Monday, October 20, 2014

Higher markets on hopes for Apple earnings

Dow rallied in the PM finishing up 19, advancers over decliners better than 2-1 & NAZ climbed 57.  The MLP index jumped up 5+ to the 502s (& up about 50 from the depths last week) & the REIT index rose 4 to the 306s.  Junk bond funds were higher & Treasuries also gained.  Oil was steady & gold rose for the first time in 3 sessions on speculation that the Federal Reserve will delay raising interest rates as global economic growth slows.

AMJ (Alerian MLP Index tracking fund)

CLX14.NYM....Crude Oil Nov 14....82.79 Up ...0.04 (0.1%)

Live 24 hours gold chart [Kitco Inc.]

When it comes to pulling up to the gasoline pump, Americans haven’t had it this good since 2011.  Plunging fuel prices will free up as much as $60B over the next year that the consumer can spend on a fall jacket, a movie ticket or just more groceries.  The boost to incomes should lift US & overseas economic growth.  A sustained drop in gasoline prices will do double duty as a source of extra cash & a psychological lift that may push consumer confidence to multiyear highs. Improving sentiment combined with hiring gains that are on track for the best year since 1999, healthier household finances & still-low borrowing costs will add to the likely burst in purchasing power.  The average price of regular gasoline at the pump fell to $3.10 a gallon yesterday, the lowest since Jan 2011 & down 57¢ since the end of Jun, according to AAA.  Since fuel accounts for about 3% of consumer spending & futures contracts suggest its price will be down about 20% by Mar from a year earlier, household incomes could get a boost.  Lower energy bills have also put households in a better mood.  A 10% decline in fuel expenses may have boosted the Thomson Reuters/University of Michigan consumer sentiment  index by about 2 points to 86.4 this month, the strongest since Jul 2007.

American Consumers See Windfall From Lower Gasoline Costs

China's economic growth will slow to about 4% annually after 2020 following decades of rapid expansion, according to the Conference Board.  China faces a “deep structural slowdown & broad uncertainty” in the decade ahead.  China’s development model, based on state direction of capital & growth-fixated monetary policy, generated “deep seated” risks and imbalances, it said.  “The course of China’s growth has always harbored the potential for deceleration at least as rapid as its acceleration,” David Hoffman, VP of the Conference Board’s China Center for Economics & Business said.  “We are beginning to see the signs of this transformation take hold.”  China’s gov has signaled it will tolerate slower economic growth this year by refraining from broad stimulus.  Weighed down by a property slump, China’s GDP probably expanded 7.2% in Q3, the slowest in more than 5 years.  The IMF in Jul urged China to set a growth target of 6.5-7% for 2015, warning of a “web of vulnerabilities” in the economy from real estate & rising debt.  This month, it forecast 7.4% GDP growth this year & 7.1% in 2015.  The Conference Board said that foreign companies may benefit in some ways from more moderate growth in China, including greater ease in attracting skilled workers & more opportunities to buy struggling local enterprises.  China’s growth goal was 7.5% in 2012 & 2013, with actual expansion of 7.7% both years.  The full transition of China’s economic growth model will probably be a long slog as the adjustment process will “necessarily be painful,” the Conference Board said.

China Growth May Slow Sharply From 2020: Conference Board

Primark Store in Berlin
Photo:    Bloomberg 

Sears Holding will lease space to Primark Stores, a British budget-clothing retailer that’s expanding in the US.  Primark will set up shop in 7 Sears stores in the Northeast.  Separately, SHLD announced a rights offering that could generate as much as $625M for general corp purposes.  “Sears Holding is strategically transforming one of the largest retail real estate portfolios in the United States over time while continuing to operate its existing stores in large, but rationalized selling space,” Jeff Stollenwerck, pres of real estate for SHLD, said.  CEO Edward Lampert & biggest investor is squeezing more cash out of the company following 9 straight qtrs of losses.  His recent transactions include a $500M div from the spinoff of the Lands’ End clothing unit & a rights offering for most of the stake in Sears’s Canadian division.  The offering consists of 8% senior unsecured notes due 2019 & warrants to purchase shares of common stock.  SHLD lost $975M in H1 of its fiscal year.  That follows a combined $2.3B in losses in the past 2 fiscal years.  At 6 of the 7 locations in today’s real estate deal, Sears will continue to operate alongside Primark.  At the 7th site Sears will close down.  Primark will then share that space with another Sears subtenant.  Primark will lease a total of about 520K square feet from Sears.  The British retailer will take over the space in the next 12-18 months as it continues to push beyond its home market.  Primark, one of Europe’s fastest-growing clothing chains, has said it was planning to add stores in the Northeastern US, the first of which is slated to open at the end of next year.  SHLD stock shot up 6.55 (23%).  If you would like to learn more about SHLD, click on this link:

Sears Holdings (SHLD)

Dow stock IBM (IBM) has to take 2nd seat to Apple (AAPL) in the new world.  AAPL announces earnings after the close & expectations are high after the new product announcements.  Of course there wasn't much time to ship the iPhones, but its fans are loyal.  Analysts are looking for $1.31, up 12¢ from last year.  There will be plenty of other earnings as this is the heart of earnings season.  With expectations so high, there is little room left for disappointment.  I keep thinking of buy on the rumor & sell on the news. 

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Dow declines on IBM earnings

Dow dropped 35, advancers over decliners 2-1 & NAZ jumped 28.  The MLP index slid pocket change in the 497s after a wild time last week & the REIT index went up 1+ to the 304s.  Junk bond funds rebounded after recent selling & Treasuries gained ground.  Oil is lower & gold inched higher.

AMJ (Alerian MLP Index tracking fund)

CLX14.NYM...Crude Oil Nov 14...82.67 Down ...0.08  (0.1%)

GCX14.CMX...Gold Nov 14.....1,244.90 Up ...6.40 (0.5%)

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The ECB bought covered bonds for the first time since Mario Draghi unveiled an asset purchase program last month.  It is believed that The ECB acquired short-dated French notes as well as Spanish securities.  Draghi said he intends to expand the bank’s balance sheet by as much as €1T ($1.3T) to stave off deflation in the euro area.  Policy makers are under pressure to take action as euro-area inflation slowed to 0.3% in Sep & the IMF said the region has as much as a 40% chance of entering its 3rd recession since 2008.  Growth will reach 1.3% next year, slower than he 1.5% pace predicted in Jul, after a 0.8% gain this year, the IMF said.   An ECB spokesman confirmed that purchases under the bank’s 3rd covered-bond program started today.  The covered bond market helps fund Europe’s mortgage industry & the notes have historically been attractive to investors because they’re guaranteed by the issuer & backed by a pool of assets.  Europe’s market for covered bonds shrank for the first time in at least a decade last year & will decline further in 2014 & 2015, according to the European Covered Bond Council.  This will be the 3rd time the ECB has created a program to buy covered bonds, with previous purchases starting in Jul 2009 & Nov 2011.

ECB Said to Start Purchase Program With French, Spanish Debt

IBM plunged as the company struggles to transform fast enough to handle the shift to cloud computing, forcing it to abandon an earnings forecast for 2015.  It will provide an update on its projections in Jan, ditching a 5-year plan to boost profit.  While CEO Ginni Rometty had been banking on a strong H2, IBM instead faced weaker-than-expected software sales & lower productivity in services in Q3.  With technology customers moving from owning hardware to storing data in the cloud, IBM is now cutting more jobs, reducing its forecast for free cash flow & offloading an unprofitable chip unit.  “Obviously we were disappointed in this quarter,” Rometty said, adding that the company is facing “unprecedented change” in the industry.  “We have more to do and we need to do it faster.”  The company now expects 2014 operating EPS to fall 2-4% from $16.64 in 2013.  That reflects changes for the chipmaking unit, which is now classified as a discontinued operation.  IBM is taking a Q3 pretax charge of $4.7B for the business.  The company had been projecting 2014 adjusted EPS of at least $18.  The company also announced an agreement to pay Globalfoundries $1.5B to take over the chip-manufacturing division.  The deal removes a drag on profit, part of Rometty’s efforts to jettison lower-margin businesses & prioritize earnings growth over expanding revenue.  IBM’s technology customers increasingly seek to store data & software on cloud-computing networks, rather than on site.  That has limited clients’ need for IBM’s servers & mainframes, making it more difficult to reach profit targets.  IBM reduced its forecast for free cash flow to $12-$13B this year, down from a projection for $16B 3 months ago.  The company also plans to cut more jobs, resulting in a Q4 charge of as much as $600M.  Q3 adjusted EPS from continuing operations were $3.68, down from $4.08 a year earlier.  Including the loss from discontinued operations, the company had EPS of 2¢.  Revenue fell 4% to $22.4B, the 10th straight quarterly drop, weighed down by declines in its hardware division & in emerging markets.  To boost EPS, Rometty has raised debt to fund share buybacks, laid off workers & reduced the company’s tax rate.  IBM has about $1.4B remaining in its current share repurchase authorization & said it will request additional funds for buybacks at its Oct board meeting.  The stock sank 13.45.  If you would like to learn more about IBM,click on this link:

IBM Plunges as CEO Abandons 2015 Earnings Forecast

International Business Machines (IBM)

Iran sees no need for OPEC to hold an emergency meeting, a sign that markets may need to wait a month before the world’s biggest producer group responds to falling prices.  No emergency meeting is necessary to discuss the price slide to try to prevent a further decrease, the state-run Mehr news agency said.  OPEC, supplier of about 40% of the world’s oil, is scheduled to meet Nov 27 to assess production & market conditions.  Brent crude, a global benchmark, has tumbled more than more than 23% since Jun & was trading near $86 a barrel today.  The decline has prompted speculation that OPEC may decide to cut production to eliminate surplus supply & led Venezuela to call for the group to convene earlier in an emergency session.  The International Energy Agency, an adviser to advanced industrialized countries, projects that demand for crude this year crude will grow by the least since 2009.  OPEC boosted production to a 13-month high in Sep, pumping 30.66M barrels a day.  Saudi Arabia has “appeared determined to defend its market share” in Asia, even at the expense of lower prices, the IEA said.  Kuwait’s oil minister said last week there may be “no room” to restore prices by trimming supply.

Iran Sees No Need for Emergency OPEC Meeting on Oil-Price Drop

Stocks are trying to extend gains from Fri, but IBM is a major drag for the Dow.  Oil remains in the dumps & prospects are for lower prices short term.  That's comparable to lower taxes for consumers & helpful to airlines, but tough on companies in the business.  MLPs have a lot at stake with lower prices.  Fracking is important to their business model & that requires high oil prices to pay for pay for high costs.  IBM's earnings indicate that earnings season will not go well for the stock market.

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