client Meetings (?) |
| Nov. 7: | Roseburg, OR – Chamber of Commerce Economic Outlook Forum Speech; Client Event |
| Nov. 20: | Great Falls , MT – Cascade Country Estate Planning Council Presentation |
Senior Vice President, Chief Investment Strategist
Davidson Companies
503.603.3059
fdickson@dadco.com