Stocks rose today as jobless despite a weak GDP reading as jobless claims fell and merger mania gripped the food stocks. Shares of Tyson Foods (TSN), Hillshire Brands (HSH), Merck (MRK), Biogen Idec (BIIB), and SunEdison (SUNE) helped lead the market higher.
Getty Images The S&P 500 rose 0.5% to 1,920.03–a record high–while the Dow Jones Industrial Average advanced 0.4% to 16,698.74. The Nasdaq Composite gained 0.5% to 4,247.95, while the small-company Russell 2000 finished up 0.3% at 1,140.07. The 10-year Treasury yield rose to 2.44%, while the CBOE Volatility Index, or Vix, fell to 11.57.
There’s funny stuff going on in food stocks. Tyson Foods jumped 6.1% to $43.25 today–the biggest gain in the S&P 500–after bidding more than $6 billion for Hillshire Brands. Hillshire surged 18% to $52.76, making it the big winner in the S&P 1500.
Tyson’s bid came just a couple of days after Hillshire Brands received a bid from Pilgrim’s Pride (PPC), and while it seems like ancient history now, Hillshire made its own bid for Pinnacle Foods (PF) earlier this month. Pilgrim’s Pride dropped 1.1% to $25.09 today, while poor jilted Pinnacle Foods gained 1% to $31.68.
Health care stocks also had a big day. Merck rose 2.3% to $57.70–making it the biggest gainer in the Dow Jones Industrial Average–on hopes for its cancer-fighting drug, while Biogen Idec advanced 3.6% to $319.85–making it the second-biggest winner in the S&P 500–after the biotech giant was upgraded to Overweight from Neutral at JPMorgan. SunEdison climbed 5.3% to $20.50 after reports that it’s planning the IPO of its “yieldco.”
US jobless claims fell to 300,000 last week, well below forecasts for 319,000, while first-quarter GDP shrunk by 1%, new revisions to previous data show. Maketfield’s Michael Shaoul favors the latter over the former:
Although this morning’s downwards revision to GDP will garner the headlines we would pay little attention the statistical representation of a brutal winter. More than enough Q2 data has already been released to show that a rebound in activity took place as soon as the weather turned while the overall strength of Q1 corporate earnings suggests that the negative growth of -1% is an overstatement of the weakness encountered.
We are much more interested in the Initial Claims report which is the latest in a long string of strong readings from a key real-time economic indicator…It should be remembered that this improvement has taken place in what has been the toughest seasonal period for official data in recent years with Claims data tending to move higher in the weeks following Easter (see seasonal chart). This makes the strength of the data a little more impressive and continues the trend of Claims data running ahead of other employment metrics and suggests that employment markets continue to tighten across the country.
Still, there are always reasons to distrust the market’s gains. One of the big ones right now: The ultra-low Vix. Only problem: SunTrust’s Keith Lerner says the low Vix is “not sounding an alarm.” He explains:
[The] VIX traded below 12 for a good portion of the period between late 1992 through 1995. During that period, stocks rose about 42%. Similarly, the VIX traded consistently below 12 from late 2004 through early 2007. During that period, stocks rose approximately 23%. There were also VIX reading below 12 in March and August 2013, and 2013 was still a good year for equities. So while this indicators does not dismiss the possibility of a correction this year, by itself, low VIX readings have not necessarily been a bad omen for equities.
And what about those record-high profit margins at U.S. corporations? Capital Economics’ John Higgins doesn’t think they’re likely to be a problem. He explains why:
The ratio of domestic profits after tax to gross value added (GVA) in the US non-financial corporate sector hit its highest level in 63 years in Q1 according to data published on Thursday by the Bureau of Economic Analysis. Equity bears may cite this as evidence margins are unsustainably high. But we think they are unlikely to revert to their long-run average any time soon.
A key reason why the ratio is now 68% above its average since 1950 is a collapse in the taxation of profits. The profit tax liability of non-financial firms has fallen from more than 50% of their pre-tax profits in the early 1950s to around 20% today.
There’s no need to get silly with the risk taking, however. Matarin Capital recommends favoring high-momentum stocks that also have “demonstrably good [businesses] and [are] available at an affordable price:”
When you break down those 100 top momentum stocks into those that have been generating positive free cash flow and those which have been burning cash, the cash-generative high momentum stocks have been outperforming the cash-burning ones by nearly 9% since the March 19th turning point.
When you break down the top 100 momentum stocks into the 50 cheapest and the 50 most expensive (for the purposes of our study, we focused on price-to-sales although other metrics will yield similar results), the cheaper stocks coming into mid-March are now outperforming the most expensive by over 16% since the turning point.
How’s that for high-flying?
This post has been updated for the close.
No comments:
Post a Comment