Monday, April 21, 2014 - Why Stocks Continue Going Higher

Why Stocks Continue Going Higher
by Sinclair Noe

DOW + 40 = 16,449
SPX + 7 = 1871
NAS + 26 = 4121
10 YR YLD un 2.72%
OIL - .01 = 103.64
GOLD – 4.30 = 1291.30
SILV - .21 = 19.54

The S&P 500 has gained for five straight sessions, marking the longest winning streak since October. This has not been a pretty rally. Volume was light today; that has been part of the trend; light volume on up days and heavy volume on down days.

We are smack dab in earnings reporting season, and 87 companies have posted results through this morning with 62% beating earnings expectations; that’s down from 66% beating earnings over the past 4 quarters, and those earnings expectations have been ratcheted lower and lower, so it should be an easy bar to cross. And still the markets have been moving higher.

Dozens of S&P 500 components will report earnings this week, including Apple, Biogen, Facebook, McDonald’s, AT&T and Caterpillar. More than 30 companies in the Nasdaq 100 (NDX) are slated to report earnings. After the close of trade Netflix posted a first-quarter profit of $53 million, or 86 cents a share, up from $3 million, or five cents a share, a year ago. The company in January had projected a profit of 78 cents a share. The stock shot up about 7% to $372 in extended-hours trading. After a jump of 300% in 2013, Netflix had slumped recently.

As part of the earnings announcement, Netflix announced a price hike, but it will only be for new customers, and the hike won’t happen for about 2 or 3 months, and existing customers will be grandfathered in with a non-specific grace period.

Also, Netflix sent a letter to shareholders in opposition to the proposed Comcast-Time Warner Cable merger. The letter says that if the merger is approved, “the combined company’s footprint will pass over 60 percent of U.S. broadband households...with most of those homes having Comcast as the only option for truly high-speed broadband. The combined company would possess even more anti-competitive leverage to charge arbitrary interconnection tolls for access to their customers. For this reason, Netflix opposes this merger."

Two months ago, Netflix agreed to pay Comcast for access to its high-speed network to improve the video quality and loading speed for Netflix streaming customers.

On a related note, major television broadcasters and Aereo will argue before the US Supreme Court tomorrow in a case that is about much more than the future of a controversial startup. The outcome could have far-reaching effects on the future of television and cloud computing, the quality of wireless service, and entrepreneurs trying to create the next big thing in technology.

You’ve never heard of Aereo? Don’t feel bad, I’m not even sure I’m pronouncing it correctly. It is a 2 year old startup that captures broadcast airwaves and then streams those signals to users, for about $8 a month. The broadcast channels such as NBC, CBS, ABC, and Fox are transmitted free of charge to anyone who has a television and an antenna. But cable companies like Comcast and Time Warner pay the broadcasters billions of dollars in fees for the right to re-broadcast the network TV channels as part of paid cable packages. Aereo argues it doesn't need to pay those fees because the broadcast signals which it's capturing and then retransmitting to its subscribers over the Internet, are free.

Broadcasters sued, claiming Aereo is violating copyright law by retransmitting the shows and threatening their industry's business model. If Aereo is legal, they fear there’s nothing stopping cable companies from copying Aereo to avoid paying the broadcasters billions of dollars in fees. If Aereo wins, broadcasters have threatened to yank their broadcast signals off the free airwaves and instead offer them only to paid subscribers.

Aereo streams network TV to subscribers via servers in “the cloud.” A Supreme Court decision against Aereo threatens to outlaw the entire cloud-computing industry. If Aereo is violating copyright law, that means other cloud providers could also be held responsible for helping users access illegal content. For example, Google or Dropbox could be responsible for policing the content stored in a Google Drive or Dropbox account to avoid copyright violations.

If Aereo wins and broadcasters follow through on their threat to stop beaming over-the-air programming, it could have an unintended benefit for smartphone users. As people consume more data on their mobile devices, it has created a shortage of wireless spectrum that could lead to dropped calls and slower wireless speeds if more airwaves aren't freed up.

The government is preparing to auction off some of those unused broadcast airwaves to wireless companies so they can improve service and avoid network congestion. An Aereo victory could prompt broadcasters to sell more of those airwaves to wireless companies, which could ultimately lead to improved smartphone service.

Now, think back a few years, no a few more years, maybe you are old enough to remember when the entertainment industry sued Sony, claiming that allowing customers to use its Betamax VCRs to record TV programming for later viewing amounted to copyright theft. The Supreme Court dismissed their arguments.

Sometimes it is difficult to make sense of the cyber world. For example, do you like Cheerios? The little circular breakfast cereal? Well, if you like Cheerios on Facebook, General Mills thinks that is reason enough to prevent you from suing them, or at least that’s what they thought. Last week, General Mills revealed a new rule to prevent people from joining class action lawsuits if they had joined the General Mills online communities, or entered a contest, or subscribed to newsletters or liked Cheerios on Facebook.

Under the new terms, those who violated the rule would be limited to arbitration or informal negotiations as a means of conflict resolution. And when you think about it for a moment it seems a bit heavy handed that a cereal company could take away your right to sue, even if you found a rat in your Progresso soup, or something yucky in your Yoplait, or actual leprechaun parts in your Lucky Charms. General Mills has now reversed the policy, and they even claim there was no policy in the first place, it was just a misunderstanding of how far they could throw around their corporate weight.

Financial markets have been fairly calm lately — no big banking crises, no imminent threats of euro breakup. But it would be wrong and dangerous to assume that recovery is assured; our still-sluggish economic progress could still be undermined by bad policies, or the argument of the past few months is that the economy could be derailed by inclement weather.

The Conference Board’s leading index is designed to forecast economic activity, not the weather. So, the split between the leading and coincident indexes so far this year offers further evidence of how the weather slowed growth in the first quarter. It also supports expectations that economic activity is picking up this quarter.

The board compiles 10 forward-looking data series, including jobless claims and new orders, to calculate its leading index, and the coincident index contains four series, including nonfarm payrolls and business sales. While growth in the coincident index usually follows the rate of the leading index with a lag, the gap between the two has widened in recent months.

Today, the board said its leading index increased a larger-than-expected 0.8% in March, and the coincident index increased 0.2%. In the past four months, which included the harsh winter period, the leading index has increased 1.5% while the coincident is up just 0.4%. The gains in the leading index mean economic fundamentals should allow the recovery to pick up steam in coming months. If so, the coincident index should post better gains. Today’s Leading Economic Index says, “The economy is rebounding from widespread inclement weather and the strengthening in the labor market is beginning to have a positive impact on growth.”

The Fed is trying to exit QE, but it won’t be easy, and they say one of the determinants is the employment picture and inflationary pressures. A new research paper by Fed economists says those two categories should not be considered separately.

Fed Chairwoman Janet Yellen has argued that a significant portion of the long-term unemployment problem is due to a depressed economy rather than structural issues such as aging or the gap between workers’ skills and employers’ needs. According to her line of thinking, Fed policies could help spur hiring by boosting demand. If the problem is primarily structural, as some other economists have argued, Fed policies are less likely to make any difference in employment. In a speech earlier this month, Yellen said, “I believe that long-term unemployment might fall appreciably if economic conditions were stronger.”

The new research paper corroborates Yellen’s findings. The new research says that by using regional data sets rather than simply national figures, and economists were able to “discriminate the independent influences of short- and long-term unemployment” on inflation.

“The results suggest that long-term unemployment has exerted similar downward pressure on inflation to that exerted by short-term unemployment in recent decades.”

Or economic recovery could be undermined by green men.

For the past two weeks, pro-Russian gunmen in green uniforms with no insignias, have been taking over government buildings in eastern Ukraine. Russia did not claim them; they were unidentified “green men”. To no one’s surprise, US intelligence is now saying the “green men” are indeed Russian military, and this is a pretty clear breach of the non-escalation agreement reached last week in Geneva. So, now the US State Department is saying that Russia and their “green men” need to vacate occupied buildings and checkpoints, accept an amnesty and address their grievances politically, or the financial sanctions against Russia will be escalated.