Yesterday there was a huge rally in the bond market, sending yields crashing and bond prices moving higher across the board. The one area where there was weakness for fixed income was on the short end which was probably the result of large funds looking to reallocate funds back out to the longer maturity dates as expectations for the Fed to raise rates actually fell yesterday. We were in the camp which thought that rates would come back in a bit, but yesterday's move certainly appears to be a bit of an overreaction and we did see a nice move off of the lows (as measured by yield) yesterday.
There is little reason to rush back into the longer end of the curve now and we think that investors would be better served waiting for the 2-year to get back to the 0.70%+ area before rotating.
Chart of the Day:
The bond market has rallied the last few sessions. Even as traders begin to place bets showing that they are less convinced that the Fed moves in September, we do think that rates will rise once again ahead of the meeting.
We have economic news today, and it is as follows:
- Factory Orders (10:00 a.m. EST): Est: 1.8%
The Asian markets are higher today:
- All Ordinaries - up 0.33%
- Shanghai Composite - up 3.69%
- Nikkei 225 - down 0.14%
- NZSE 50 - down 0.41%
- Seoul Composite - up 0.97%
In Europe, markets are lower today:
- CAC 40 - down 0.56%
- DAX - down 0.23%
- FTSE 100 - down 0.32%
- OSE - down 0.51%
Insurers Report Quarterly Results
Allstate (NYSE:ALL) and American International Group (NYSE:AIG) reported their quarterly results after the bell yesterday, with Allstate surprising investors with lower than expected EPS and AIG exceeding EPS estimates by $0.17/share. Allstate blamed an increase in claims related to its auto insurance business for the disappointing results as claims rose across geographic area, risk class, ratings plans and maturity of the business; meaning that in general accidents are rising in the country. The blame for this can be assigned to the improving economy which has more people driving to and from work and using disposable income to take vacations or venture outside of the house for entertainment purposes. Allstate will follow competitor Geico, which is owned by Warren Buffett's Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B), in raising rates as the industry now appears set to push through price increases across the board.
AIG, which is the largest commercial insurance company in the United States, saw its EPS come in at $1.39, which exceeded analysts' consensus of $1.22/share. The company also moved to more than double its dividend to $0.28/share from $0.125/share while also adding $5 billion to its share repurchase agreement. As results continue to improve, the company is focusing on selling noncore assets to shore up its finances and return excess cash to shareholders. The majority of funds for the additional $5 billion in share repurchases will come from the company's sale of stakes in Springleaf Financial (NYSE:LEAF) and AerCap Holdings, NV (NYSE:AER).
We will be watching for Disney's (NYSE:DIS) results today, which by all accounts should once again come in strong on the back of strength from the company's movie studios. There are many expecting an awful lot from the company, something that has us a bit worried that even a good quarter will not be enough to prevent a sell-off in the shares once the company reports results. With expectations so high, even mildly bad news about ESPN and the company's other cable channels could spook investors and start some profit taking.
We remain bullish of the name and do not believe that one should be taking profits right now, but we do recognize that the stock does seem to be priced for perfection owing to the fact that it really has not sold off in days that the general market has and instead has continued higher. We are still debating what our move will be today, but we may add a small position now and then continue nibbling through the end of the year as we have a fear that Disney could become similar to Boeing (NYSE:BA), in that gains could be short lived after results are reported. We hope not, but it feels that with market expectations that we are very close to that point.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in DIS, AIG over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: DIS, BA, AIG have all previously been recommended.