A round of cheery economic reports, some mergers and acquisitions news and positive comments about Goldman Sachs (GS) by Warren Buffett helped stocks to a solid start to May, the ''sell in and go away'' month. The Dow Jones Industrial Average turned in its best performance since February, rising 143.22 points to settle at 11,151.83. The S&P 500 made its way back above 1200, rising 15.58 points to close at 1202.26 while the Nasdaq added almost 38 points, but could not find its way back above 2500, closing at 2498.74.
Stats Table #1
Consumers are showing some strength and that is good news for retail stocks and the broader market. Monday's consumer spending update showed spending was back in vogue as shoppers rang the register more than they had at anytime during the previous five months. On an inflation adjusted basis, spending was up 0.5% for the second straight month.
The increase in consumer spending in March has some pundits pontificating about how strong those spending numbers will be when the economy starts to see some legitimate job and wage growth. Incomes rose just 0.3% in February while wages and salaries advanced a scant 0.2% in March. Consumer spending accounts for about 70% of U.S. GDP and when the consumer is feeling good about his personal economic situation, he is apt to part with some of his cash and splurge on new purchases. Friday's job report will be telling about how strong the consumer recovery really is.
Consumer Spending/GDP Chart
Another positive economic data point in the form of the Institute for Supply Management (ISM) monthly manufacturing update was in the news today. The ISM report said U.S. manufacturing activity rose to 60.4 in April from 59.6 in March. Most economists were expecting a reading of 60 and any number above 50 is considered a sign of expansion. The index now resides at its best level since June 2004 and has risen for nine straight months and 13 of the last 16 months. ISM said the purchasing manager's index was also above 42 for the 12th consecutive month, another sign the economy is expanding.
In stock-specific news, Goldman Sachs got a decent bounce after getting a vote of confidence from Warren Buffett at the Berkshire Hathaway (BRK-A, BRK-B) shareholder meeting over the weekend. Goldman shares were up $4.30, or 2.96%, to close at $149.50. Nearly 28.3 million shares changed hands compared to average daily volume of almost 16 million shares. Not be Debbie Downer, but it should be noted this was a $160 stock last Thursday.
It is actually pretty easy to discern why positive comments from Buffett alone would not be enough for Goldman shares to make up more last week's decline. Berkshire's stake in Goldman is just $5 billion, an investment that pales in comparison to other Berkshire investments such as the firm's $44 billion purchase of Burlington Northern.
Beyond that, Berkshire is collecting $500 million a year on its $5 billion Goldman stake. That is a lot better than the 1% yield regular shareholders of Goldman get. Buffett also has a say in what executives occupy the top three spots at Goldman and Berkshire has warrants to acquire Goldman shares at $115. So when the mainstream media asks Buffett whether or not he would do this deal again, it seems like a waste of time and calling his comments on Goldman ''eye-popping'' as some did, is just a gross overstatement. The reality is no investor would pass on a deal that is basically guaranteed to make money. The unfortunate reality is that not every investor can get their hands on a deal like Buffett has with Goldman.
Onto companies that actually provide services that are readily attainable to most consumers, Continental Airlines (CAL) and UAL (UAUA) finally agreed to terms on a $3 billion merger, creating the world's largest airline in the process. On their own, United and Continental are the third- and fourth-largest U.S. carriers, respectively.
Under the terms of the stock-swap transaction, United will acquire Continental and the new airline will sport the United name, but use the Continental logo. The two money-losing carriers said they expect annual savings of $1 billion to $1.2 billion by 2013 and revenue increases of up to $900 million. The combined company will have more than half its routes in the U.S. with hubs in Chicago, Cleveland Denver, Houston, Los Angeles, Newark and San Francisco.
From the standpoint of international travel for U.S. customers, competition will be diminished as a result of this deal. There will be only three U.S.-based carriers with significant access to international routes Delta (DAL), American (AMR) and the new United. The deal must be approved by the Justice Department and the European Commission and labor issues could be a problem for the carriers to deal with as headcount reductions usually do not go over well when the airline industry consolidates. Still, the news was warmly received by investors as both stocks were up more than 2% and the Claymore Airline ETF (FAA) was also up more than 2%.
Apple (AAPL) was another name on the receiving end of some positive trade on news of strong iPad sales. The company said today that the millionth iPad was sold last Friday. Putting that statistic into context, it took 73 days for the first iPhone to reach 1 million units sold. The iPad reached the million unit mark in 28 days. According to Fortune's Apple 2.0 Blog, Piper Jaffray analyst Gene Munster said he and his team called 50 Apple stores on Sunday and 49 had run out of the 3-G iPad and most were out of all versions of the product.
Given the robust demand here in the U.S., it will certainly be interesting to see how the iPad performs when it makes its international debut in June. Apple has delayed selling the product outside of the U.S. due to strong demand here, but the company is planning to announce international release dates next Monday. As is the case with the iPhone, apps are also a lucrative revenue for stream Apple when it comes to the iPad. Two of the three most popular iPad apps to date are developed by Apple and they cost $10 each to download.
iPad Sales Estimates
The bottom line is Steve Jobs said demand for the iPad is outpacing supply and that is a nice problem to have. Apple was up $5.26, or 2% to $266.35 today. The 52-week high is $272.46.
Oil services names that had been battered in the wake of the oil spill in the Gulf of Mexico caused by an explosion at the Deepwater Horizon rig got a boost on rumors that BP (BP) has stemmed the flow of leaking oil from the well. Unfortunately, BP confirmed that the flow of leaking oil remains unchanged. Some estimates put the flow of leaking oil as high as 5,000 barrels per day.
What may have been behind the jump in oil services stocks is the thought that the bulk of the costs related to this disaster are going to arrive on BP's doorstep. President Obama placed the blame squarely on BP's shoulders this weekend and federal law dictates that if the oil being extracted by the rig belongs to BP, then BP is liable.
That could spell some relief for oil services names like Cameron International (CAM), Halliburton (HAL) and Transocean (RIG), all of which traded higher today. Cameron led the way, gaining 3.32% on more than five times its average daily volume. The costs for BP still are not clear, but one analyst estimated the Horizon spill could cost the company $5 billion to $15 billion in cleanup costs and legal bills. That compares with $4 billion Exxon (XOM) had to shell for the Valdez spill.
Looking at the charts, volatility is back in a big way as the Dow has swung in triple-digit ranges for the past three days and six of the past seven. The Dow found support at 11,000, a level that has been support since mid-April. If 11,000 is violated, 10,850 should be the first support level and from there we could see 10,700. Uptrend resistance would be found at the recent high of 11,258 and with today's close, the Dow was able to move back above its 21-day moving average just above 11,050.
The S&P 500 flirted with an important support level at 1185 with Friday's close, but rebounded today to reclaim 1200. Even with Monday's bullish move, the S&P 500 remains locked in a range that we have seen since mid-April. A breakout above 1225 would be bullish while a violation of 1185 would encourage selling.
S&P 500 Chart
Apple and its iPad sales were not enough to move the Nasdaq to a close above 2500 and the intraday high was just 2503, but there were some other positive signs, though faint. After being battered last week, semiconductor makers rebounded on Monday with the Semiconductor HOLDrs ETF (SMH) gaining 2.1%. Uptrend resistance looms around 2520, but if support at 2450 is broken, 2400 becomes the next number to worry about and after that, things really get ugly.
A confluence of factors ranging from a lack of clarity over Greece's bailout package to ratings downgrades for Portugal and Spain to the Gulf oil spill and further pressure on Goldman Sachs contributed to last week's sell off. Remember that stocks had advanced for eight consecutive weeks, so the aforementioned factors only exacerbated selling that was probably overdue.
It appears that Greece finally has a bailout package in place, so that would serve to possibly remove one negative story from the market and if BP can finally deliver some positive news on its spill containment efforts, energy names should see further relief. Monday was a good day for stocks overall, but it was just one day of trading and not we are not deep enough into the month to know if ''sell in May and go away'' is going to work this year.