The Dow pushed its streak for positive days to 30 of the last 36 days and also posted a new historic high close at 13556. There appears to be no stopping the big caps and every dip continues to be strongly bought. The rebound from Tuesday's dip definitely surprised me and judging by the sprint higher on Wednesday and Friday there were a lot of shorts surprised as well. There have been record high short levels on the NYSE and that is helping to fuel the rallies. Option expiration Friday's are not normally big move days with everyone already positioned for the expiration by Thursday's close. The early morning spike higher threw those plans into disarray and that prompted another day of strong moves. A strong buy program at 12:30 succeeded in breaking the intraday stalemate and put even more pressure on shorts and market makers trying to manage the expiration.
Dow Chart - Daily
Nasdaq Chart - Daily
The only economic report of note on Friday was Consumer Sentiment. Sentiment rose slightly from 87.1 to 88.7 and that was better than the consensus estimate for a drop to 86.5. The gains came from a rise in the expectations component from 75.9 to 79.0. The current conditions component fell slightly to 103.8 from 104.6. Declines in sentiment due to higher gasoline prices appear to be offset by the constantly rising stock market. A strong job market is also a positive driver for sentiment.
Next week is pretty sparse for economic reports with the only material events being the Chicago Fed National Activity Index on Monday and the Richmond Fed Survey on Tuesday. Those are not normally market movers. Late in the week we will get the monthly home sales numbers for April. Not exactly a busy week as we head into the holiday weekend.
Stock news was also sparse on Friday. The big news was not in stocks but from China. China announced ahead of its meeting with U.S. officials in Washington next week that it was making additional changes in its finance policy to bring the Yuan closer to the Dollar. China said they were increasing the float range on the Yuan to +/- 0.5% per day in value to the dollar from the current 0.3% range. They also raised their interest rate to 6.57% from 6.39% and raised reserve requirements for banks. The goal for these changes is to slow down economic growth and allow the relationship between the Yuan and Dollar to move closer. The U.S. has been critical for years of China's artificial support for the Yuan giving them an unfair trade advantage. We should expect further announcements as their U.S. meetings begin next week.
Microsoft made a defensive acquisition of Internet ad agency aQuantive (AQNT) for a 85% premium to its closing price on Thursday. AQNT spiked +27.92 to $63.79 on the news. The Microsoft acquisition at $6 billion or $66.50 was a shock to everyone and was viewed as defensive given the DoubleClick acquisition by Google and the 24/7 Real Media deal announced yesterday. WPP Group announced it was acquiring 24/7 for $649 million on Thursday. This follows Yahoo's purchase of Right Media for $680 million and of course the Google/DoubleClick deal for $3.1 billion. With only a couple of major independent companies left in the space Microsoft was forced to pay a premium for aQuantive. AQNT technology will allow Microsoft to deliver ads to third party websites. Microsoft currently delivers ads to its own websites like MSN. AQNT also owns a large marketing agency called Avenue A/Razorfish, which creates marketing/advertising programs like a traditional marketing agency but does it online. Avenue A and Razorfish joined forces in July-2004. Advertising Age ranked the combined company as the largest interactive agency in May 2006. The company has dozens of major clients like Capital One, Carnival Cruise, Cigna, Coke, Dell, DCX, EMC, Ford, HET, JPM, Kraft, Levis, Mercedes, Nike, Sony, Starwood, TM, Visa and hundreds of others. Microsoft not only bought AQNT but a very nice customer base as well. This major premium is also a shot across Google's bow warning them that they are planning on being a strong competitor in the $25 billion a year sector. Microsoft could have developed their own ad business from scratch but that would have given Google another couple of years of lead and allow them to cement relationships with advertisers and providers. By acquiring AQNT Microsoft has shortened its lead-time to market with a competing technology and a lucrative customer base. AQNT earnings rose +55% in Q1 and revenue jumped +87%.
About the only major player left in the space as an independent is ValueClick (VCLK) and with the field of potential acquirers shrinking they could end up out in the cold. Possibly Amazon, Ebay or Interactive Corp (IACI) could take a shot at VCLK but as the last unattached partner on the dance floor it remains to be seen if they would bring a high price or a price that simply puts them out of their misery. After all competing against the giants now fortified with billions in cash and technology from their new parents is going to be a losing battle. IACI acquired Ask.com and is reportedly planning on spending $100 million in 2007 to boost the brand. It would not hurt to have a premium advertiser in the fold as well. Amazon has been picking off straggler websites for years like digital photo review site DPReview.com, website-traffic rating site Alexia.com and literally dozens of others. Amazon is not only acquiring sites that are complementary to their own but acquiring sites to avoid others from getting them. With these dozens of separate entities it would not hurt to have a common advertising engine to serve them. Amazon may also have its eye on Cnet.com because of its varied content menu but if it does not act fast Microsoft or Interactive may beat it to the punch further solidifying their hold on millions of surfing eyeballs.
IBM gained +2.68 after raising its guidance for a big profit jump by 2010. IBM said earnings could nearly double by 2010 on cost cuts, acquisitions and continuing stock buybacks. IBM earned $6.11 last year and they said they could see earnings in excess of $11 by 2010. IBM has bought back $27 billion in stock from 2003 through 2006. Last month the IBM board authorized $16.4 billion in additional buybacks. IBM also said software sales could reach 50% of profits by 2010. This suggests Cognos (COGN) and Business Objects (BOBJ) could be potential acquisition targets. It is easier to buy growth and customer base than create them organically.
GE shares rose slightly on news that they may be close to a deal to sell their plastics division to a Saudi based group for $11 billion. This would be much more than the $8 billion analysts had previously expected GE to get for the unit. The plastics division contributed to a 12% drop in GE corporate profits in the 4th quarter. It would make sense for a Saudi company to buy the plastics division since plastics are made with petroleum byproducts. Saudi Basic Industries Corp (Sabic) is rumored to be in the bidding and Sabic is 70% owned by the Saudi Arabian government. It is the worlds largest chemical producer by market cap. Another candidate is Basell, based in Hoofddorp Netherlands, which is owned by Access Industries, a New York holding company run by billionaire oil entrepreneur Lenoard Blavatnik. If Sabic wins the bidding analysts are wondering if they will have the same problems as the attempted takeover of our ports by a Saudi company. None are expected but you can never tell how regulators will act.
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Apple Inc (AAPL) returned to making new highs after the FCC approved the iPhone well in advance of its expected delivery date. Apple also said rumors it would miss the expected June delivery date were untrue. Apple rebounded from a dip to $104.36 on Wednesday's rumor to close exactly on the $110 price strike on Friday and a new all time high close.
Intel jumped to a new 67 week high after being upgraded due to its commanding lead over AMD and a very strong product cycle just ahead. Intel hit $22.75 intraday and a level not seen since Jan-19th 2006. That was one day after Intel crashed from the $26 level on an earnings disappointment. Since then Intel has turned up the heat on AMD and will be debuting another round of processor improvements in the coming months. These extremely fast processors will benefit those companies moving to the EMC VMware technology that allows servers to run applications from different technologies on the same server and the ability to switch applications on the fly from server to server to better use computer resources. EMC is crawling at a snails pace or I would recommend it here. EMC has registered to IPO its VMware division later this year for $100 million and analysts feel the company could be worth more than $1 billion. VMware just announced its latest versions of "virtualization" software last week with additional support for some new operating systems. I have seen this software in operation running 24 virtual machines on a server that I had built using Intel Quad Core Xeon chips. Simply amazing. Two Quad Core Xeon chips (8 processors) 32GB of ram and 3TB of disk in a 2U rack server that weighs 44 lbs. Early in my career in the late 60s, early 70s, I managed several different computer installations for major companies in Dallas with computers that occupied entire floors of block sized buildings. Dozens of IBM mainframes, hundreds of tape/disk drives requiring hundreds of computer operators. If you took all the systems I ever worked on in my 20-year career as an IT manager and combined them all together they would not have the speed or capacity of the 44 lb server I mentioned above. With EMC's VMware that speed and capacity can be exploited to its fullest. That will be an IPO I will buy.
Sepracor lost -5.58 on fears that Medicare and Medicaid will soon start reimbursing for the companies best selling asthma drug, Xopenex, at the cheaper generic rate. Sepracor traded down on seven times its average volume. Xopenex accounted for about half of Sepracor's $1.2 billion in revenue in 2006. Xopenex reimbursements were running $.92 to $1.54 per dose while the generic versions called albuterol and levalbuterol only cost 71 to 81 cents per dose. The Medicare website shows the Xopenex codes discontinued as of July 1st and replaced by the cheaper generic codes. Analysts were not expecting any changes until the June 20th CMS update and the early change caught investors off guard.
Odyssey Marine (OMR) announced on Friday it had discovered and salvaged a major 400-year-old shipwreck. The artifacts recovered included 17 tons of gold and silver coins. The company made the announcement after the coins were legally imported and arrived safely in the United States. Odyssey refused to give any details regarding the wreck until salvage operations are completed. The announcement sent its stock soaring +80% and doubled the market cap of the company overnight to $390 million. http://www.shipwreck.net/
June Crude Futures Chart - Daily
Oil prices rallied on Friday to $65.64 before slipping back to just under $65 at the close. Since the June contract ceases trading on Tuesday I am surprise it did not decline further on profit taking. Pushing prices higher were continued problems with light crude production in Nigeria and multiple refinery outages pushing gasoline prices higher as well. Shell has resumed production of Bonny light crude in Nigeria but has not yet lifted the force majeure on deliveries. Nigeria is preparing itself for a country wide two-day strike beginning May-28th to protest the recent elections. It is expected that this strike and the violence anticipated with it will further slow shipments of light crude from Nigeria. Nigeria has recently grown to our 3rd largest importer of light crude, which is most easily refined into gasoline. Currently nearly 800,000 bpd of Nigerian production is offline. This forced the price of Brent Light Crude from the North Sea and shipped to Europe to rise to more than $70 on Friday. There may be sufficient oil on the market as OPEC claims but it is not the right grade to fill the current gasoline shortage. We normally import more than 1 mbpd of gasoline from other countries and according to Reuters those shipments are down -25% from normal levels although last week saw a sharp increase to 1.528 mbpd. For 12 consecutive weeks from late Feb through April gasoline inventories declined by 34 million barrels or 15%. It was the sharpest decline in the EIA's recorded history. With seven U.S. refineries down at some point over the last week our current gasoline refining capacity is 750,000 bpd below the rate needed to produce the quantity needed to meet summer demand. The Conoco refinery in Sweeny TX is only operating at 70% capacity. The Murphy Oil plant at Meraux LA is out for another 2-3 days. The BP Texas City plant is expected to be offline for another 11 days. Multiply this across the seven U.S. outages this week and several others across the globe and it is not surprising AAA said U.S. average gas prices hit $3.13 on Friday. Current inventory levels are -7% below 2006 for the same period. In the chart below from the EIA it shows the normal range for inventories (blue) and the current inventory levels. (red)
Last year I ran the table below each Sunday to document the increase in demand and the price of gasoline through the peak driving days of summer. Those are from Memorial Day through July 4th. I am going to repeat it again this year. There are conflicting reports of increased demand for gasoline and decreased demand depending on who is reporting and their bias to the facts. According to the numbers reported by the Dept of Energy demand was higher last week by 77,000 barrels or 3,324,000 gallons than the same week in 2006. Not shown on the table is the retail price for last year at $2.95 per gallon for the corresponding week compared to $3.10 for this year. Gasoline futures hit $2.44 on Friday. The closing average for the week was $2.36 compared to $2.26 in the prior week. This suggests retail costs could climb another dime very quickly. This demand data is updated weekly on Wednesdays by the DOE. Next Tuesday we will also get the latest Hurricane forecast data and that is sure to create additional volatility.
GGasoline Demand Table from Dept of Energy
June RBOB Gasoline Futures Chart - 30 min
The markets around the world are floating on a sea of liquidity. You only need to view the sales records for paintings at last week's art auctions to see just how much liquidity is sloshing around in the system. The Andy Warhol painting below sold for $71.7 million and a new record for his work. Mark Rothko's White Center took top honors selling for $72.8 million. Over $1 billion in art was purchased at auction in the last week alone.
Andy Warhol - Green Car Crash Mark Rothko - White Center
Those art sales make Apple at $110 or IBM at $108 seem positively cheap! In fact give me some more of those Dow calls at 13,555 this puppy could be going to 20,000 if those art sales are proof of the liquidity flood. Where does this insanity end? The yield on the ten-year note hit 4.8% and a three-month high at the close on Friday. If the Fed really was going to cut rates any time soon we should have seen a new low rather than a new high. Why are bonds being sold so strongly? Some analysts claim China is dumping treasuries to raise money for their new $500 billion investment fund. Unfortunately there is no evidence to back that up and the large institutional traders say it is nonsense. Bonds are being sold because the 4.8% return is chicken feed compared to equities today. With the Dow rising 1-2% per week, energy +4%, commodities even more there is no return in treasuries. Add in the stronger than expected economic numbers for the week and it appears the economy is rebounding sharply instead of a slow recovery as most thought just a couple weeks ago.
Market liquidity has reached new heights according to some recent numbers. New offerings hitting the market on Friday matched a record of $10.1 billion set back in April 2000 and nobody noticed. Normally offerings of far less than $10 billion in one day would slow equities as funds left current investments to take advantage of the new offerings. There have been $104 billion in mergers and acquisitions announced in just the first 15 days in May. Slightly over 50% of those involved private equity.
German Finance Minister Peer Steinbrueck said as he prepared to start the G8 meeting, "The world economy has never been this good." It appears private equity and equities in general are in agreement. Despite almost daily cautions by numerous market strategists large cap equities continue to climb. Keene posted the following chart in the Market Monitor on Friday showing the Relative Strength (RSI) of the Nasdaq compared to the S&P-500. Note that even though the Nasdaq had rallied slightly late in the week the relative strength was terrible and rapidly getting worse. The same was true of the Russell.
Nasdaq Composite Relative Strength to S&P
Big cap stocks are continuing to find a bid because they are liquid. In theory highly liquid stocks can be exited on a moments notice should the market suddenly hit reverse. The Dow stocks are mostly multinational and receive a large portion of their profits from overseas sales. They are benefiting from the weak dollar and they are liquid. 20 of the Dow 30 stocks are at new 52-week highs and they are liquid. Did I mention they are highly liquid? The Dow stocks are going up because, and I will try and simplify this, they are going up. Yes, it is that simple. New highs attract new money like Paris Hilton attracts photographers. Every fund manager in the country is afraid of missing out on the same returns their competitors are getting so they are throwing every spare penny at the big caps. Highly leveraged hedge funds some as much as 40:1 are throwing money at big caps. With the constant Dow gains going short has not been working and sitting on cash while your competitors are riding the rally train is also not an option. If you can't short them, join them. Sell your treasuries and put that money into blue chip equities where 4.8% a week would not be usual today.
Eventually this is going to end badly. Some are now thinking it will end very badly. I heard three different analysts on Friday suggesting there could be a 1987 event in our future. I am not suggesting that but when everyone who has been throwing money at those new Dow highs for the last 36 trading days tries to exit all at once those liquid blue chips may not be as liquid as they thought. In 1987 the market crash turned into an implosion because of trading programs and stop losses. We have curbs to theoretically stop those kinds massive losses but I am sure everyone remembers that -500 point day back on February 22nd. When everyone rushes to the same side of the boat it can capsize.
Market expectations for next week are neutral. Now that option expiration is over traders will probably want to just tip toe through the week and hope to get to the holiday unscathed. It was a particularly amazing OpEx event. I looked at a couple hundred stock charts after the close on Friday and I would say an extremely high percentage were pinned exactly to a strike price. AAPL would be a prime example. It hit $110 at 10:30 and stuck like glue the rest of the day to close at $109.98 and never venturing more than 25 cents in either direction.
The Dow closed at its high of the day at 13556 for yet another new record close. The -100 point decline intraday on Tuesday was completely forgotten and Tuesday's intraday spike high of 13481 was left in the rear view mirror. There is no overhead resistance other than its own weight as it moves into even more overbought territory. Support is a trailing 50-point stop where dip buyers are waiting breathlessly. If I sound frivolous today it is because the conditions on the Dow are bordering on the ridiculous.
Nasdaq 100 Chart - 60 min
The Nasdaq actually found some traction after Tuesday's drop to 2520 and has managed to return to resistance at 2560. There is a resistance band from 2560-2580 and despite the falling relative strength the Nasdaq has returned to do battle at that level again. The Nasdaq 100 or NDX has established a very solid line of resistance at 1900 and Friday's close at 1897 is right at that threshold once again. The NDX has been trying to break that level since April 26th and only succeeded for more than a few seconds on three occasions and those breakouts lasted only slightly longer before crashing back to earth. Eventually that resistance like any other resistance will be broken but the question we have to answer is when. Pre holiday trading volumes should peak on Monday/Tuesday and then decline sharply to nonexistent by Friday. That suggests any major moves should be expected early in the week if at all. Once past Memorial Day we are officially into summer and it won't be long before the tech doldrums begin to appear.
Russell-2000 Chart - 180 min
S&P-500 Chart - 60 min
The biggest surprise of all came from the S&P. A buy program Thursday afternoon pierced the resistance at 1515 only to be knocked back at the close. Friday's open saw another wave of merger mania and SPX expiration games push the S&P back over 1515 and this time it stuck. Option holders content to let the S&P expire under 1515 were forced to make adjustments and as they say the rest was history. The S&P closed at 1522 and the high of the day. The March 2000 high of 1527 has become the official target for the bulls and media market watchers. It is almost a foregone conclusion that it will be reached next week and most likely on Mon/Tue. That is when the fun should start. Depending on which market observer you listen to we will either go into rapid decline or see explosive gains once that level is broken. I could easily see a sell the news event but there is really nothing to power that selling. The funds are going to want to keep the markets rising as long as possible or at least until after the holiday. Eventually somebody is going to pull the exit trigger and should several of them pick the same day it could get ugly. Trees don't grow the sky and neither do markets but of course you could never convince anyone currently long.
When I wrote the wrap last Tuesday night I was nearly convinced we were going to see a failure of support at 1500 on the S&P. The Russell had just hit a two week low at 813 and looked very negative. The Nasdaq had joined the Russell pity party and also closed at a two week low. I would have bet anyone in the room a hundred bucks we were about to see a breakdown in the rally. Alas, it proved me wrong and I am glad nobody was around to take the bet. The Nasdaq and Russell did rebound but only recovered roughly 50% of what they had lost in the prior sessions. Neither are close to their recent highs despite the Dow and S&P breakouts. This diversion among the indexes can't last forever. Either the Russell and Nasdaq will eventually succumb to investor euphoria and charge through overhead resistance or the Dow rally will lose traction and slip back into reality.
I am not saying things are not good economically or earnings are dropping or
China is going to nuke our markets as soon as their representatives leave the
country next week. I am only cautioning that the Dow is extremely overbought and
the small cap and tech indexes are signaling it is time for a rest. When it will
come is always the $64 question and I do not have the answer. I will continue to
short the Russell at 835 until proven wrong and I will continue to buy the dips
on the Dow
until proven wrong there as well. If I had to pick an economic report
next week for a market mover it would be the Richmond Fed Survey on Tuesday. It
fell into negative territory in December and has remained at the -10 level for
four straight months. A sudden significant improvement could upset the status
quo as could another leg down to even deeper negative territory. The
Semiconductor Book-to-Bill from last week was rescheduled for Tuesday night. A
dramatic change there could also
move tech stocks but that number is so managed
by the SEMI organization I doubt it will happen. Try to avoid over committing
yourself and your trades. Remember the law of gravity has not been repealed and
reversals tend to move much faster than rallies. Enjoy the ride higher but keep
that parachute handy.