One of the stocks in one of the recent go-go sectors, 3D Systems Inc, holds its analyst day on Tuesday, and it’s one of those names that’s been beaten down so much of late that it’s bound to have some kind of positive reaction to news. But like many other companies, implied volatility in the stock is pretty low right now – it’s hard to see much of anything happening during such a tranquil period when the S&P 500 adds a point or two here and there every day or so. It’s doubly difficult because stocks like this have had their big correction – in this case, falling nearly 50 percent from its all-time high reached early this year.
Right now the expected move on the stock post-analyst day is about 2.3 percent, which is low compared to the last three analyst days, which have seen the shares move at least 3.3 percent, and Goldman Sachs believes there could be a bigger swing. They believe the company could raise its guidance for the fiscal year, depending on what it says about research and development and new products.
After the world’s most boring jobs report in history (seriously, misses consensus by 1,000, unemployment and wage growth in-line with expectations, and revisions over the last two months amount to a total decline of 6,000 jobs, which is a pittance), the bond market is catching a bit of a bid again. That shouldn’t be a surprise given the way this market is still taking its cues from the European bond market, which is soaring on what would otherwise be a quiet Friday. (Those of you who read Richard Leong’s story yesterday noting the likely rally in bonds post-jobs would have been all over this – just sayin’.)
It’s not going to be long before Spain’s 10-year yield falls through the U.S. 10-year yield – the spread has narrowed to about 6-7 basis points and at one point was around 3 basis points before the jobs figures. Even though the in-line figures could argue for higher rates, the report doesn’t change the consensus on the economy all that much and allows fixed income to concentrate on supply and relative valuation issues – and those point to yields remaining under pressure. Mark Grant of Southwest Securities lays it out well on a lot of issues in a comment this morning, but very specifically, he points out that “money from Asia and the Middle East is going to come pouring into the American market because of the yields here versus all of Europe. When the French 5 year yield is 304% less than the American one something is going to give and the ECB will not permit that answer to be a higher French yield.”
Determining the bond market’s next move is the ultimate in tea reading right now – long-dated fixed income Treasuries, after spending some time in the mid-2.40 percent range area, could tick back to the upper end of the yield range following whatever transpires with Friday’s jobs figures as investors focus on the fundamentals in the economy driving yields. Europe still has a part to play, too – and as Gertrude Chavez and Mike Connor pointed out in a late Wednesday story, investors believe there are a number of factors that complicate the assessment of where bonds are and what they’re saying about the economy given external factors like Europe.
That said, stronger-than-expected jobs data, especially after ADP disappointed investors with its 179K increase, would go some way toward pushing yields into the upper range of late – somewhere between 2.75 percent and 2.80 percent.
Coming data on same-store sales will help illuminate whether the modest upward tick in prices is something that is being replicated throughout the economy and signalling a stronger overall economy or perhaps one that remains more weighted to the most wealthy in the United States. According to Thomson Reuters data, Costco is poised to post the strongest same-store sales figures among the retail chains, though its 4.6 percent estimated increase would fall short of the 5 percent rise a year ago. The figures have a bit less utility than in the past given the likes of Wal-Mart stopped supplying this data years ago, but you work with what you have. Either way, it’s notable that the discounters have been weak this year – a sign of lackluster spending outlooks for lower income Americans.
The lower-income sector has seen its share of economic growth diminish over recent years, a trend that has been accelerated in part by the weakness in housing prices in most parts of the economy, poor overall demand and lack of spending among all but the upper tier of consumers, and no real growth in wages — though this morning’s data on productivity and labor costs does show finally some wage growth.
Discerning where the bond market is headed next has been the primary occupation of investors in the last several days. The selloff seen in the Treasury market after the Institute for Supply Management fixed, re-fixed and then officially re-fixed its manufacturing survey shows that perhaps long-dated yields have come about as far as they’re going to go for some time here – moving back above the 2.55 percent level after dipping down to around 2.44 percent on Friday. We’ve been over this before, but it’s instructive to look at just what’s forced yields this low and take a measure of the various factors involved, and what it might tell us about where we’re going from here.
A number of strategists notably believe the expectations for a lot of monetary helicopters over Europe has something to do with it – noting that the sharp dive in Euro-zone yields has contributed both to a shift in institutional funds to the comparatively high yielding U.S. debt market, as they see the German bund 10-year dropping to about 1.40 percent while Italy sits at 2.96 percent and Spain is at about 2.84 percent at this time.
Sometimes the biggest pain trade is not being in the market at all, and that’s certainly the case in 2014. We’re in something of a Goldilocks environment when it comes to major markets: Bank of America-Merrill Lynch laid this out pretty well in a note yesterday, noting that global equities, US stocks, emerging markets, government bonds, gold, high yield bonds and investment grade corporate are all up between 3.9 and 5.2 percent so far this year.
One way or another now, there are a lot of people waiting for something to go wrong in the market and as a result it’s more or less caused people to freeze in place. Recent investor surveys in the stock market have more people neutral than has been seen in a long time, because while they don’t see equities falling dramatically any time soon, they also are confounded as to how the equity market can keep rallying.
There’s nothing dull these days about the bond market, which is exhibiting an unforeseen, profound level of strength that’s spread through the various asset classes on the fixed income side, and that continues to remain unexpected for the most part.
As of Wednesday the Barclays US Aggregate Index had notched a year-to-date return of 3.62 percent; the 10-year-plus index was up a crazy 9.39 percent, and the Barclays Intermediate High Yield Index was up 4.05 percent. Looking at one of their competitors, the Bank of America/Merrill Lynch Corporate Index has so far netted a 5.39 percent return year-to-date while the Merrill High Yield CCC and Lower Index is up 4.45 percent. So that’s pretty solid returns across the board – comparing favorably with the S&P 500’s total return of 4.3 percent so far this year. Explaining how it’s all happening in the bond market is the more difficult task, but let’s give it a whirl.
NEW YORK (Reuters) – U.S. and European bond markets rallied and benchmark yields fell to multi-month lows on Wednesday in expectations of stimulus from the European Central Bank next week and on month-end buying from U.S. funds.
Stock markets were largely flat. Wall Street dipped slightly after the benchmark S&P 500 .SPX set a closing record on Tuesday. The MSCI World Index .MIWD00000PUS was up fractionally to 420.27 points, less than 2 percent from its lifetime high.
There are a million cliches people lean on to explain some aspect of the market that’s otherwise baffling, and the key one this week – the cliche du semaine – is something along the lines of, “You don’t want to short a dull market.”
And indeed this has been a bit of a dull one lately. The S&P 500 grinds to new highs, accompanied by the Dow transports, with the industrials not that far off.
Shares of Hewlett-Packard fell late in Thursday’s session after the company inadvertently released results just before the closing bell, but the year hasn’t been so bad for HPQ at least where its stock is concerned – shares are up about 13.6 percent so far in 2014, part of solid performance by a group of stocks Goldman Sachs identifies as “weak balance sheet” companies, the kind of phenomena that occurs when the economy seems to be in recovery and financial conditions are favorable, which they are right now – low rates, high levels of borrowing, reduced covenants in loans and further appetite for risk.
That may change as financial conditions tighten -if Treasury rates start to rise, for instance, or if banks throttle back on lending – but at least HPQ has something going for it right now. The company is cutting 16,000 jobs as it tries to revive its moribund profit margins and reverse what is now 11 straight quarters of sales declines. Companies with weak balance sheets in Goldman’s screen such as HPQ, Time Warner, Norfolk Southern and Delta Airlines generally post lower per-share earnings growth and weak sales growth – often companies in more mature industries or that find themselves left behind one way or another.