Market Trips Over Oracle
Oracle said it stumbled on execution in the last quarter and it saw a -7% drop in revenue. The market tripped over the ORCL news and took a dive at the open. Helping accelerate that drop was a drop in Consumer Sentiment and weaker Retail Sales. It appears the wheels on this rally may need some serious grease soon or we could see them start falling off.
Friday started off negative with a weaker than expected Retail Sales report for August at +0.6%. Consensus was +1.3%. You may remember that we had many retailers announcing during the month that sales were ahead of plan, tax checks were boosting the trend, back to school was strong, etc. Unfortunately that was primarily focused on the discount retailers like Wal-Mart. The broader sectors of apparel, building supply and non-store retailers experienced declines. Auto parts, electronics, food and beverage also declined. If you were not in the back to school category you did not see the same gains. This depressed the broad economic recovery viewpoint. Sales were still up overall but only marginally and after the multiple guidance upgrades by Wal-Mart investors expected much better.
The PPI came in at +0.4% and inline with estimates but only because of the increase in energy prices. Excluding food and energy the core rate was only +0.1%. While we are not seeing that "unwelcome fall in inflation" that Ben Bernanke is on guard for I am not sure that seeing prices rise due to high energy prices is actually the desired result. The weaker dollar and the higher import prices will continue to pressure producer prices but the amount of increase is still minor. This report will not give the Fed any reason to hold off on any future rate cut.
The Michigan Consumer Sentiment fell slightly to 88.2 from 89.3 in August but was significantly under the 90.4 estimate. The index is only 4 points below its May high but this was the third consecutive drop. The current conditions fell to 98.8 from 99.7 and expectations fell to 81.3 fro 82.5. The jobless rate was given as the major factor. If they had a job and an income then the tax rebate checks and reduction in withholding was a plus. Unfortunately with over 9 million workers still unemployed the drag is being felt. Confidence is falling with the increased Jobless Claims and the rising energy prices. $2 gas impacts the blue-collar sector with long commutes and $40 fill ups takes discretionary funds out of the economy. This slows eating out, movies and other recreational events. The tax rebate checks helped to ease any pent up demand and a falling confidence could put the consumer led recovery at risk.
Economic reports for Monday include Business Inventories, NY Empire State Survey, Industrial Production and Capacity Utilization. Tuesday has CPI and the FOMC meeting.
Oracle announced earnings inline with estimates at 8 cents but new license revenue dropped -7%. Oracle said they see a modest uptick in current quarter revenues but that new license revenue could continue to drag. This is not what the market wanted to hear. Since Oracle deals with the large corporate client they are viewed as an indicator of IT spending on a broader scale. Microsoft software is broken up into hundreds of small bites of a couple hundred dollars a piece and has customers from the smallest home computer to the largest corporations. It is hard to get a true read on corporate spending from MSFT results. Oracle however deals with mostly large scale enterprises and its products are generally more expensive. If Oracle is having trouble then there is a good possibility the broad based IT recovery is not making any progress. Maybe Oracle should spend more time building its business than trying to mount a hostile takeover of PeopleSoft.
There were conflicting reports of fund flows with TrimTabs claiming that all equity funds had outflows of -$400 million for the week ending Sept-10th compared to inflows of +$3.4 billion the prior week. However, if you only take funds that invest in U.S. stocks they reported a +$2.8 billion inflow. Confused? It gets worse. Fred Alger Management reported that there were $20 billion of inflows in the ten weeks covering July/Aug and there was +$2.7 billion inflow in the first week of September. They also pointed out that -$15 billion flowed out of money markets as investors started thinking about the stock market again. CNBC reported that there was only $94 million in equity inflows for the first week of September compared to +$4 billion in inflows for the prior two weeks. What this means to me is that nobody knows exactly and the numbers reported can be skewed in any direction you want to report and the timeframe you choose to use. Personally I saw a flood of buyers last week and a flood of willing sellers. If the retail customer is coming off the bench to the tune of +$15 billion flowing out of money markets then they are right on time and I think we saw evidence of that money moving into the stock market. It remains to be seen if the lure of Dow 10,000 only a couple hundred points away pulled them into the market at the top or just before the next breakout.
JPM upgraded their outlook on the economy and raised their GDP estimates for the second half of the year to 5% from 4% and said they thought there was still +6% upside in the market for the year. They said they felt there was an increase in capital expenditures that would benefit the industrials and the materials sectors. They reiterated their overweight on U.S. equities. Another analyst was quoted on Friday as expecting as much as 7% growth in the 3Q with the fastest GDP growth since 1999. I want some of his drugs.
The real bear market is in Iraq. We heard on Friday that a new round of firefights had claimed the lives of even more U.S. soldiers and the violence appears to be increasing with the opposition becoming more organized. I report this only because it is reaching the point where it could begin to drag on the market. If investors feel we have gotten into a Vietnam style quagmire with no foreseeable way out then they could begin to withdraw from the market. They will expect the deficit to continue to skyrocket with the $87 billion Iraq request this week as only the first installment. If the economic recovery is slowing and the government is going to be flooding the market with paper then bonds are going to suffer as well as stocks. For every $50 billion of new bonds sold that removes money from stocks. It is not even close to 1:1 basis but there is a negative drag.
The 9/11 anniversary is over and the numerous TV specials and sound bites are fading. All eyes are now focused on the Fed meeting on Tuesday as though there was going to be a proclamation from on high that would soothe all fears. What they are probably going to get is a reworded release similar to the last several releases. Lately they have not even been changing the words to most of it. This has been the meat of the statement for the last two meetings. "The Committee continues to believe that an accommodative stance of monetary policy, coupled with still-robust underlying growth in productivity, is providing important ongoing support to economic activity. The evidence shows that spending is firming, although labor market indicators are mixed. Business pricing power and increases in core consumer prices remain muted." Expect nothing but more of the same with a possible bone for the bond market. Saying anything about the "D" word will help keep bonds in check while talking up the recovery will pressure interest rates and actually slow the recovery. Sounds like to me we need to hear some more "unwelcome disinflation" comments to keep everything on track.
Fund managers will be back at work on Monday after two weeks of conferences hosted by the various investment banking firms. They will have new and updated information about the stocks they own and the ones they want to own. This is normally when the hard decisions about the end of year portfolio restructuring take place. We will also get another flurry of mid quarter updates and the earnings warnings will accelerate as we near the first earnings dates in three weeks.
After a serious slump at the open the markets managed to pull out of their depression and rally back to positive territory. The Dow hit a low of 9380, yes under 9400, and rallied back to close at 9468 after making a decent attempt to retest 9500 again. The Nasdaq dropped to 1822 at the open on the Oracle news but rallied back to 1853 and a close over the prior 1850 strong support. All things considered this was a bullish showing by the major indexes although volume was even lighter than Thursday's. The advancers got the nod and the new 52-week highs climbed for the second consecutive day. While I think the effort was positive, especially the close over 1850 by the Nasdaq after the Oracle news, we are far from ruling out any September weakness ahead. The wave of bullishness is building again and I would not be surprised to see another move up. The last dip in late August lasted five days and we have had four weak days in this current bout of profit taking. I said I would not be surprised but that was not exactly correct. I am surprised each day the market overcomes the distribution at these levels. I am surprised at the strength and depth of the bids. It refuses to go down despite a growing parade of analysts predicting a drop. Sounds like a new bull market. When they start predicting Dow 10,000 again we may need to worry.
Next week should be critical to the bulls. They will be faced with the Fed on Tuesday but it is doubtful the Fed can or will say anything that can hurt equities. Bonds will be the target. This gives equities a free pass until Thursday when we get Jobless Claims again along with the Philly Fed and FOMC minutes for August. The Philly Fed had a blowout in Aug at 22.1 when consensus was only 10.0. If this report can just hold that line then the bulls could continue to romp. If it reverses back to the 10.0 level and proves to be a one month wonder we could see some weakness. We also get the semiconductor book-to-bill on Wednesday night. In July the number rose to 0.97 and just slightly under breakeven. If the BTB can break 1.0 then the bears could hibernate early.
Look for initial resistance at Dow 9500 then much stronger resistance at 9600. Initial support is 9250. The Nasdaq has strong resistance at 1885 and support at 1820. The 50% retracement level for the Nasdaq is 1853 and exactly where it closed on Friday. 50% for the Dow is 9500. That puts both the indexes right in the middle of their recent ranges with the opportunity to wander in either direction without much effort. Keep your finger on the trigger and look for the next major move to come after the Fed meeting.
Enter Very Passively, Exit Very Aggressively!