May 1, 2017

Stocks opened higher this morning (Dow +8 points; SPX +.26%). Consumer discretion, financials and tech are leading the way. Utilities, telecom and consumer staples are trading lower. The VIX Index is down modestly to trade around 10.6 and VIX May futures are just under 12. The dollar is pretty much unchanged and commodities are mostly higher, except for oil. WTI crude oil continues to slide, trading near $48.70/barrel. Many traders say it could go to $47 in the near-term. Remember, oil was above $53 less than a month ago. Bonds are down slightly today in price. The 5-year and 10-year Treasury yields edged up to 1.84% and 2.31%, respectively. 

So far this year, the SPX  is up 6.8% and the Nasdaq is up about 12.9%. And sure enough, technology is the leading sector, up 15.5%. There are two simple reasons for that: 1) the tech sector’s total earnings growth last quarter was over 20%; 2) about 89% of the tech companies that have reported first quarter results beat earnings expectations. 

Personal incomes and spending both came in slightly softer than expected in March, but still confirm that US consumers are in good shape. Consumer spending held steady at 4.7% y/y growth in the month, matching the prior month’s growth rate. Personal income growth was also unchanged in March at 4.5%. Both incomes and spending have accelerated over the last year. And yet, inflation isn’t alarming. The price index on personal spending (called “PCE deflator”) edged down to 1.8% y/y growth. So the Federal Reserve still has room to be patient with interest rate hikes. 

GDP growth slowed to .7% in the first quarter from 2.1% in the fourth quarter of 2016. There were a number of reasons. Lower Inventory purchases by businesses subtracted over .9% from GDP growth, offsetting the 1% contribution to growth in the prior quarter. Federal, state, and municipal government spending also fell. Defense spending in particular declined 4.0% in the quarter. Finally, consumer spending was anemic, rising a scant .3%. Part of that was driven by mild winter weather which limited demand for utilities. And of course, we know that auto sales have been weaker of late. There was some good news in the report. Business capital spending picked up sharply as the oil and gas industry recovery continues. Homebuilding and commercial construction also surged. Economists are saying second quarter GDP will bounce likely back in a strong way. 

Southwest Airlines (LUV) reported a mixed quarter last Thursday, with revenue up 1% y/y and earnings down 31% y/y. Both metrics seem to have fallen short of analysts’ expectations. The carrier’s profit margins sagged as labor costs rose and ticket prices fell modestly. Revenue per available seat mile fell 2.8%. Part of the problem is temporary—Easter travel fell into the second quarter instead of the first quarter this year. There was some good news. Total capacity should grow about 3.5% this year, which is on the low end of expectations.  By the way, American Airlines’ (AAL) announcement that it will grant pay raises for pilots and flight attendants clearly adds to the narrative that wage pressure is beginning to dent profit margins. That will add nearly $1bil in extra costs over the next 3 years for AAL. A JP Morgan analyst estimates this could reduce 2017 earnings per share by 6%. So that sent all the airline stocks lower last week. Interestingly, LUV stock dipped 4% immediately after the earnings announcement, but has since recovered it all back. 

Last week, Amazon (AMZN) beat both revenue and earnings expectations when it reported first quarter results. Total company sales rose 23% y/y. And the company’s high-growth web services business generated $3.6bil in revenue, up 42% y/y. Unlike Amazon’s online retail store, web services actually generates a profit.  The stock is up about 3% since reporting. 

Alphabet (GOOGL) reported an excellent quarter, with 22% revenue growth. The company remains dominant in web search, and paid ad clicks surged 44% in the quarter. But Google’s datacenter services apparently grew faster than the rest of the company. Google’s “Other” segment, which includes these services, posted 49% revenue growth. This product competes with Amazon’s web services. 
The stock has risen about 5% since reporting. 

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