Friday, November 29, 2013

U.S. Stocks Rise as Dow Extends Record on Stimulus Bets

U.S. stocks rose, with the Dow Jones Industrial Average extending a record, as investors awaited retailer earnings reports to gauge the strength of consumer demand and the likelihood of cuts to monetary stimulus.

Transocean Ltd. added 3.6 percent after the offshore rig contractor agreed with investor Carl Icahn to propose a $3 per share dividend. ViroPharma Inc. jumped 26 percent as Shire Plc. bought the company for about $4.2 billion. Best Buy Co. rose 4.5 percent after a UBS AG analyst upgraded the stock. KKR & Co. fell 1.5 percent after it bought Brickman Group Ltd. for $1.6 billion.

The Standard & Poor's 500 Index climbed 0.1 percent to 1,771.89 at 4 p.m. in New York to close within a point of its record. The Dow rose 21.32 points, or 0.1 percent, to 15,783.1. About 4.8 billion shares changed hands on U.S. exchanges today, 21 percent below the three-month average. Bond markets were closed because of the Veterans Day holiday.

"Sometimes a boring day is nice,"John Carey, a portfolio manager at Pioneer Investment Management who oversees $200 billion in assets globally, said by phone from Boston. "People will be watching over the next few weeks to see if the Fed does decide to begin tapering this year. If earnings continue trending higher the support will be there for better share prices."

The S&P 500 added 0.5 percent last week for a fifth week of gains, the longest streak since February. Better-than-forecast data on jobs and growth indicated the economy is strong enough to withstand a reduction in Federal Reserve stimulus, even as consumer spending climbed last quarter at the slowest pace since 2011. There were no economic reports today.

Earnings Scorecard

Corporate earnings that surpassed estimates and unprecedented monetary support from the Federal Reserve have propelled the S&P 500 higher by more than 160 percent from a March 2009 low.

Of the 449 S&P 500 companies that have released third-quarter profits so far, 75 percent have beaten analysts' forecasts, data compiled by Bloomberg showed. Earnings per share for the companies on the gauge probably increased 4.7 percent in the third quarter, and will rise 6.2 percent in the fourth, according to estimates compiled by Bloomberg.

"We can put in the books that the third quarter earnings season was another positive surprise," Phil Orlando, New York-based chief equity market strategist at Federated Investors, said by phone. His firm oversees about $380 billion in assets. "The market was way too pessimistic going in."

News Corp. was the only S&P 500 member to post results today, releasing its report after the market closed. Wal-Mart Stores Inc., Macy's Inc. and Nordstrom Inc. are among retail companies reporting earnings later this week. Home Depot Inc. posts results on Nov. 19.

'Fairly Restrained'

"Investors want to know the strength of the U.S. consumer going into what might be a tepid holiday season," said Alison Porter, who helps oversee $108 billion as U.S. equities fund manager at Ignis Asset Management. "Consumer spending has been fairly restrained. With big retailers like Wal-Mart and Home Depot yet to report, we'll want to see whether that has picked up."

Economists still forecast the Fed will delay tapering asset purchases until March even after the payrolls data beat forecasts. Policy makers will probably pare the monthly pace of bond buying, known as quantitative easing, to $70 billion at their March 18-19 meeting from the current pace of $85 billion, according to the median of 32 estimates in a Bloomberg survey Nov. 8. The median forecast in an Oct. 17-18 survey of 40 economists also called for a cut to $70 billion in March.

"There's been a correlation between rising share prices and low interest rates and the QE program," Carey said. "People legitimately are wondering if and when the Fed begins the tapering."

Equity Valuations

The S&P 500 has rallied 24 percent in 2013, heading for the best annual gain in a decade. The gauge is trading at 16 times projected earnings, more than the five-year average of 14 times earnings, according to data compiled by Bloomberg.

Investors have poured money into exchange-traded funds tracking U.S. stocks, pushing assets in the iShares Core S&P 500 ETF above the Vanguard FTSE Emerging Markets (VWO) ETF for the first time since 2010. The iShares S&P 500 fund manages $50.5 billion, compared with $48.3 billion for the ETF linked to shares of developing nations, according to data compiled by Bloomberg. The SPDR S&P 500 ETF Trust is the world's largest ETF with about $156 billion.

'Look Deeper'

"Valuations are not as attractive and people need to look deeper into the market to find better value," Ignis' Porter said by phone from Glasgow.

The Chicago Board Options Exchange Volatility Index (VIX), which measures future volatility signaled by S&P 500 options, fell 2.9 percent to 12.53 today, a three-month low.

Six of 10 main S&P 500 groups advanced, with health-care stocks rising 0.2 percent to pace the gains. Phone shares fell 0.3 percent for the worst performance in the broader index.

Transocean rose 3.6 percent to $55.37. The company agreed with Icahn to pay about $1.1 billion in dividend and to increase margins by $800 million through cost cutting. Transocean will also back two of Icahn's nominees to the board, whose size will be cut to 11 directors from 14, according to a joint statement.

Deal Activity

ViroPharma rallied 26 percent to $49.42, it's highest since April 2000. Dublin-based Shire will pay $50 a share in cash for the maker of drugs that treat some rare diseases, according to a statement today.

Gogo Inc. (GOGO), a provider of in-flight Internet services, jumped 29 percent to a record $24.15 after the company raised its year-end revenue estimate. Itasca, Illinois-based Gogo reported a smaller third-quarter loss than analysts had expected. Inc. rose 1.2 percent to $354.38. The world's biggest online retailer said it is teaming up with the U.S. Postal Service to offer Sunday delivery.

Best Buy added 4.5 percent to $44.33, the highest in almost three years. UBS analyst Michael Lasser upgraded the stock to buy from neutral. Lasser said he sees Best Buy estimates being pushed higher when the company reports third quarter earnings on Nov. 19.

FirstEnergy Corp. plunged 5.7 percent to $36.62, its biggest drop since May. The public utility holding company said yesterday it plans to spend $2.8 billion on transmissions through 2017.

Homebuilder Slump

An S&P index of homebuilders dropped 0.7 percent for a third day of declines. D.R. Horton Inc. (DHI), which reports earnings tomorrow, slid 0.4 percent to $18.06, the lowest in almost four weeks.

Denbury Resources Inc. plunged 5.9 percent to $18.20 for its biggest drop since June 2012 and the steepest slide in the S&P 500. The petroleum producer yesterday said it would initiate a regular quarterly dividend and not create a master limited partnership, something the company in May said it was considering.

KKR declined 1.5 percent to $23. The private-equity firm led by Henry Kravis and George Roberts agreed to buy landscape-maintenance company Brickman from Leonard Green & Partners LP for $1.6 billion.

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