It was a day spent in the green for equities as positive economic news and earnings reports helped stocks to fresh highs. The Dow Jones Industrial Averge plowed through 11,000 to book a triple-digit gain, adding almost 104 points to close at 11,123.11, right near the next resistance level at 11,125. Perhaps more importantly, the S&P 500 strongly moved past 1200, adding over 13 points to close at 1210.65 while the Nasdaq posted a strong gain of its own, gaining almost 39 points to finish the day at 2504.86. Hey, the Nasdaq merely needs to double again to return to its all-time high.
The rally in equities was aided by some positive economic news, including March retail sales, which show the consumer may be on his way back. March retail sales surged 1.6% over February's tally, helped by gains in auto and apparel sales and the fact that more folks seem to be dining out again. In a Wall Street Journal survey, many economists are now saying their economic growth forecasts for the next 18 months may prove too low and that they may be ''underestimating'' the vibrancy of the economic recovery.
If the return of the consumer proves legitimate and job growth follows, estimates for 3.1% GDP growth in the U.S. this year may prove too conservative. Barclays Capital boosted its GDP estimate to 3.5% on Wednesday after the retail sales news, the Journal reported. That makes sense because as the famous anecdote says, the consumer accounts for 70% of U.S. GDP. The Commerce Department said consumers spent $363 billion in March, up almost 8% from March 2009.
Retail Sales Chart
The Federal Reserve's Beige Book report also had investors smiling on Wednesday. The report showed economic growth in 11 of the Fed's 12 districts with the St. Louis region showing some soft economic conditions. The Beige Book data echoed the sentiments of the retail sales data, with the Fed saying retail and auto sales were firming across the country. Manufacturing activity was up in all regions except for St. Louis and real estate and tourism activity also made gains in many regions.
Auto sales were higher in eight of the 12 districts and it is fair to say in summary that the Beige Book update offered a rosy assessment of the U.S. economy. Fortunately, Fed Chairman Ben Bernanke's testimony on Capitol Hill today helped the cause. Bernanke signaled that interest rate increases were not in his near-term plans and that makes sense as inflation does not appear to be an issue right now. For those that follow bonds, I have included a chart that illustrates spreads between 10-year Treasuries and 10-year TIPS are below the averages of 2004-2007, indicating inflationary pressures are relatively benign in the current market environment.
We are at the start of another earnings season and after Intel (INTC) and CSX (CSX) delivered excellent reports yesterday after the close, it was JPMorgan Chase's (JPM) turn to step into the earnings confessional Wednesday morning. The Dow component and second-largest U.S. bank is widely viewed as the strongest U.S. bank and it is the first of the major U.S. financials to deliver earnings results, so yes, this news is kind of a big deal.
JPMorgan did not disappoint, reporting a first-quarter profit jump of 57% to $3.3 billion, or 75 cents a share, from $2.1 billion, or 40 cents a share, a year earlier. The bank posted revenue of $27.7 billion up from $25 billion, handily beating analyst estimates as the bank's trading and investment banking operations were standouts, accounting for $2.47 billion in profit.
The profit numbers were more tame in JPMorgan's retail banking business, but the good news is that the bank is seeing a decline in 30-day credit card delinquencies, which were down from the prior quarter and the year earlier period. The company said it had $19 billion in non-performing assets at the end of the first quarter, down from $19.74 billion at the end of last year. Non-performing loans comprised just 2.39% of the total loan portfolio, a decline from 2.77% in the fourth quarter.
That means JPMorgan set aside less cash for bad loans in the first quarter than it had in prior quarters. The first-quarter loan-loss reserve was $6.99 billion, down from $7.17 billion in the fourth quarter and $8 billion in the third quarter of 2009. One might take that to mean the economy is improving and the next logical step from there is to ponder when the bank will raise its meager dividend. After all, CEO Jamie Dimon has said that he wants to the economy improve and bad loans to subside before a dividend increase is considered.
JPMorgan currently pays a quarterly dividend of just 5 cents a share and when it comes to candidates for dividend hikes, JPMorgan is probably the most watched company out there. For his part, Dimon has tantalized and teased regarding the subject. Dimon's own forecast is for a possible dividend hike in the second half of this year. So take your pick, you have six months to choose from regarding when the market will finally be blessed with this news.
Sure, JPMorgan shares enjoyed a good day on Wednesday, adding over 4%, but it is worth noting that over the near-term, the stock has been outperformed by eight of the 10 largest U.S. banks. That may just be a footnote, but I bet a dividend increase would almost certainly boost JPMorgan shares higher.
JPMorgan Chase Chart
The positive earnings news continued to flow after the market closed as economic bellwether United Parcel Service (UPS) pre-announced its first-quarter numbers with a big upside surprise. The largest package delivery firm in the world said it earned 71 cents a share in the first quarter, compared with 52 cents a share a year earlier, easily beating the consensus estimate of 57 cents a share. Increased demand in international markets helped revenue jump 7%, UPS said.
The good news from UPS did not stop there. The company said it expects to earn $3.05 to $3.30 a share in 2010, well above the guidance of $2.70 to $3.05 a share the company issued in February. Take the middle of that range, which is $3.18 a share, and UPS would easily surpass the Street estimate of $2.95 a share.
The stock was up almost 1% during regular hours on volume that was about 20% higher than the daily average, but UPS shares rocketed higher in the after-hours session and are up $2.97, or 4.54%, to $68.42 as of this writing. As I always say, transportation companies are a great way to gauge the overall health of the economy. Combine the CSX and UPS news and this recovery might be for real after all.
UPS credited strength in international markets as one reason for the boffo numbers and not to be outdone when it comes to benefiting from global markets was Yum! Brands (YUM), the operator of the Kentucky Fried Chicken, Pizza Hut and Taco Bell fast-food chains. Yum! said it earned $241 million, or 50 cents a share, in the first quarter. Excluding items, the company earned 59 cents a share, beating Street estimates of 53 cents. Yum! earned 48 cents a share a year earlier.
Revenue rose 5.8% to $2.35 billion, beating the consensus estimate of $2.26 billion. Since the chains that Yum! owns are familiar to most Americans, some folks may not realize how important international markets are to the company. Well, let me put it this way: KFC is a big hit in China. Yum! Earned $176 million in China, where it owns 3500 stores, during the first quarter.
Not surprisingly, the company said it expects Taco Bell, its strongest U.S. brand, and international markets to account for 90% of its profits this year, up from 70% in 2004, according to the Wall Street Journal. Yum! shares gained almost 2% during Wednesday's trading session on volume that was more than twice the daily average. After-hours, the stock added another 93 cents, or 2.35%, to move to an all-time high at $42.66.
Taking a look at the charts, the Dow had closed above 11,000 a couple of times prior to today, but did so in less-than-impressive fashion. Obviously, Wednesday's close was a different story and the Dow closed right near its intraday high. Where the Dow goes from here will be interesting to watch and of particular importance is whether old resistance at 11,000 can now act as support. There are no Dow members reporting earnings tomorrow, but the break in the action will be short-lived with Bank of America (BAC) and General Electric (GE) stepping to plate on Friday morning.
The S&P finally made its way beyond legitimate resistance at 1200 to close right at its high of the day. The move above 1200 could prove significant as the index had failed in its two previous attempts to surpass that number. If the earnings reports that are scheduled for the rest of this week mirror what we have seen the past two days, the S&P 500 should continue its march higher.
S&P 500 Chart
Aided by Intel's earnings report, the Nasdaq is looking quite strong and has moved beyond resistance at 2500. Like the S&P 500, the Nasdaq closed right at its high of the day. Internet search giant Google (GOOG) delivers earnings after the close tomorrow and this will be another marquee report for tech investors to digest. Google shares have significantly lagged the Nasdaq in the past three months, gaining just 2% in that time compared to an almost 10% run for the Nasdaq. Analysts are expecting Google to earn $6.57 a share on revenue of $4.93 billion.
As long as earning reports continue to beat to the upside and companies keep offering bullish full-year guidance, the path of least resistance will be up. Investors are clearly starting to feel better about the economy and even if Google disappoints, that may be a one-off event that can be easily dealt with, particularly if Bank of American can do its best JPMorgan impression on Friday and if GE can continue its bullish ways.