A WINNING WEEK FOR U.S. STOCKS
A bullish sentiment consumed Wall Street as U.S. stocks edged higher on Friday to make it the best week in two months. The ‘fear gauge’ has been falling for the past 5 sessions and investors were relieved by the report that inflation eased last April. Market analysts believe inflation will remain tame.
Stocks of telecom companies produced the best returns among the 11 sectors of the S&P 500 index, rising 2.1% as it helped the broad-market index to gain 2.4%. It was their best week too in two months.
The Dow Jones Industrial Average marked a seventh straight positive session and posted its best run since February. This longest winning streak is reminiscent of a similar stretch that ended on November 8, 2017. The blue-chip index advanced 91.64 points (+0.37%) on Friday.
The Dow Jones has rallied 568.66 points from last week. Many are saying that the strong earnings delivered by Apple Inc. (AAPL) and Warren Buffet’s purchase of 75 million Apple shares injected fresh confidence into the market and propelled the Dow Jones to its longest winning streak since entering correction territory in February.
Meanwhile, the Nasdaq Composite Index finished the week at break-even level as it ended its multiday run-up of five consecutive advances. For the week, the Dow climbed 2.3%, the S&P 500 rose 2.4% and the Nasdaq advanced 2.7%.
The Week’s Highlights
- The NAFTA trade talks entered a make-or-break situation on Monday. All three ministers from Canada, Mexico, and the United States are seeking to resolve an impasse in key areas ahead of the elections in Mexico and the U.S.
- The United States withdrew from the 2015 Iran nuclear accord. As a result, the plane deals Boeing Inc. (BA) and Europe’s Airbus with Tehran collapses. Oil prices rose and notched a second weekly advance after the Trump’s decision to quit the said nuclear deal.
- The University of Michigan Preliminary Consumer Sentiment in early May came in at 98.8 and remained unchanged from the April survey. However, analysts observed the small uptick in near term inflation expectations, the downward slippage in income expectations, and the expected stabilization of the national unemployment rate at decade lows.
- There were no Mergers and Acquisitions reported this week but several conglomerates went into “partnership and cooperation” to strengthen positions in their respective industries. The team-ups are unusual but appear to be a sound collaboration.
Information Technology Sector Highlights
Apple Inc. and Goldman Sach’s ‘New’ Joint Credit Card
According to a report by The Wall Street Journal, Apple Inc. and Goldman Sachs Group Inc. (GS) <$242.92 as of 05/11/2018 (-4.65% YTD)> are teaming up to launch a new joint credit card. The terms and benefits of the proposed card are still being discussed but when it is finalized, this would be the first foray of the world’s largest tech company into ‘plastic’ and win more customers over.
Matt Schulz, a senior analyst for CreditCards.com said, “These are two iconic brands who have lived in very different worlds.” The companies are looking to tap into each other’s customer bases. A card that gives rewards to consumers buying Apple products could potentially encourage them to buy more.
On the part of Goldman Sachs, Schultz said, “Goldman sees a big opportunity in lending directly to consumers.” Tying the Goldman brand to the Apple brand could help with that, particularly if the new credit card offers special benefits to people buying Apple products, Schulz added.
However, customers should be warned that although the deal from this co-branding could be a good thing, they might end up overspending which is a bad thing. Also, for special financing are usually higher. Goldman would be making money on both interest payments and merchant swipe fees.
Within Reach of One Trillion Market Capitalization
On May 7, Apple finally surpassed $185 per share, hitting a high of $187, to bring the world’s largest tech company closer to becoming the world’s first trillion-dollar company. In early 2015, Apple was the first company to reach a value of $700 billion.
Based on data provided by Recode, Apple’s value reached an all-time high of $945 million. Three tech companies follow Apple in terms of market cap rankings: Amazon.com Inc. (AMZN) – $773 billion; Microsoft Corp. (MSFT) – $732 billion; and Alphabet Inc. (GOOGL) – $719 billion.
Symantec Corp. (SYMC) – Internal Probe Sends Stock Tumbling
The biggest loser in the S&P 500 this week is Symantec Corp. Shares of the company that owns the popular Norton antivirus software and LifeLock identity theft protection service plummeted to the bottom after its board of directors ordered a probe into its accounting.
Wall Street was stunned upon learning that Symantec’s audit committee is conducting an investigation of the company. SYMC tumbled 33.1% from $29.18 on Thursday to $19.52 on Friday.
No details of the ongoing probe were company During the its earnings report presentation on Thursday, the company disclosed that the investigation was “in connection with concerns raised by a former employee.” Symantec’s audit committee hired independent advisers to help and that they are in close coordination with the Securities and Exchange Commission (SEC).
KPMG is Symantec’s independent accountant and is also the accountant for two blue-chip companies with major financial woes – General Electric Co. (GE) and Wells Fargo & Co. (WFC). KPMG has been under criticism lately.
Retail Trade Sector Highlights
Morgan Stanley Downgrades Macy’s Inc. (M) Rating
Investors were displeased with the downgrade as Macy’s is one of retailers that is exerting all efforts to stay competitive in the retail trade sector that’s increasingly being dominated by Amazon.com Inc. (AMZN) and Walmart Inc. (WMT).
On Thursday, when the broader market was up, shares of Macy’s fell more than 3% after one of Wall Street’s top investment banks downgraded its rating. Morgan Stanley (MS) gave the American retailer’s stock an “underweight” rating.
Macy’s is boosting its digital commerce efforts while it begins closing some stores and selling some of its real estate holdings. The retailer surprisingly posted strong profit in the last quarter of 2017. They are schedule to present their first-quarter earnings report on May 16.
Shares surged nearly 50% in the past six months and still up 17.67% year-to-date even after Thursday’s drop. The downgrade by Morgan Stanley somehow affected the stocks of other department store chains. Shares of JC Penney Co. Inc. (JCP) were off by 1.9%, Nordstrom Inc. (JWN) shares fell 1.7% while Kohls Corp. (KSS) shares slipped 1.6%.
Morgan Stanley analyst Kimberly Greenberger said the investment bank is concerned about Macy’s sluggish sales and that it needs to do more to get rid of underperforming stores. “Even though Macy’s is closing stores proactively, it may not be doing so quickly enough,” she said.
Another concern is the sale of Macy’s real estate properties. Greenberg said there are only a couple of properties left with significant value. Their flagship is the iconic building in New York City’s Herald Square. The store in San Francisco’s Union Square has been sold and there are plans to sell their I. Magnin building in San Francisco.
“Macy’s real estate gains cannot continue in perpetuity,” Greenberger wrote. Investors are cautioned not to expect more from future store sales. Hence, Morgan Stanley had to make the cut and change the rating from “equal weight” to “underweight” with a corresponding lowering of target price from $27 to $25. MS also cited M’s “ongoing negative store comps and continued decline in return on invested capital (ROIC)”.
Buy Your Tires on Amazon and Install them at Sears
That’s the new battle cry of the newly forged ‘tire deal.’ Sears Holdings Corp. (SHLD), the iconic American retailer, announced that tires bought or ordered from Amazon.com Inc.’s (AMZN) website will be installed at Sears Auto Centers.
Amazon has been selling tires online for some time now. Customers can choose various tire brands from among different auto shops. But now that Sears has entered the picture, Amazon has agreed to start selling Sears’ DieHard tire brand.
Sears will provide installation service and charge a fee on all tires purchased from Amazon regardless of brand. Sears hopes that besides the tire installation service, Amazon customers would consider their auto centers for their car servicing needs.
The program will be launched at 47 Sears Auto Centers. Soon after, it will be implemented in more than 400 Sears’ auto centers across the country.
Partnering with Amazon might open a new course for Sears but the business would not be sufficient to lift the age-old retailer from its deep financial problem. Sears needs a business that can deliver astronomical revenues to contain operating losses, reduce debt levels, and prevent store closures.
Otherwise, the once largest and most important retailer in the U.S. will continue its downward spiral and ‘tire’ out in the long run. For Amazon, the e-commerce giant will proceed to conquer new worlds.
Healthcare Sector Highlights
Price Control on Prescription Drugs
The bullish market sentiment was momentarily dampened after U.S. President Donald Trump unveiled his “American Patients First” plan in his health care policy speech. The said plan calls for the lowering of prescription drug prices as Trump said that drug makers were “getting away with murder” in what they charge the government for medicines.
However, after digesting Trump’s speech, health stocks rallied. The healthcare sector, which makes up 13.6% of the S&P 500, is underperforming the broader S&P 500 by more than two percentage points. However, the SPDR S&P Biotech ETF is doing far better and is up 7.99% thus far this year.
The drug industry exchange-traded fund and individual company shares surged Friday afternoon along with the SPDR S&P Pharmaceuticals ETF (XPH) 2% and the Health Care Select Sector SPDR (XLV) which climbed 2.0% and 0.9% respectively. The concerns about drug pricing regulations have been constantly putting pressure on the healthcare group.
Height Capital Markets issued a note through analyst Andrea Harris saying to the effect that Trump’s health plan will impact on manufacturers, pharmacy benefit managers (PBMs), insurers, hospitals, and foreign countries. The POTUS alleges that they are responsible for high drug costs. However, Trump needs congressional support more than his fiery rhetoric.
Eli Lilly & Co. (LLY) Acquires ARMO Biosciences Inc. (ARMO)
Eli Lilly & Co. is set to acquire immuno-oncology biotech ARMO Biosciences Inc. (ARMO) in an all-cash deal estimated to be worth $1.6 billion.
After the announcement on Thursday, the price of ARMO surged 67.0% from $29.82 to $49.80. ARMO’s lead product candidate, pegilodecakin, is in a late-stage clinical trial for pancreatic cancer and in earlier trials for lung and renal cell cancer, melanoma and other solid tumors. The said therapy will bolster Eli Lilly’s immuno-oncology program.
There are two more products entering clinical trials in humans plus one more that is pre-clinical. The deal will not materially change the adjusted earnings of Eli Lilly in 2018 but will benefit them considerably moving forward.
LLY started at $78.63 on Monday and finished the week higher at $82.45 (+4.86%). Looking back, ARMO shares have dropped 22% over the last three months while Eli Lilly shares have risen 4% as compared to the 3% rise in the S&P 500 and a 1.5% rise in the Dow Jones Industrial Average.
ARMO’s president and chief executive, Peter Van Vlasselaer said, “Given the resources that Lilly, a leader in oncology R&D, can bring to bear to maximize the value of pegilodecakin and the rest of the ARMO pipeline, we believe it is in the best interest of ARMO, our stockholders and the patients we serve, to execute this transaction.”
Eli Lilly and ARMO Biosciences sees the transaction to be completed by the end of the second quarter after full compliance to the customary closing conditions.
The Week Ahead
As a recap, the U.S. stock market made a solid rebound this week, rising in four of the five trading days to 2.4%. The fundamental readings remain positive despite the prevailing policy risks. Many investors are hoping the worst of the correction is over and that market volatility would lessen.
Meanwhile, the earnings season has reached the tail-end with only 10 S&P 500 companies reporting first-quarter results next week. Investors will be shifting their focus to geopolitical events and important economic data. The retail sales report is due on Tuesday, housing is next on Wednesday, and the Leading Economic Index (LEI) is last on the agenda this coming Thursday.