News for the Week of July 11 – July 15, 2016
by David Abuaf, CFA
Investment Manager, RJFS
Government / Political / non-Economic
1. The UK’s Conservative Party made Theresa May PM to be, ending weeks of leadership turmoil that began with the Brexit vote. She will be the 2nd ever female PM
2. It’s believed the Dallas shooter had planned to carry out a larger attack involving explosives but rushed ahead with Thursday’s rampage
3. President Obama is suggesting that Congress and his successor add a public insurance option to the health-care law
· Public insurance option means the government would run some of it. This might be most applicable to those living in rural areas where they may have just one option
4. An international tribunal rejected China’s territorial claims in the South China Sea, raising regional tensions and forcing Beijing into a conundrum over how to respond. What a waste of a tribunal. It’s like having your “enemies” to have a tribunal on whether you’re a good person
5. Britain’s new PM, May, quickly assembled a “built-for-Brexit” cabinet on her first day as PM, putting Boris Johnson in charge of foreign policy
· He had served 8 years as mayor of London and was a major player in the Leave campaign. He famously stated that when Obama wanted the UK to stay in the EU, Obama was “motivated by anti-British sentiment caused by his Kenyan ancestry.”
6. Microsoft won a major legal battle as an appeals court ruled the US can’t force the firm to turn over emails and other data stored overseas
7. The driver of a large truck plowed through a crowd celebrating the Bastille Day holiday in Nice, France killing over 80 people and injuring hundreds
General Markets / Economic
1. Eurozone finance ministers cautioned that prolonged uncertainty over the relationship with the UK posed a major risk
2. New data is emerging that share buybacks have been among the most prominent drivers of this year’s stock market rally.
· It was expected though; for stock prices to rise, one of four things must happen:
1.Revenues rise dramatically – giving hope that there is growth for the stock
2.Profit margin increases – meaning efficiency of the company is improving
3.Multiples increase – a multiple is P/E or P/B or P/S or EV/EBITDA, something of that ilk. In order for multiples to increase, we need to be entering or at the beginning stages of a market rally – which we are not now
4.EPS increasing – this is typically tied to 1 and 2, however, this value can increase by decreasing the denominator (shares outstanding), which is done through share buy-backs
3. The US accused China of failing to remove some export duties, as agreed when China entered the WTO
1. The SEC is investigating whether Tesla breached securities laws by failing to disclose to investors a fatal crash involving one of its cars
2. GM says a dispute with a parts supplier threatens to shut down its North American assembly plants
3. The UFC has been sold to WME-IMG for about $4B
4. AMC said it is acquiring Odeon & UCI, Europe’s largest movie-theater chain
5. A federal appeals court denied GM’s attempt to use a bankruptcy shield to block some lawsuits over faulty ignition switches
6. Bayer raised its takeover offer for Monsanto to about $65B
1. The biggest brewers in the US plan to add nutrition labeling for beer. Because, beer drinkers care whether it’s 170 or 160 calories per drink, or more. Maybe they were sick of Coors Light saying “Tastes Great [because of] Less Filling”? Ok, that was a bad joke on my end
2. A would be robber in New Zealand was ignored by a shop owner after he pulled a gun on the owner. The armed man ended up leaving the shop after the owner finished serving a customer and walked to the back room to call the police. I mean, maybe it was a toy gun and that’s why the robber didn’t put up much of a fight?
3. The former chairman of the Port Authority of NY and NJ pleaded guilty to using his office for personal gain. One thing he did? He had United Airlines run a money losing service from Newark to South Carolina!
Commentary for Week of July 11 – July 15, 2016
by David Abuaf, CFA
Investment Manager, RJFS
After being caged in a tight range for nearly 14 months and after several fruitless attempts to top its all-time high set in May 2015, the bull market charged to a new high in a convincing fashion. The two major stock indexes (Dow and S&P 500) set records every day but one and rose about 2%.
The rally’s proximate causes were short covering by mauled bears; good to decent economic news out of the US and China; and indications from central banks that the global ultralow interest rate regime will continue (low interest rates typically begets higher stock prices). What’s really most noteworthy is the 8% rally since Brexit lows on June 27 – not only would I never have guessed that, I’d have taken the under, good thing I don’t take bets with your money!
The reaffirming good news is that trading volume and many other market technical measures, like breadth (stocks advancing vs stocks declining), are strong. Even better reaffirming news? Remember we said above that the S&P 500 is up 8% since Brexit lows? Well that’s large cap stocks, small cap stocks (Russell 2000) are up over 11% in that same time period – meaning investors want even more risk!
My biasness aside, I do like to be objective. I did read a piece stating how “bad the market is.” According to Ralph Fogel, at Fogel Neale, “[if you] take a few hundred stocks out of the equation, the broad market hasn’t surpassed the highs,” honesty, I’m still rolling on the floor laughing at that one!
All that said, it is true that it is hard to see significant upside from here. Earlier this year I figured we would have a high single digit positive return on the S&P 500. We’re only half way through the year, the S&P 500 average P/E is 18x (cusp of big bull market territory) with declining EPS growth. Unfortunately, the choices are limited of what to invest in, given the extraordinarily low yields that government and corporate bonds offer – the ten year Treasury yields 1.6%.
All opinions presented are those of David Abuaf, and not of Raymond James or Forman Investment Services.
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