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  S&P 500 Companies Still Cash Rich Despite Returning More Capital To Shareholders
Posted Under: Broader Stock Market

 

View from the Observation Deck  

  1. S&P 500 companies have been rewarding shareholders by increasing stock dividend payouts as well as repurchasing company stock in an effort to boost earnings-per-share growth via the reduction of share count.
  2. From Q1’11 through Q1’15, S&P 500 companies increased their spending on buybacks and stock dividends from $546.02 billion to $900.14 billion. That represents a 64.9% increase in spending.
  3. Over that same period, despite increasing capital outlays on buybacks and stock dividends by $354.12 billion, the cash and equivalent holdings of the S&P 500 Industrials (Old) companies increased from $0.96 trillion to $1.23 trillion.
  4. Keep in mind that S&P 500 companies also utilize capital for such things as mergers and acquisitions, investment in plants and factories, and to purchase software and equipment. 
  5. Companies have been able to boost spending and their cash holdings while operating in the midst of a modest economic recovery, in our opinion.
  6. Data from the Bureau of Economic Analysis shows that U.S. real GDP growth has averaged just 2.1% in the current recovery (Q3’09-Q1’15), according to Bloomberg.
  7. We will continue to monitor this dynamic moving forward.

This chart is for illustrative purposes only and not indicative of any actual investment. Investors cannot invest directly in an index. The S&P 500 Index is a capitalization-weighted index comprised of 500 stocks used to measure large-cap U.S. stock market performance.

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Posted on Tuesday, June 30, 2015 @ 2:40 PM • Post Link Share: 
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  US Stocks Week Ended June 26, 2015
Posted Under: Weekly Market Commentary

 
While the S&P 500 Index was in positive territory for the month through June 24, last week’s -0.37% slide took it into negative territory as it pushed below May’s close. The S&P 500 Index currently sits 1.19% below its all-time closing high on May 21, 2015. Stocks opened up on Monday on optimism of a future Greek debt deal. The S&P 500 Index continued to rise early as US existing homes sales hit 5.35M, the highest level since November 2009, but later pulled back from the days’ high to return 0.61% on Monday. The index returned 7 bps on Tuesday, though it fluctuated throughout the day on positive new home sales data and negative durable goods orders data. Released GDP data for the quarter met expectations, but Monday’s optimism of a possible Greek debt deal turned negative on Wednesday and brought the worst performance of the week with a -0.73% return. Thursday brought positive economic news with higher than expected personal spending and US initial jobless claims of 271K. This was higher than the previous week’s 267K, but slightly better than the consensus estimate of 273K. The S&P 500 Index returned -0.29% for the day as talks on a Greek debt deal continued to diminish. The US Supreme Court’s decision on the Affordable Care Act gave a boost to health care stocks, as health care and telecommunications services were the only two sectors in positive territory on Thursday. Friday showed a mixed trading day as utilities, financials and consumer discretionary stocks put positive pressure on the S&P 500 Index while information technology and materials stocks created a drag on the index. The index returned -2 bps. Seven of the ten economic sectors had negative performance for the week. The telecommunication services sector was the best performing sector with a 1.16% return. The consumer discretionary and health care sectors followed with 0.47% and 0.33% returns, respectively. The utilities sector’s -2.32% return was the worst performance of all the sectors and was followed by materials and industrials which returned -1.74% and -1.16%, respectively. The Williams Companies Inc., an energy infrastructure company, turned in the best performance in the S&P 500 Index with an 18.16% gain. The stock opened up and increased over 25% on Monday from an unsolicited offer to be acquired by Energy Transfer Equity LP. The next two best performers were Tenet Healthcare Corp. and HCA Holdings Inc. with returns of 9.76% and 8.82%, respectively.
Posted on Monday, June 29, 2015 @ 2:59 PM • Post Link Share: 
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  US Economy and Credit Markets Week Ended June 26, 2015
Posted Under: Weekly Market Commentary

 
Yields rose, as prices fell, with Greece continuing to be the major source of concern in the bond markets. There is a continued push to avert default between Greece and its creditors, but currently there is no resolution regarding the situation. This Tuesday, a payment of 1.55B Euros is due from Greece to the IMF. Last Monday, the May report on existing home sales was better than expected showing a 5.1% increase in May and a rise of 9.2% from a year ago. The median price of an existing home which was sold rose to $228,700, up 5.2% vs. a year ago. Following up this report was Tuesday’s new single-family home sales which also exceeded expectations. Sales were up 2.2% in May and 19.5% from a year ago. The new durable goods orders report was also released Tuesday and it registered a decline of 1.8%, which was worse than expected. Wednesday’s real GDP growth report was revised up to a 1.2% annual rate for Q1. Thursday’s personal income data showed income increasing .5% in May, in line with expectations. This gain was outpaced by a .9% increase in consumption for the month of May. For the year however, spending has not yet increased as much income has risen as consumers have saved some of their windfall, both increased incomes and lower gas prices. Major economic reports (and related consensus forecasts) for the upcoming holiday shortened, but still busy, week include: Tuesday: June Consumer Confidence Index (+1.6); Wednesday: Prior Week MBA Mortgage Applications, ADP employment change (215K, +14K), Markit US Manf PMI (53.4, unch), May Construction Spending (+.5%), and ISM Manufacturing (53.1, +.3); Thursday: June Change in Nonfarm Payrolls (230K, -50K), June unemployment rate (5.4%, -.1%), Prior Week Initial Jobless Claims (270K, -1K) and May Factor Orders (-.5%, +.1%).
Posted on Monday, June 29, 2015 @ 2:55 PM • Post Link Share: 
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  Let Guidance Be Your Guide
Posted Under: Weekly Market Commentary Video
Bob Carey, Chief Market Strategist at First Trust Advisors L.P., discusses the latest developments in the market and reminds investors to listen closely to guidance forecasts during the upcoming earnings season.
Posted on Friday, June 26, 2015 @ 6:38 AM • Post Link Share: 
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  Corporate Earnings Look Poised To Rebound After Q1’15 Dip
Posted Under: Broader Stock Market

 

 
View from the Observation Deck 

  1. The S&P 500 and S&P MidCap 400 indices closed the 6/24/15 trading session 1.04% and 0.98%, respectively, below their all-time highs, according to Bloomberg. The S&P SmallCap 600 Index closed at its all-time high.
  2. Today’s chart is intended to give those investors concerned about stock indices trading at or near their record highs, factoring in the dip in Q1’15 earnings, some visual perspective on where equity analysts think earnings are headed.
  3. One of the primary reasons cited by companies for the dip in Q1’15 earnings was the stronger U.S. dollar. The U.S. Dollar Index (DXY) was up 8.96% in Q1’15, according to Bloomberg. It is down 3.17%, however, in Q2’15, as of 6/24/15.
  4. A secondary reason cited for weaker earnings, at least at an index level, was the ongoing slide in crude oil prices. The price of a barrel of oil fell 10.64% in Q1’15, according to Bloomberg. It is up 26.60%, however, in Q2’15, as of 6/24/15.
  5. We believe that corporate earnings drive the direction of stock prices over time, especially when the major indices are trading at or near record highs.
This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. There can be no assurance that any of the projections cited will occur. Investors cannot invest directly in an index. The S&P 500 Index is a capitalization-weighted index comprised of 500 stocks used to measure large-cap U.S. stock market performance. The S&P MidCap 400 Index is a capitalization-weighted index that tracks the mid-range sector of the U.S. stock market. The S&P Small Cap 600 Index is a capitalization-weighted index that tracks U.S. stocks with a small market capitalization.

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Posted on Thursday, June 25, 2015 @ 2:29 PM • Post Link Share: 
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  The Ability Of REITs To Raise Capital Is A Good Sign For Investors
Posted Under: Sectors

 

View from the Observation Deck  

  1. From 12/31/13-3/31/15 (15 months), the FTSE NAREIT All Equity REITs Index posted a cumulative total return of 33.12%, according to Bloomberg. The index, however, was down 5.35% from 3/31/15 through 6/19/15.
  2. While interest rates have generally moved higher in 2015, as measured by the benchmark 10-Year Treasury Note (T-Note), the move was a modest 9 basis point increase to 2.26%, from 12/31/14 through 6/19/15, according to Bloomberg.
  3. The yield on the 10-Year T-Note, however, did make a notable move from 1.86% on 4/1/15 to a 2015-high of 2.49% on 6/10/15. We believe that this spike may have motivated some investors to sell or take profits, especially when you factor in the Federal Reserve’s comments regarding the potential for a federal funds rate hike at some point in 2015.
  4. In order to qualify as a REIT, or Real Estate Investment Trust, at least 90% of all taxable income must be distributed to shareholders, according to REIT.com. The REIT must pay corporate income taxes on income it retains, like any other corporation.
  5. Since most REITs distribute close to 100% of taxable income to shareholders, REITs usually raise capital by issuing stock in the primary and secondary markets, or via debt securities.
  6. Their ability to raise capital can be interpreted as a sign of confidence in the REIT market, in our opinion.
  7. From 2007 through 2014, REITs were able to raise $50.2 billion per year, on average (see chart). REITs raised $73.3 billion in 2012, $77.0 billion in 2013, and $63.6 billion in 2014.
  8. REITs raised $34.9 billion in the first five months of 2015. If this pace were to hold up for the remainder of the year, the industry would raise approximately $83 billion.

This chart is for illustrative purposes only and not indicative of any actual investment The illustration excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Investors cannot invest directly in an index. The FTSE NAREIT All Equity REITs Index is a free float adjusted market capitalization-weighted index that includes all tax qualified REITs listed on the major U.S. exchanges.

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Posted on Tuesday, June 23, 2015 @ 1:06 PM • Post Link Share: 
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  US Stocks Week Ended June 19, 2015
Posted Under: Weekly Market Commentary

 
Equity markets ended the week higher after the Federal Reserve indicated that interest-rate increases will be gradual and dependent on improving economic data. Most Fed officials still expect short term rates to rise before year end, but increases are likely to be shallower as Fed officials lowered interest-rate forecasts for 2016 and 2017 by 0.25%. The S&P 500 returned 0.78%, while strong performance in biotech stocks led the Nasdaq Composite to a record close on Thursday, before retreating Friday over Greek concerns. Greece remained the biggest story, next to the Fed announcement, as a potential default on €1.6 billion remains in the forefront of investors’ minds. Health care was the best performing sector for the week as Cigna Corp. became the latest managed care provider to trade higher on rumors of a takeover offer and Allergan plc announced the acquisition of KYTHERA Biopharmaceuticals, Inc. for a 40% premium. FedEX Corp. declined the most since January after missing top and bottom line expectations due to moderate economic growth and higher-than-expected expenses. TripAdvisor Inc. shares jumped after signing a partnership with Marriott International Inc., allowing customers to instantly book hotel rooms through their website. Gap Inc. traded higher after the company announced plans to close 175 underperforming stores as the company continues to shift some of its focus from “bricks” to “clicks”. KB Home shares surged over 9% on Friday as net orders increased by 33% versus last year. Looking ahead, the risk-on risk-off trade will likely remain until Greece resolves their latest scuffle with creditors. However for investors with longer horizons, stocks remain the best option for long term wealth accumulation as fundamentals continue to improve after a cold winter and a port strike that temporarily slowed the economy.
Posted on Monday, June 22, 2015 @ 8:45 AM • Post Link Share: 
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  US Economy and Credit Markets Week Ended June 19, 2015
Posted Under: Weekly Market Commentary

 
Treasury prices rose last week as growing concerns of Greece defaulting on its debt increased demand for safe-haven assets. Factory production unexpectedly declined on Monday. The ongoing weakness has been primarily due to a strong dollar and a collapse in energy prices. On Tuesday, treasury prices rose for a second consecutive day as a breakdown in talks between Greek officials and International Creditors fueled growing concerns over a potential default by Greece. U.S Housing Starts declined 11.1% to a 1.04 million in May; however, it followed April’s 1.17 million pace resulting in the best consecutive month reading since 2007. U.S. government bonds rallied Wednesday as the Federal Reserve showed signs it will take a slow approach to raising interest rates. A pick-up in wage growth, along with solid employment, supported the Fed’s case to raise interest rates as soon as September. Treasuries fell on Thursday over concerns that the Federal Reserve’s decision to support economic growth by maintaining interest rates low will lead to long-dormant inflation. On Friday, the consumer price index did not meet expectations, signaling inflation may take time to meet the Federal Reserve’s goal to raise rates. Major economic reports (and related consensus forecasts) for the upcoming week include: Monday: May Existing Home Sales (5.26M); Tuesday: May Durable Goods Orders (-0.7%), June Markit US Manufacturing PMI (54.1), May New Home Sales (524K); Wednesday: Prior Week MBA Mortgage Applications, First Quarter GDP Annualized (-0.2% QoQ); Thursday: May Personal Income (0.5%), May Personal Spending (0.7%), Prior Week Initial Jobless Claims (273K); June University of Michigan Sentiment (94.6).
Posted on Monday, June 22, 2015 @ 8:42 AM • Post Link Share: 
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  Investors Have Been Rather Aggressive With Respect To Passive Investing
Posted Under: Conceptual Investing

 

View from the Observation Deck  

  1. Those investors directing capital into mutual funds and exchange traded funds (ETFs) have clearly favored passive investing over active management over the past year.
  2. Passive mutual funds and ETFs reported net inflows totaling $484.8 billion, compared to net outflows totaling $39.9 billion for those actively managed (see chart).
  3. The three asset classes/categories impacted the most have been U.S. Equity, International Equity and Taxable Bond.
  4. The passive versus active philosophical argument is garnering some coverage from the financial media these days. Perform an Internet search on the topic and you will likely find a number of articles to peruse.
  5. One of the primary reasons for the increased interest in passive investing is the surge in the number of ETFs designed to replicate an index, in our opinion.
  6. We intend to monitor net flows moving forward to see if this is just a phase, or perhaps the “new norm.”

This chart is for illustrative purposes only and not indicative of any actual investment.

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Posted on Thursday, June 18, 2015 @ 12:08 PM • Post Link Share: 
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  The U.S. Dollar Has A Significant Influence On Commodity Prices
Posted Under: Commodities

 

View from the Observation Deck  

  1. For the 12-month period ended 6/12/15, the U.S. Dollar Index (DXY) posted a 17.86% gain, compared to a 27.57% decline for the TR/CC CRB Commodity Index (see chart), according to Bloomberg.
  2. Jodie Gunzberg, global head of commodities at S&P Dow Jones Indices, has noted that a strong U.S. dollar can depress commodity prices because goods priced in dollars become more expensive for other currencies, according to Business Insider.
  3. Gunzberg points out that the dollar’s influence on commodity prices does vary by type. Over time, the dollar has tended to have much more of an impact on the direction of crude oil prices than the price of sugar. 
  4. The strong U.S. dollar, however, isn’t the only influence on commodity prices. Global growth rates, inflation/interest rates and geopolitical events can also impact demand, in our opinion. 
  5. Global growth has slowed since 2010. Global real GDP growth advanced at a rate of 5.4% in 2010, but slowed to 3.4% in 2014, according to the International Monetary Fund (IMF). 
  6. China, which has been one of the world’s largest consumers of commodities over the past decade, has seen its real GDP growth rate fall from 10.4% in 2010 to 7.4% in 2014 (IMF). 
  7. While some investors might be concerned that the U.S. dollar could strengthen if the Federal Reserve decides to raise interest rates at some point in the near future, the data suggests that it is not a given.
  8. The past three times that the Fed raised the federal funds target rate for an extended period (2/94-2/95, 6/99-5/00, 6/04-6/06), the U.S. dollar declined from the date of the first rate hike through the date of the last hike in two of the three instances, according to data from Bloomberg.
  9. For the 12-month period ended April 2015, investors funneled a net $1.78 billion into Commodities (Broad Basket) mutual funds and exchange traded funds, according to Morningstar.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Investors cannot invest directly in an index. The Thomson Reuters/CoreCommodity CRB Commodity Index is an average of commodity futures prices with monthly rebalancing, while the U.S. Dollar Index (DXY) indicates the general international value of the U.S. dollar relative to a basket of major world currencies.


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Posted on Tuesday, June 16, 2015 @ 1:53 PM • Post Link Share: 
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These posts were prepared by First Trust Advisors L. P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
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