by Ed Wijanarakula, NMS Investment Research
The S&P 500 closed at 1,999.99 on Friday, up 2.67% for the week, rising for the third week in the row. The best performing S&P 500 sectors for the week were Energy and Financials, which were up 5.79% and 4.46%, respectively. The WTI crude oil price surged another 10.63% for the week, despite that the EIA reported a 10.4 million barrel inventory buildup in the U.S. for week ended February 26, compared to economists' estimates for a 2.54 million barrel build. The EIA also said that U.S. refineries ran at 88.3% of capacity in the week ending February 26.
Traders shrugged off the EIA's bearish data, as the People's Bank of China (PBoC) said on Monday that the bank cut the required reserve ratio, RRR, by 0.5 percentage points, effective March 1. According to Bloomberg, the action will inject about 685 billion yuan ($105 billion) into the financial system. The Fitch ratings agency told Reuters that the cut could fuel increased lending growth by the Chinese banks, which would result in more bank risks. The China Banking Regulatory Commission said earlier this year that the new non-performing loans, NPL, held by Chinese banks more than doubled in 2015 from the previous year. Crude oil prices and basic materials also got a big boost by speculators ahead of the Chinese National People's Congress on Thursday to discuss China's development plans for the next 5 years.
Shares of big U.S. banks, including Bank of America Corp (NYSE:BAC), up 6.46% for the week, jumped after Democratic-Socialist U.S. Presidential candidate Sen. Bernie Sanders appears to be on the way out. Democratic U.S. Presidential candidate Hillary Clinton has the lead in the primary elections with 1,129 delegates, while Mr. Sanders has only received 498 delegates after Super Tuesday and Saturday's primary elections and caucuses. Mr. Sanders has promised voters to break up U.S. big banks if he is elected President.
The worst performing sectors for the week were Consumer staples and Healthcare, up 1.78% and 0.18%, respectively. AARP's report on Monday, "Prescription Drug Costs Soar, Doubling in 7 Years", blaming the drug manufacturers for price hikes, sent the S&P 500 Healthcare sector tumbling 1.58%.
Tough talk about the high costs of prescription drugs and healthcare are popular in an election year, and no one seems to understand that lower drug prices mean fewer drugs. Pharmaceutical company mergers to cut costs, and low profit margins for generic drugs have reduced the number of manufacturers of many generics so much that shortages are pushing prices up sharply.
Republican U.S. Presidential candidate Donald Trump revealed his healthcare plan on Thursday, which calls for negotiating pharmaceutical drug prices and for importing drugs from overseas to "bring more options to consumers". If Mr. Trump has his way with his plan, the federal law, the Medicare Prescription Drug, Improvement, and Modernization Act or Medicare Modernization Act, MMA, of 2003, which bars the Department of Health and Human Services from getting involved in talks over prices with drug companies, will have to be amended.
The current law already allows individual and private drug plans, such as CVS Health (NYSE:CVS) that provides the coverage for Medicare, to negotiate. According to Republican Sen. Charles E. Grassley, a principal author of the 2003 Medicare law, "Private competition works, … the government has very little experience and a dismal track record figuring out what to pay for drugs."
If the U.S. government allows more drugs to be imported to this country, the Food and Drug Administration (FDA) will have to hire additional inspectors to crack down on foreign drug makers for not complying with applicable regulations. Last year, at least 10 Indian pharma plants made the FDA's do-not-import list. It will open the floodgates for biopharmaceutical companies to leave the U.S., as corporate income taxes are lower abroad. Pfizer just moved to Ireland, for example.
Shares of Gilead Sciences Inc. (NASDAQ:GILD) closed down 1.01% for the week after New York Attorney General Eric Schneiderman said that his office had issued subpoenas to 16 health insurers-which includes all major commercial plans in the state-requesting documents on the companies' processes for authorizing drugs used to treat hepatitis C and documentation on patients who have been denied coverage, according to The Wall Street Journal.
According to the Commitment of Traders, COT, data released by the Commodity Futures Trading Commission, CFTC, for the week ended March 1, there are 140,031 short positions of S&P 500 consolidated futures, traded on the Chicago Mercantile Exchange, CME, by leveraged funds, a decrease of 1,964 short positions from the previous week. This is compared to about 70,404 long positions, an increase of 76 from the previous week.
The data suggests that hedge funds slightly trimmed their short positions, but still hold a large short positions in their portfolio. This resulted in a decrease in net short positions of S&P 500 consolidated futures by about 2,040 contracts, where contracts of S&P 500 futures are traded in units of $250.00 x S&P 500 index.
There were more warning signs this week that the U.S. economy is still trending downward. The Institute for Supply Management, ISM, said on Thursday that its index of non-manufacturing activity fell to 53.4 in February, from 53.5 the previous month. Although the reading is above 50, meaning the service sector of the U.S. economy had still expanded, the figure was barely above expectations of 53.2 from a Reuters poll of 81 economists. The ISM continues its downtrend since October 2015, when the reading was 59.1.
The Labor Department said on Friday that there were 242,000 nonfarm payrolls jobs added in February, while Wall Street economists forecasted only 190,000 jobs. About 150,000 jobs came from healthcare, social assistance, retail, and food services, meaning low wages. Consequently, average hourly wages declined 3 cents to $25.35, following an increase of 12 cents in January. As the government counts everybody, both legal and illegal workers, there is no way how to determine the deviation. So, believe it or leave it!
S&P 500 Summary: -2.15% YTD as of 03/04/16
Barclay Hedge Fund Index: -3.28% YTD
Outperforming Sectors: Telecommunication services +11.03% YTD, Utilities +8.17% YTD, Consumer staples +2.7% YTD, Energy +1.09% YTD, Industrials +0.6% YTD, Materials -0.37% YTD, and Consumer discretionary -2.07% YTD.
Underperforming Sectors: Information technology -3.02% YTD, Healthcare -6.67% YTD, and Financials -6.95% YTD.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.