WASHINGTON, May 14, 2013 –A record-breaking rally in stocks paused Monday as investors assessed whether the rise in stock valuations overstated the recent improvement in the economy. Half an hour after Tuesday’s opening bell, the market seems to have been buoyed by more optimistic economic statistics, and is trying this morning to reverse yesterday’s losses, with the Dow up more than 70 points at 10:30 a.m. Financials are catching a bit today after getting punched around a bit in yesterday’s trading.
The latest positive data, out Monday, showed that Americans increased spending at retailers last month. That suggests that consumers may boost economic growth in the current quarter ending June 30. Still, that wasn’t enough to lift shares.
“What we have seen is a huge rally, and there aren’t any stones unturned at this point,” said Alec Young, global equity strategist at S&P Capital IQ. “You reach a point where investors aren’t willing to bid things up any more.”
Stocks have surged this year, boosted by an improving economy, Federal Reserve stimulus and record corporate earnings. Signs that the housing market is reviving are also supporting stocks. The Dow Jones industrial average and the Standard and Poor’s 500 index both closed at record highs Friday.
Retail sales increased 0.1 percent in April from March, the Commerce Department said Monday. That’s an improvement from the 0.5 percent decline in March, which was the largest drop in nine months. Economists had forecast that sales declined by 0.3 percent.
Consumer sentiment is improving as the housing market recovers, which is giving people the confidence to spend more, said Doug Cote, chief market strategist at ING Investment Management.
“If housing continues its upward trajectory, the animal spirits of the consumer will continue to be bolstered,” said Cote.
On Monday, stocks started lower before paring some of those losses throughout the day.
The Dow fell 26.81 points, or 0.2 percent, to 15,091.68. The S&P 500 index was little changed at 1,633.77. The Dow is up 15.2 percent this year, and the S&P 500 is 14.6 percent higher.
All is not rosy, however. On the negative side of the roster, signs continue to emerge from Beijing that China is once again trying to slow its growth. With China now a huge part of the global market, any such pronounced slowdown could have a negative ripple effect on world markets.
In addition today, Gartner reported that Apple witnessed an 18.2 per cent drop in iPhone sales, knocking the stock down over three points as of 10 a.m. today. Any negatives for Apple influence broader markets and particularly popular ETFs like QQQ (S&P 100 where Apple has an outsized influence). That said, Apple has been on a modest tear since its shares flirted with the $400 level recently. Its price is fluctuating around the $450 mark today.
Today’s stock idea:
To use financial pundits’ favorite word, the Maven has been observing an “unexpected” boost in bond insurers’ fortunes over the last few weeks.
Given the overreach of these firms during the CDS (collateralized debt securities) mess that helped lead the economy into the tank in 2007-2009, these firms became vastly overextended when they ventured out of their usual municipal bond insurance businesses to pursue higher growth in a wildly speculative market.
After a great deal of pain, lawsuits, and other corporate machinations, however, these companies seem to be clawing their way back to life.
Radian (RDN) and MBIA (MBI) have been popping considerably over the past few weeks, with MBI getting a particularly strong boost last week when S&P upped the rating on its bonds from CCC (pure junk, highly speculative) to B (more respectable, although not for widows and orphans).
In addition, after an incredibly tangled Chapter 11 mess, Ambac (formerly traded as ABKFQ, a bankruptcy stock designation), suddenly re-emerged from bankruptcy as a viable “new” company free of old indebtedness. Its old stock was canceled outright, while its new stock was listed on the exchanges as AMBC, and, after an initial kick upwards, has settled down to trade around $23 per share.
The Maven has been in and out of RDN with great success lately (and is currently, alas, out as the stock is spiking again.) He hasn’t nibbled at MBI yet but intends to try. And, mirabile dictu, he’s actually in the brand new AMBC stock—as a former holder of some of this company’s worthless bonds, he was, like other AMBC bondholders, given shares of the new stock in lieu of the bonds which are canceled.
This settlement is likely a bitter pill for longtime Ambac bondholders, all of whom got a haircut on this one. But, as senior creditors, they now have stock in a legally new, viable bond insurer, which is a heck of a lot better than the former stockholders got.
For more details on these Lazarus stocks, we’ll be posting on this topic in our companion column, The Prudent Man, a bit later today.
–AP contributed to this report
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