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The S&P 500 shrugged off the announcement by Pfizer
[NYSE:PFE] on Monday that the company would buy Allergan Plc [NYSE:AGN] in a deal worth $160 billion, to create the world's largest pharmaceutical company and move its headquarters to Dublin, Ireland. Pfizer said that the company will decide after 2017 on whether to spinoff its division consisting of products facing generic competition, like arthritis drug Celebrex and cholesterol drug
Lipitor, into a separate entity.
In an interview with CNBC, Pfizer chief executive Ian Read said, "This is a great deal for America”. The company, which has 40,000 combined employees in the United States, is now planning to investment $9 billion in cash in the country. U.S. President Barack Obama has called such inversion deals unpatriotic, as more and more U.S. multinational corporations are moving out of the United States to countries with lower corporate tax rates to cut costs and stay competitive. According to
KPMG, the United States has the highest 2015 corporate tax rate in the free world, with a 40% rate while
Ireland’s corporate tax rate is just 12.5%.
Earlier in the week, the S&P 500 gyrated between trendline resistance (T/R) and support, after Turkish fighter jets shot down a Russian warplane near the Syrian border on Tuesday and the Islamic terrorist group, Islamic State of Iraq and Syria (ISIS), is still threatening Brussels, Belgium, with Paris-style attacks. Ironically, NATO headquarters is located in Brussels, but on the northeast perimeter of the city.
Turkey may have to pay the price for being quick on the trigger, as Russia can use its natural gas ties with Turkey as a geopolitical weapon. Russia, the largest supplier of natural gas to Turkey, exported 27.33 billion cubic meters of natural gas to Turkey last year. Russia’s Gazprom is currently in talks with Turkey about building a natural gas pipeline, called Turkish Stream, to ship Russian gas underneath the Black Sea to Turkey. The deal is now at risk.
The U.S. Commerce Department said on Tuesday that the second estimate of the third-quarter U.S. gross domestic product (GDP) came in at 2.1% on a year-on-year basis, compared to the advance estimate of 1.5% reported in October, in line with economists' expectations. The upward revision came mostly from the decrease in private inventory investment, which was smaller than previously estimated, meaning businesses accumulated more inventories in the third-quarter than the government thought.
The Commerce Department also reported that the preliminary estimate for corporate profits from current production, adjusted for inventory valuation and capital consumption, decreased $22.7 billion in the third-quarter, in contrast to an increase of $70.4 billion in the second-quarter. According to Reuters, corporate profits, which have been undercut by the dollar's strength and lower oil prices, were down 8.1% from a year ago, the biggest decline since the fourth-quarter of 2008.
FactSet issued an Earning Insight report on Friday that of the 490 S&P 500 companies that have reported earnings so far, to November 27 for the third-quarter 2015, the blended revenue decline is 3.9% while blended earnings declined 1.3%. Thus, the third-quarter marks the first time the index has seen two consecutive quarters of year-over-year declines in earnings since the second-quarter and third-quarter of 2009, meaning the index is officially entering into “earnings recession”.
It also marks the largest year-over-year decline in earnings since the third-quarter 2009 during the global financial crisis. The 12-month forward P/E ratio is 16.4. This P/E ratio is based on Thursday’s closing price of 2,088.87 and a forward 12-month EPS estimate of $127.14.
A mixed bag of economic data from the Commerce Department was reported on Wednesday from durable goods, core personal consumption expenditures (PCE) and consumer spending. The Commerce Department said on Wednesday that the non-defense, or “core” capital goods orders, excluding transportation items such as aircraft, increased 1.3% last month, beating expectations for a gain of 0.2%. The September figures were revised upward to 0.4% from a 0.1% decline. Shipments of core capital goods, a category used to calculate quarterly economic growth, decreased 0.4% in October, worse than the forecasted drop of 0.3%.
The Commerce Department also said that core inflation, excluding food and energy as measured by the PCE price index, rose 1.3% year-on-year, remaining unchanged for 10 months and below the Federal Reserve’s target of 2% for the 42nd straight month. Consumer spending came in with a 0.1% increase, missing the Reuters forecast of a 0.3% rise. Despite tepid consumer spending, Wells Fargo economists still see a 3.4% increase in holiday retail sales this year as the shopping season gets underway.
The S&P 500 gave a muted response to the Shanghai Composite Index 5.48% sell-off on Friday, after the National Bureau of Statistics (NBS) of China said industrial profits fell 4.6% year-on-year in October, compared to 0.1% the month before. To make matters worse, the nation’s largest brokerages, Citic Securities Co. and Guosen Securities Co., said they were facing regulatory probes for alleged rule violations, while China Shanshui Cement Group Ltd and state-owned steel trader Sinosteel Co. said they’re struggling to repay bonds.
According to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) each Friday, as of November 17, there are 166,045 short positions of S&P 500 consolidated futures, traded on the Chicago Mercantile Exchange by leveraged funds, a decrease of 9,248 short positions from the previous week. This is compared to about 66,015 long positions, down 224 from the previous week. The data suggested that until Tuesday, hedge funds were reducing their net short positions by 9,472 contracts, worth about $4.85 billion, where contracts of S&P 500 futures are traded in units of $250.00 x S&P 500 index.
The yield of the U.S. 10-Year Treasury Note pulled back another 1.87% for the week to close at 2.222% on Friday. The yield of the U.S. 2-Year Treasury Note inched up 0.54% to close at 0.926% on Friday, driving the yield spread between the 10-year and 2-year Treasury Notes down 3.5% to 1.296 percentage points for the week, the lowest in six months. Falling spreads may indicate worsening economic conditions in the future, resulting in a flattening yield curve. A very low or negative spread could signal an upcoming recession.
The federal funds futures, traded on the Chicago Mercantile Exchange and commonly used to estimate the market’s views on the likelihood of changes in U.S. monetary policy, dropped to 22.5% odds from 26.4% odds last week for a quarter-point rate hike at the Fed’s FOMC meeting on December 15-16 while the odds for a half-point rate hike jumped to 77.5% from 73.6% last week, according to data from the CME Group as of November 27.
The S&P 500 closed at 2,090.11 on Friday, up 0.94 for the week. The best performing S&P 500 sectors for the week were Consumer Staples and Energy, which jumped 1.5% and 1.46%, respectively. Energy was the worst performing sector last week. The worst performing S&P 500 sectors for the week were Utilities and Materials, which were down 1.2% and 0.74%, respectively. The Information Technology sector was the best performing sector last week.
S&P 500 Summary: +1.52% YTD as of 11/27/15
Barclay Hedge Fund Index: +0.76% YTD
Outperforming Sectors: Consumer discretionary +12.69% YTD, Information technology +6.7%YTD, Healthcare +4.95% YTD and Consumer staples +2.22% YTD.
Underperforming Sectors: Financials –0.88% YTD, Industrials –1.85% YTD, Telecommunication services –3.72% YTD, Materials –6.37% YTD, Utilities –10.21% YTD and Energy –15.39%
YTD. |
