What started out as a positive yet boring session turned ugly and the markets closed on session lows. Once again, the greatest losses were in the small caps, mid-caps and growth sectors. However, there was no single reason for the market turning from gains to losses. Rather it was a series of unconnected events.
Obama and the West Are Seen as Weak By the Markets
President Obama, while in Belgium, delivered a nonsensical speech (most politicians seem compelled to do so) in which he said, amongst other things that “This is not another Cold War that we’re entering into … unlike the Soviet Union, Russia leads no bloc of nations, no global ideology. The United States and NATO do not seek any conflict with Russia. In fact, for more than 60 years we have come together in NATO not to claim other lands but to keep nations free.”
The market took this as if he said “we are prepared to begin an economic cold war with Russia and its economic bloc” and as another sign of weakness on the part of the US and its Western allies. It was the President’s speech that pushed the market off of its morning and day’s highs in the early morning.
King Digital’s IPO Was a Disaster
King Digital Entertainment (KING), maker of the Candy Crush Saga digital game, which priced its initial public offering (IPO) the evening before at $22.50 found its shares crushed to close nearly 16% lower at $19.00. This broken IPO took the entire mobile applications / social networking segment lower. Of course, the fact that Facebook (FB) continues to act like a drunken sailor during fleet week when it paid $2 billion for virtual reality goggle manufacturer Oculus Rift, did not help the sector one iota. Once these stocks got hit; the ecommerce, biotech and other high growth stocks, which were trading higher in the morning, after suffering heavy losses over the past week, lost their bids and got crushed as well. The only exceptions were Netflix (NFLX) which posted a modest gain and Regeneron Pharmaceuticals (REGN) which closed with a modest loss.
By the time the closing bell rang, the S&P 500 (SPX) closed at 1,852.56, just four points higher since the year began and 31 points off of the all-time high set last week. However, the real pain was felt in the NASDAQ 100 (NDX) which now sits at 3,582.88, down ¼% for the year and over 4% from its recent 52-week high set earlier in March. This is really nothing out of the ordinary for a bull market. It just feels worse than it actually is because the quarter is about to end and professionals in this business are measured by their performance and paid accordingly based on quarterly and annual snapshots.
Bank Stress Tests Will Dominate Market Today
What professional money managers also know is not to extend the pain or pleasure of the prior day to the next day. Looking ahead to today, the market is likely to be shaped by the release of the Federal Reserve’s stress test on banks. Essentially, these are statistical tests which are applied to banks’ capital structures under various economic and financial conditions. As always, there are winners and losers to the stress test. The big loser was Citigroup (C) which failed the test. That bank’s shares were clobbered after hours and are likely to do so today. Goldman Sachs (GS) and Bank of America (BAC) passed the test but only after resubmitting their capital plans. In other words, those two banks cut back on their more aggressive share buyback and dividend increases. Furthermore, Bank of America agreed to pay $9.3 billion to settle mortgage bond claims. This for the most part, is the final chapter in claims against the bank, with respect to the financial crisis. Immediately after the stress test results were released, Bank of America, Goldman Sachs, JP Morgan Chase (JPM), KeyCorp (KEY) and Morgan Stanley (MS) all announced dividend hikes. Morgan Stanley shareholders were the big winners as they were also greeted with an increase in the company’s share repurchase program.
The bubblistas are coming out of the woodwork. They will be proven wrong in the long term but for the here and now they are gaining more room at the financial bully pulpit. So, expect the stock market to be unsettled for the next few days. We need to look ahead and not behind. By many measures, the stock market remains extremely cheap. It is the risk takers that will be rewarded. I am a risk taker. As I intended, I engaged in more spring cleaning and moved assets into the healthcare sector. My next move is to allocate capital into media content.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long BAC — although positions can change at any time.
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