Why American Airlines Just Landed In The S&P 500 Index by Frank Holmes

For the first time in its 84-year history, American Airlines was cleared for landing in the S&P 500 Index.

Joining rivals Southwest Airlines and Delta Air Lines, the once-beleaguered carrier is the newest member of the prestigious club for the nation’s largest companies by market capitalization.

Not bad for a company that, only four years ago, found itself in bankruptcy court.

But in a classic Cinderella-story transformation, American succeeded at charting a new course for itself. In 2013 it merged with U.S. Airways, making it the biggest airline group in the world. The company now has a market cap of nearly $37 billion and controls 627 active jets in its fleet.

American’s ascension is a perfect reflection of the now-robust airline industry as a whole. As recently as a decade ago, about 70 percent of U.S. carriers were operating under Chapter 11 bankruptcy protection. Fast forward to 2014, and the industry saw its most profitable year ever. To generate more revenue and save money, airlines have aggressively implemented new policies in the last few years, including adding additional seats on aircraft, streamlining operations and focusing on fuel-efficiency measures.

American Airlines stock is already up more than 51 percent for the 12-month period, compared to the S&P 500’s 14 percent, and is currently trading close to all-time highs. Its inclusion in the S&P 500 should further help its stock price climb higher, as many funds that track the index will now be compelled to purchase shares.

American Airlines

Low oil prices have benefited American more so than some of its competitors, as the carrier didn’t buy derivatives on fuel and was therefore not locked into higher prices before they began to tumble last summer.

Many analysts predict that the next airline to join the S&P could be United Continental.

Dollar Overbought, Gold Oversold

In a recent Frank Talk I revisited the relationship between the U.S. dollar and gold. For the ninth straight month, the greenback has strengthened, which has weighed heavily on the yellow metal. The inverse relationship between the two is key to understanding the Fear Trade.

As I discussed in the blog post, the dollar is extended—the greatest standard deviation in a decade—and it appears due for a correction.

American Airlines

Conversely, the gold selloff is overdone and looking for a rally.

Next week we’ll be looking out for the latest consumer price index (CPI), or inflationary number. It’s important to be aware of this number because the inflation rate has a large influence on gold prices.

Last weekend I presented at the Investment U conference in St. Petersburg, Florida, where I had the pleasure of hearing Oxford Club’s natural resources strategist, Sean Brodrick, speak. He reminded his audience why so many investors see gold as a safe haven, saying that, unlike the dollar, “gold will never go to zero.”

As always, I advocate that 10 percent of your portfolio consist of gold: 5 percent in bullion and 5 percent in gold stocks, then rebalance every year.

Munis Still Make Sense

Safety is part of the reason why the municipal bond market is today worth $3.65 trillion. To determine just how safe munis have been for investors, Moody’s looked at more than 54,000 municipal bond issuers and 5,600 high-yield corporate bond issuers between 1970 and 2011. What they found is that only 71 muni issuers defaulted, whereas corporate bond defaults for the period rose to more than 1,800.

What’s more, even lower-rated munis have historically had better credit quality than high-rated corporate bonds. In a similar study, Moody’s reported that since 1970, “adequate” Baa-rated munis have had a default rate of 0.30 percent. But of the corporate bonds that received the highest, “extremely strong” rating, 0.50 percent failed to meet their obligations.

Munis had a stellar 2014, delivering positive returns all 12 months of the year. This helped the asset class outperform both corporate bonds and high-yield corporate bonds.

American Airlines

Rightfully so, many bond investors are concerned of what might happen to their holdings when the Federal Reserve decides to raise rates, which could happen sometime this year. When interest rates rise, bond prices drop. For this reason, the bond market reacted positively to Fed Chair Janet Yellen’s announcement on Wednesday that a rate hike wouldn’t occur just yet. Short-term munis are where investors want to be when rates inevitably increase.

Recently we’ve also seen a spike in bond yields. John Derrick, portfolio manager of our Near-Term Tax Free Fund (NEARX), has prudently put fund assets to work, using the following oscillator, among other tools, to determine the most opportune times to deploy capital.

Note that we’re using the two-year Treasury as a proxy for interest rate moves. Munis have tended to track these macro trends.

American Airlines

NEARX has delivered 20 straight years of positive growth in a variety of interest rate environments. Out of 25,000 equity and bond funds, only 30 have done this. Since 1999—the first year he began managing the fund—John has achieved this rare feat by picking only investment-grade munis with short-term maturities. Short-term bonds are less sensitive to rate increases than longer-term bonds that are locked into rates for greater periods of time.

American Airlines

Total Annualized Returns as of 12/31/2014
  One-Year Five-Year Ten-Year Gross Expense Ratio Expense Cap
Near-Term Tax Free Fund 3.07% 2.64% 2.98% 1.21% 0.45%

Expense ratio as stated in the most recent prospectus. The expense cap is a contractual limit through December 31, 2015, for the Near-Term Tax Free Fund, on total fund operating expenses (exclusive of acquired fund fees and expenses, extraordinary expenses, taxes, brokerage commissions and interest). Performance data quoted above is historical. Past performance is no guarantee of future results. Results reflect the reinvestment of dividends and other earnings. For a portion of periods, the fund had expense limitations, without which returns would have been lower. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance does not include the effect of any direct fees described in the fund’s prospectus which, if applicable, would lower your total returns. Performance quoted for periods of one year or less is cumulative and not annualized. Obtain performance data current to the most recent month-end at www.usfunds.com or 1-800-US-FUNDS.

Index Summary

  • The major market indices finished higher this week.  The Dow Jones Industrial Average rose 2.13 percent. The S&P 500 Stock Index gained 2.66 percent, while the Nasdaq Composite advanced 3.17 percent. The Russell 2000 small capitalization index rose 2.75 percent this week.
  • The Hang Seng Composite gained 2.37 percent; Taiwan rose 1.78 percent this week and the KOSPI advanced 2.59 percent.
  • The 10-year Treasury bond yield fell 19 basis points to 1.92 percent.

Domestic Equity Market

The S&P 500 moved sharply higher this week, breaking a string of recent negative performance. The U.S. dollar finally cracked this week on dovish comments from the Federal Reserve, allowing yield and dollar-sensitive areas to move higher such as utilities and energy.

American Airlines

Strengths

  • The health care sector was the best performer for the second week in a row as biotechnology names staged a strong run. Biogen Idec, Regeneron and Amgen were the top performers in not only the health care sector but the entire S&P 500 Index. Biogen was the leader rising more than 15 percent. The company announced strong early-trial results for a new Alzheimer’s drug, propelling the stock on Friday.
  • The utility sector was also a strong performer this week. Every utility stock in the S&P 500 rose as bond yields fell sharply following Wednesday’s Federal Open Markets Committee (FOMC) meeting. The Fed came across more dovish than expected and it appears that if interest rates do rise this year, it will be later and at a slower pace than feared.
  • Biogen Idec was the best performer in the S&P 500, along with other biotech stocks as mentioned above. Other areas of strength included those sensitive to the U.S. dollar such as energy stocks. Strong performers here included Transocean, Nabors Industries and Range Resources.

Weaknesses

  • The materials sector was the worst performer this week as bellwether names like Dupont and Alcoa fell sharply in an otherwise strong week. The industrial gas companies were also weak as Airgas provided disappointing guidance, citing adverse weather and slower sales to energy and chemical companies.
  • Other areas of weakness outside the materials sector included leisure products and brewers.
  • Dupont was the worst performing company in the S&P 500 this week, falling 7.65 percent. The company was downgraded at a prominent brokerage firm, citing fundamental headwinds in agricultural and chemicals businesses as the strong dollar takes a toll on profitability. The company is also in a tussle with an activist investor that has become contentious.

Opportunities

  • With a possible inflection point for a weaker U.S. dollar this week, companies with a high percentage of foreign sales may be thought of in a better light.
  • A strong dollar continues to benefit domestic consumers, maintaining an advantage for certain U.S.-focused retailers and consumer products.
  • The market ended the week with lots of positive momentum and a different thought process on the Federal Reserve. The bull market just keeps moving forward.

Threats

  • Retail sales were disappointing in February and even though weather had a negative impact, it is still a little surprising that the low oil price, gasoline “tax cut” is not having a bigger impact on consumer spending patterns.
  • After appearing to be a positive place to be in over recent weeks, financials underperformed as the yield curve flattened and a more dovish Fed is not necessarily good for banks.
  • If the Fed is changing course due to concerns that the economy will slow, that could be viewed negatively by the market.

The Economy and Bond Market

U.S. Treasury bond yields moved sharply lower this week as the Federal Reserve displayed a more dovish tone than what the market expected, effectively breathing a sigh of relief. The Fed removed the much-anticipated “patient” phrase from its press release, but also made it clear there is no rush to raise interest rates either. This once again emphasizes a data-dependent path. The entire yield curve responded, especially on the intermediate to long end.

American Airlines

Strengths

  • The Fed somewhat surprised the market with its dovish signals this week, implying that a rate hike is not imminent. The pace of any hike will likely be more moderate than recent expectations.
  • The German ZEW survey of economic growth expectations jumped higher in March and continues a recent trend of improving data out of Europe.
  • The index of U.S. leading economic indicators rose in February, continuing a long string of positive results and reinforcing the idea of stable growth over the next couple of quarters.

Weaknesses

  • Industrial production rose slightly in February and was mainly driven by weather-related electricity production. Underlying manufacturing trends contracted for the third month in a row.
  • Housing starts fell 17 percent in February and were well below estimates. Weather played a role in this as well, but it is still worth keeping a close eye on.
  • The current account deficit widened to the highest level in two years during the fourth quarter as a strong dollar impacted exports.

Opportunities

  • European economic data is already on the mend and should get an intermediate-term boost as quantitative easing (QE) just began.
  • China inflation recently hit a five-year low and this week Premier Li Keqiang hinted at more stimulus in the future.
  • With the rally in yields this week, U.S. yields remain the highest in the developed world. It appears that funds will continue to flow into U.S. fixed income.

Threats

  • One of the themes from the recent earnings season was that the strong U.S. dollar has negatively impacted companies’ bottom lines and capital spending plans. It looks as though this will be the case for the first quarter as well. We saw the negative impact this week in export and manufacturing data.
  • With the Fed meeting out of the way this week along with the big market reaction, it will be interesting to see if Fed members try to talk the market down.
  • With a global easing cycle underway, global economic growth expectations have already started to improve, making it an easier decision for the Fed to possibly raise rates.

Gold Market

For the week, spot gold closed at $1,183.16 up $24.61 per ounce, or 2.12 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 6.45 percent. The U.S. Trade-Weighted Dollar Index lost 2.40 percent for the week.

Date Event Survey Actual Prior
Mar-17 ZEW Survey Current Situation 52 55.1 45.5
Mar-17 ZEW Survey Expectations 59.4 54.8 53
Mar-17
Europe CPI Core YoY
0.60% 0.70% 0.60%
Mar-17 U.S. Housing Starts 1048K 897K 1065K
Mar-18 FOMC Rate Decision (Upper Bound) 0.25% 0.25% 0.25%
Mar-19 U.S. Initial Jobless Claims 295K 291K 289K
Mar-23 HSBC China Manufacturing PMI 50.4 50.7
Mar-24 US CPI YoY -0.10% -0.10%
Mar-24 US New Home Sales 470K 481K
Mar-25 US Durable Goods Orders 0.20% 2.80%
Mar-26 US Initial Jobless Claims 290K 291K
Mar-27 US GDP Annualized QoQ 2.40% 2.20%

Strengths

  • Gold had a constructive rally in the back half of the week after the Federal Open Market Committee (FOMC) highlighted the weak inflationary pressures facing the economy and lowered its projections for interest-rate increases. Despite the Federal Reserve removing the “patient” language from its statement, investors feel we are further from a rate hike than previously anticipated.
  • Gold traders are the most bullish since the week ending January 2, according to a Bloomberg survey. This shift in sentiment is primarily the result of the dovish tone from the FOMC this week.
  • The U.S. dollar broke a four-week streak of positive gains this week. This pullback in the currency is a welcome sight for gold. However, the greenback remains considerably strong and is a headwind for gold.

Weaknesses

  • Despite ending the week with a positive gain, platinum remains the worst performing precious metal of the year. On Tuesday, platinum prices were at the lowest level since July 2009.
  • As of Monday, total holdings in gold-backed funds fell to 1,638.4 tonnes. Investors sold their holdings for each of the prior 14 days, making it the longest selling streak in over a year. Of course, as much of the selling was in anticipation of the Fed meeting, investors should feel more confident about returning to the market.
  • As negotiations near, the Association of Mineworkers and Construction Union stated it will have solidified its demands by the end of March. The union, which was behind South Africa’s longest mining strike last year, emphasized its pessimism regarding the upcoming negotiations.

Opportunities

  • Australia & New Zealand Banking Group Ltd. is predicting gold demand in Asia to double by 2030. The bank attributes the surge in demand to the increasing appetite of China and India for jewelry.
  • Since the fall in the net-long position is nearing recent bottoms over the past year, the Fed’s dovish read on the economy has set up a noticeable opportunity for buyers to return to the market, which should send gold higher.

American Airlines

  • China is set to allow more participants in the gold market to import the precious metal in an effort to expand the country’s gold trade. China has already taken crucial steps to liberalize its gold market as the country began offering foreigners access to RMB-denominated gold contracts in Shanghai’s free-trade zone last year.

Threats

  • The Reserve Bank of India is restricting banks from selling gold that is imported on a consignment basis to jewelers on an outright basis. The move is set to deter gold imports further.
  • The dollar remains elevated around its multi-year highs and further gains could depress gold and related-equity shares even further.
  • Geopolitical tensions, particularly in Eastern Europe, have calmed for the time being. Consequentially, the fear premium attached to gold prices stands to ease as tensions moderate.

Energy and Natural Resources Market

American Airlines

Strengths

  • Major integrated oil stocks increased this week along with an increase in crude oil prices. The moves come partially due to a weakening U.S. dollar which makes these areas more attractive. The BI Global Integrated Oils Valuation Peers Index jumped 6.9 percent.
  • Precious metals stocks reversed course this week as investors responded to comments from the Federal Reserve Bank. Comments from the Fed pointed to further delay of the highly-anticipated interest rate hike. The NYSE Arca Gold Miners Index gained 6.45 percent.
  • Base metals stocks outperformed during the week on improved sentiment for economic stimulus in China, as well as the closure of the world’s second-largest copper mine due to labor unrest in Indonesia. The S&P/TSX Capped Diversified Metals and Mining Index gained 6.14 percent.

Weaknesses

  • Fertilizer stocks underperformed this week on the inability of Potash to secure a deal with China and allowing contract negotiations to linger. Also, oversupply concerns mounted for other nutrients.  The Bloomberg Fertilizer Index fell 122 basis points in a strong week for commodity stocks.
  • Construction materials stocks lagged the benchmark this week as investors consolidated strong gains over the prior 20 days.  The S&P 500 Construction Materials index dropped 1.4 percent this week.
  • Following uninspiring numbers from the March Homebuilders Index, chemical stocks underperformed for the week. We also witnessed a cut in earnings forecast by Airgas, Inc.   The S&P Chemicals Index declined 1.2 percent over the period.

Opportunities

  • The American Institute of Architects’ billing index increased to 50.4 in February versus 49.9 in the prior month. This signals an increase in design services, which typically leads construction spending by 9-12 months.
  • The U.S. dollar’s rapid decline follow the Federal Reserve’s dovish commentary regarding the next rate hike, may give the entire commodity complex a reprieve from the universal bearish sentiment and negative money flows.  Commodities are the worst performing asset class year-to-date.
  • The price of WTI crude oil may get a boost going into the second quarter. Refinery runs could pick up following the end of the maintenance season and we could see U.S. production growth beginning to subside in response to weak pricing and lower drilling budgets.

Threats

  • Given the prior month’s rising inventory-to-sales ratio, the recent port strike and a large decline in the Chicago purchasing managers’ index (PMI) data, some analysts speculate that the U.S. manufacturing economy may be headed for a recession. This would be detrimental for commodities demand.
  • If nuclear talks with Iran are successful, the global-crude oil imbalance may become even more over supplied as half a million barrels or more per day of Iranian crude is released back into the global market.

Emerging Markets

 

Strengths

  • Brazilian equities had a significant bounce this week along with the real. The dovish tone from the Federal Open Market Committee (FOMC) meeting this week boosted emerging markets along with their currencies. The Ibovespa Brasil Sao Paulo Stock Exchange Index rose 6.94 percent this week.
  • Turkish equities and the Turkish lira also outperformed this week on the back of the dovish stance from the Federal Reserve. In addition, the central bank left interest rates unchanged, despite repeated calls from government officials that rates must fall. The Borsa Istanbul 100 Index rose 7.65 percent this week.
  • Chinese equities had another constructive week.  Investors continue to expect further easing from the country’s government. The Shanghai Stock Exchange Composite Index closed up 7.25 percent this week.

Weaknesses

  • Greek equities suffered this week as concerns mount over the country’s lack of cash in order to repay its bailout package. The Athens Stock Exchange General Index fell 3.34 percent this week.
  • Oil-leveraged markets retreated this week as crude prices remain depressed and supply remains plentiful. The Abu Dhabi Securities Market General Index and the Qatar Exchange Index fell 3.25 and 4.61 percent, respectively.
  • Peruvian equities were relative underperformers for the week, despite copper’s rally in the back half of the week. Peru is home to many large copper mines. The Bolsa de Valores de Lima General Sector Index rose just 0.42 percent this week.

Opportunities

  • With the Fed’s more dovish stance on the outlook for U.S. monetary policy, and lowering their collective forecasts for rate increases by the end of the year, emerging markets could benefit. It was made clear that these countries stand to gain from a more dovish Fed by their performance just this week following the announcement.
  • The spread between U.S. and German government 10-year bond yields is at a multi-decade high. With no clear reason for German yields to rise with the implementation of the European Central Bank’s (ECB’s) bond purchasing program, it appears U.S. yields are effectively capped. This could move investors to seek higher returns in more risky assets such as emerging markets.

American Airlines

China’s plan to convert existing local government debt into longer duration, lower interest-rate municipal bonds, aims to lighten banks’ post-crisis nonperforming loan legacy. This move could also free up more lending capacity and reduce the need to raise more capital.  This debt swap program would result in China’s total government debt reaching 53 percent of 2013 GDP, much less than major developed countries globally, given its restrained pace of new debt addition in the last four years. Chinese banks are direct beneficiaries of this solution to a longstanding, systemic problem.

American Airlines

Threats

  • Political disruption in Brazil continues to plague markets. This week over 1 million protesters filled the streets to protest governmental corruption. Consequentially, credit default swaps have spiked alongside the uncertainty out of the country.
  • Ukrainian debt continues to depreciate as investors forecast steep write-downs. The government is expected to alleviate some of its debt burden as part of a multi-billion dollar assistance package.
  • Tremendous popularity of the online environmental documentary, Under the Dome, self-funded by a former investigative journalist in China, could cause a stir. More specifically, the documentary could aggravate investor sentiment on heavy polluters in coal, cement and steel industries, possibly intensifying their secular decline.

Leaders and Laggards

 

Weekly Performance
Index Close Weekly
Change($)
Weekly
Change(%)
XAU 69.27 +3.69 +5.63%
S&P/TSX Canadian Gold Index 164.71 +6.81 +4.31%
S&P Energy 563.30 +18.43 +3.38%
Nasdaq 5,026.42 +154.66 +3.17%
Russell 2000 1,266.08 +33.94 +2.75%
S&P 500 2,108.06 +54.66 +2.66%
Korean KOSPI Index 2,037.24 +51.45 +2.59%
Gold Futures 1,182.00 +29.60 +2.57%
Hang Seng Composite Index 3,355.06 +77.83 +2.37%
DJIA 18,127.72 +378.41 +2.13%
Natural Gas Futures 2.79 +0.06 +2.13%
Oil Futures 45.72 +0.88 +1.96%
S&P Basic Materials 309.56 -2.45 -0.79%
10-Yr Treasury Bond 1.92 -0.19 -9.13%

 

Monthly Performance
Index Close Monthly
Change($)
Monthly
Change(%)
Korean KOSPI Index 2,037.24 +75.79 +3.86%
Russell 2000 1,266.08 +38.12 +3.10%
Nasdaq 5,026.42 +120.05 +2.45%
DJIA 18,127.72 +97.87 +0.54%
S&P 500 2,108.06 +8.38 +0.40%
Gold Futures 1,182.00 -18.20 -1.52%
Natural Gas Futures 2.79 -0.05 -1.62%
S&P Basic Materials 309.56 -14.13 -4.37%
S&P Energy 563.30 -32.18 -5.40%
10-Yr Treasury Bond 1.92 -0.16 -7.64%
S&P/TSX Canadian Gold Index 164.71 -13.95 -7.81%
XAU 69.27 -7.20 -9.42%
Oil Futures 45.72 -6.42 -12.31%
Hang Seng Composite Index 3,355.06 -332.01 -14.83%

 

Quarterly Performance
Index Close Quarterly
Change($)
Quarterly
Change(%)
S&P/TSX Canadian Gold Index 164.71 +19.02 +13.06%
Russell 2000 1,266.08 +70.14 +5.86%
Korean KOSPI Index 2,037.24 +107.26 +5.56%
Nasdaq 5,026.42 +261.04 +5.48%
Hang Seng Composite Index 3,355.06 +168.20 +5.28%
DJIA 18,127.72 +322.92 +1.81%
S&P 500 2,108.06 +37.41 +1.81%
S&P Basic Materials 309.56 +2.64 +0.86%
XAU 69.27 -0.09 -0.13%
Gold Futures 1,182.00 -14.70 -1.23%
S&P Energy 563.30 -33.55 -5.62%
10-Yr Treasury Bond 1.92 -0.24 -11.14%
Oil Futures 45.72 -10.80 -19.11%
Natural Gas Futures 2.79 -0.68 -19.60%

Please consider carefully a fund’s investment objectives, risks, charges and expenses.   For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637).   Read it carefully before investing.  Distributed by U.S. Global Brokerage, Inc.