September 2010 apparently did not get the memo about what a glum month this usually is for stocks as news of the Basel III banking accords helped lift financials on both sides of the Atlantic and further evidence that China's economic growth story remains provided a boost to the broader market. Here in the U.S., technology issues led the way with the Nasdaq gaining almost 2%, the best performance among the major U.S. indexes. By the time the closing bell rang, U.S. stocks settled at a one-month high.
The Basel III banking accords were viewed as a positive by investors as both U.S. and European financials moved to the upside on the news. At the heart of the matter, banks will now have more time (up to 2019) to raise more capital if needed. European Central Bank President Jean-Claude Trichet called the agreements ''a fundamental strengthening of global capital standards'' and that Basel III's ''contribution to long-term financial stability and growth will be substantial.''
The timeframe of over eight years for banks to raise additional capital is probably intended to accommodate the weakest links of the bunch, for example Greek banks. The strongest European and U.S. banks have already shown they do not need that much time to raise fresh capital. Deutsche Bank (DB) is meeting the challenge head-on after announcing a capital raising plan last week and while a Swiss press report said over the weekend that Credit Suisse (CS) and UBS (UBS) may need to raise a combined sum of nearly $20 billion, analysts believe the banks earnings should be sufficient to cover the new capital requirements.
Bottom line: The Basel news was viewed in a positive light as major U.S. banks enjoyed a solid a day. The Financial Select Sector SPDR (XLF) finished the day higher by more than 2%, closing above its 200-day moving average for the first time since early August.
China chimed in with some strong economic news that aided the rally in U.S. equities. Over the weekend, China said industrial output in August jumped 13.9% in August compared to a 13.4% increase in July. The bullish news out of China did not stop there. Retail sales surged 18.4% on the year and fixed asset investment in China cities came in at a robust 24.8%.
Of course, good news out of China usually means positive price action in the commodities complex and that was the result today. Copper surged 7.25 cents, or 2.1%, to settle at $3.4790 per pound, settling near the intraday high of $3.4935. The red metal is now within striking distance of four-month high of $3.5345, which was set last week.
The most recent London Mercantile Exchange data shows copper stockpiles have been drawn down by 950 tons to 390,450 tons, the lowest level since November and down 150,000 tons since February, according to Reuters.
Oil was no slouch either, popping 74 cents, or 1%, to close at $77.19 per barrel on the New York Mercantile Exchange. That is good for the highest closing price since August 11. China's economic news certainly helped, as did news of a shutdown of an Enbridge Energy Partners pipeline in the Chicago area. A leak was discovered at that pipeline last Thursday and since the pipeline moves 670,000 barrels per day from Canada to the U.S., near-term supply concerns also helped prop oil up today.
Speaking of oil, there were a couple of analyst notes out today that said the legal claims BP (BP) is facing from the Gulf of Mexico oil spill may be less than the $20 billion the company set aside in the independent claims fund it formed at the behest of the White House earlier this year. Citigroup said the $32 billion provision BP took to cover spill costs is the most reasonable estimate of the financial obligations BP faces for the largest oil spill in U.S. history.
The Citi note went onto to say BP's fourth-quarter financials may be strong enough to support the company's dividend being reinstated in that quarter. BP previously suspended shareholder dividends to conserve cash. Managing Director Robert Dudley, who will become BP's CEO on October 1, has not been all that encouraging about the dividend, saying in July that the company would not be in a hurry to reinstate the dividend.
Dudley did not indicate that the dividend would be reinstated this year in a recent meeting with analysts. Bernstein analysts said that BP would probably need to complete $30 billion in planned asset sales over the next 18 months before restoring the dividend. ''BP's cashflow position should be just strong enough to support restoration of dividends by the first quarter of 2011, under an $80 barrel price scenario based on estimates,'' Bernstein said.
Speaking of dividends, Microsoft (MSFT) surged by more than 5% on news that the company may sell debt to fund dividends and share repurchases. Mr. Softie is among a dozen tech giants that are sitting on mounds of cash that also are not rewarding their shareholders with any, or in the case of Microsoft, not much of that cash. To be fair, Microsoft does currently pay an annual dividend of 52 cents, good for a paltry yield of 2.2%.
Microsoft has $36.8 billion in cash and short-term investments, so selling debt to fund a higher regular dividend or a special dividend and share buybacks is a curious move, but sources close to the matter say the company is choosing to sell debt because too much of its cash is held overseas, Bloomberg News reported. The debt offering could come as soon as this calendar year, according to Bloomberg.
Whether or not this prompts other tech companies to juice their payouts remains to be seen. Barron's addressed the issue of big tech companies with big wads of cash who aren't sharing that cash with investors. With data from Morgan Keegan, the Barron's piece shows that if Microsoft opted to go big and have a payout ratio of 70%, the shares would yield 7.2%. Even a payout ratio of 40% would result in a respectable 3.9% yield.
Still, Microsoft's current 2.2% yield is better than the 0.8% Hewlett-Packard (HPQ) and Oracle (ORCL) offer and 0.8% is better than what Apple (AAPL), Cisco (CSCO), EMC (EMC) and Google (GOOG) offer because those companies pay no dividends at all despite the fact that they could easily afford to. A payout ratio of 40% would take HP's yield to a solid 4.6%, but HP chooses to spend its money in other ways, a point I will address in momentarily.
For now, the chorus of those calling Microsoft a value play is likely to grow louder. I am not so sure, but the shares did move above the 50-day moving average.
Staying in the tech world, HP continues to be an investment banker's dream. A shakeup at the top of HP that has the company operating under the guidance of an interim CEO who has said she does not want the top job is not enough to deter the computer giant from its acquisitive ways. The latest apple of HP's eye is network security provider ArcSight (ARST), which surged more than 25% on news that HP would buy the company for $1.5 billion.
HP sure is not shy about paying up for its targets. The $2.07 billion price tag for 3Par (PAR) is about 10 times annual revenue and paying $1.5 billion for ArcSight, which posted $181 million in sales in its most recent fiscal year, does no exactly represent a big discount. HP is a tad late to the network security business party, where it will find itself competing directly with rivals like EMC and IBM, but analysts seem to agree that the ArcSight Acquisition makes sense.
Whether or not these deals make financial sense for HP is another matter altogether. At least one analyst voiced this concern on HP's conference call today. Something else to consider with regards to investing in HP: The stock is down more than 10% in the past two years while IBM is up 10% and given that 90% of all acquisitions fail to create shareholder value, it is highly probable that HP is making a mistake or two with all these deals, at least statistically speaking. All this begs the question: Why is HP not using some of its cash to boost its dividend?
Looking at the charts, the S&P 500 took out resistance at its 200-day moving average at 1115 today and with a close just below 1122, the index is in prime position to start dealing with resistance in the 1127-1130 area, also known as the August highs. With today's gain of 1.1%, the S&P 500 is now up 6.8% in September and that includes just one day of negative trade.
S&P 500 Chart
The Dow was able to ease its way above its 200-day moving average at 10,450 on Friday and that put the blue chip index in position to break through resistance at 10,475, a feat that was easily accomplishd today. Basel III helped the financials and the Microsoft dividend news provided a boost as well. The close above 10,475 turns attention to resistance at 10,700.
As I mentioned at the start of the wrap, the Nasdaq was the real juggernaut today, easily taking out resistance at 2270 to move comfortably above the 200-day moving average. Now 2300 becomes the big hurdle, an area the Nasdaq has not closed above since late July. I am not saying it is going to happen soon and I highly doubt it will happen this week, but a Cisco dividend would be a useful catalyst for the Nasdaq.
Do not forget about the Russell 2000, which turned in an impressive 2.5% run today. I saw a piece over the weekend where a pundit said small caps looked ready to roll over. That thesis may prove true, but it is a difficult bet to make right, especially since the Russell 2000 took out resistance at 650 today. The big event would be a move above 675.
Russell 2000 Chart
This September continues to defy the historical precedent set by this month and any good economic news, Chinese or otherwise, is just going to send the shorts running for cover. Retail sales could get the ball rolling tomorrow and if investors start to pull cash out of bond funds to chase this September rally, the path of least resistance will remain up, at least in the near-term.