After several days of declines, earnings from tech stocks overcame negativity from blue chips and pushed the major averages back into the green. Apple (AAPL) gained +$12 to $185 after blowout earnings and lifted techs in the PC, cell phone and semiconductor sectors. Even a guidance miss from Texas Instruments failed to kill the rally. Will we be so lucky after the Amazon earnings tonight?
Dow Chart - Daily
Nasdaq Chart - 60 min
The Chain Store Sales snapshot fell again by -1.5% and the largest decline in 22 weeks. This erased the prior week's gain and sent the index to a 52-week low. Year over year growth fell to +2.2% even with weak comparisons from 2006. Warm weather continued to be blamed for keeping winter shoppers out of the malls. Higher gasoline prices were also cited for a continued drag on consumers. The ICSC survey on gasoline price concerns saw consumers cutting discretionary spending by more than 50% to compensate. The ICSC warned that increased discounting would continue to provide buying interest but those sales would come at the expense of profit margins. We have already seen lowered guidance from some chains but it is expected to increase.
The Richmond Fed Manufacturing Survey erased four months of positive gains with a drop back into negative territory. The headline drop of -5 for October came after a four-month rally from negative territory to +14 in September. The -19 point decline was a giant step backwards and could be an indication of increased weakening in the economic base. All components fell except for the six-month outlook, which rose from 18 to 36. Shipments fell 27 points to -5 from +22, new orders fell -22 points to -8 from +14 and order backlogs fell to -17 from -1. Negative numbers represent contraction rather than expansion.
Mass layoff announcements rose to 1,271 events involving more than 123,656 workers compared to the prior month of 1,189 announcements impacting 118,120 workers. Manufacturing was still the leader with 29,381 layoffs with the rest of the layoffs spread broadly across all sectors. The number of layoffs has been consistently averaging around 125,000 since declining from a high of 254,000 back in December. I expect these numbers to begin rising since year-end is normally filled with pink slips rather than new hiring.
The rest of the week is void of material economics reports with the Durable Goods and Kansas Fed Survey on Thursday the only points of interest. The Kansas Fed survey was already heading back to negative territory with the September headline number declining to +4 from +15 in August. This suggests we could see a material decline if the trend seen in the Richmond Fed survey carries over into the Kansas region. The Kansas survey does not carry as much weight as the Richmond or Philly surveys but would be another data point on the Fed's check off list when they meet next week.
The Federal Open Market Committee (FOMC) meets again next week to determine the state of the economy and set interest rate policy. The consensus at the close today was for a 90% chance of a 25-point rate cut at that meeting. The announcement would come at 2:15 ET on Halloween. Trick or treat!
The economic reports are not causing the volatile market. Q3 earnings are the culprit or more specifically earnings guidance. The generally negative guidance has overshadowed the positive earnings reports and the divergence between winners and losers has never been stronger.
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Coach (COH) fell -12% after reporting strong earnings that beat the street but warned that future earnings would be below plan due to a weakening in consumer sales. Coach said they were worried about falling traffic in North American stores due mostly to the slump in housing and high gasoline prices. They said sales of $300 purses and other high dollar items could suffer as consumers turn to cheaper prices at the discount stores in an effort to stretch their dollars. COH fell to near a 52-week low at $36 on the warning.
Texas Instruments (TXN) beat the street by 4-cents but was knocked for an 8% loss to $31 on lowered guidance. TXN said profits in Q4 would be below analyst estimates due to a slowdown in wireless products used by Motorola and Sony. Sony had recently announced they would be buying chips from suppliers other than TXN. TXN makes chips for more than 50% of the world's cell phones. TXN is cutting 424 jobs at the Dallas facility and 300 in Tucson. They are adding 200 at the Sherman Texas plant to cover consolidations from those other cuts. TXN was the most heavily traded stock on the NYSE.
UPS said Q4 shipments in the US would rise at the slowest rate in four years. Their positive earnings came mostly from strong global growth and not from the +1.9% growth in the US in Q3. This gloomy forecast for US sales has been the common theme among shippers. UPS opened higher but declined to only a 50-cent gain by days end. With EBAY and AMZN showing gains in online sales UPS should continue to do well despite the tough consumer sector. During the holiday season 3 of every 4 packages shipped by UPS are generated by EBAY and AMZN sales.
Amazon (AMZN) reported earnings after the close and they beat estimates but not by the magnitude of the prior two quarters. Earnings rose to 19 cents with 18 the official estimate. However the whisper number was 21 cents and the earnings were considered a miss. The sales numbers rose dramatically but margins shrank and analysts were quick to cut estimates for Q4 based on the expected slowdown in US consumer sales. Amazon said it sold 2.5 million copies of the Harry Potter book in its biggest product release to date. Amazon raised its guidance but traders trashed Amazon stock in after hours trading. AMZN was up +14 from Monday's low to nearly $102 ahead of the earnings with +9.53 coming today. After the earnings news broke AMZN declined to $92 and erasing all of its gains for the day. This suggests it will trade even lower tomorrow. The intraday gains were powered by short covering ahead of the report. Many traders expected Amazon to miss earnings and the short interest was very high. Given the massive post earnings spikes in April and July exiting ahead of the earnings was a good plan. I am sure those that covered at $100 ahead of the news is cussing tonight with AMZN at $92 but that is the risk traders take in trading earnings reports. The Option Investor AMZN straddle hit its profit target prior to the close and traders should have exited with a nice gain.
Amazon Chart - 30 min
Wal-Mart (WMT) said it was slashing capital spending in 2008 due to slowing sales growth in the US. WMT said it would cut new supercenters by 30% in 2007 from 281 to 195 new stores and to only 170 in 2008 and 140 in 2009. Last June WMT told investors it would open 170 in each of the next three years. WMT said capital spending would drop from $15.7 billion in 2007 to about $14 billion a year after 2008. International spending, where sales growth is exploding, would increase from $3.5B to $5.5B through 2010. Domestic spending would fall to less than $9.2 billion in 2010. WMT said sales growth for the full year would be closer to 9% compared to 12% for all of 2006. They warned that sales could slow to 5-8% over the next two years. WMT fell -3% to $44.
Target (TGT) warned after the close on Monday that sales for October would slow to 2-4% compared to their prior guidance for growth of 3-5%. TGT shares were flat on analyst comments that they actually expected a warning that was much worse. In September TGT said sales fell from 4-6% estimates to a very anemic 2% and analysts were relieved that the October revisions were not in that range.
Countrywide (CFC) fell -4% to $15 after saying they would offer modifications on $16 billion in mortgages in an attempt to ease the current foreclosure crisis. "Unprecedented times call for unprecedented remedies" according to Countrywide CEO David Sambol. Countrywide said it would solicit 82,000 borrowers with offers to modify their loans. Countrywide has already completed over 20,000 loan modifications from borrowers in trouble. This is only about 5% of the more than 500,000 loans currently in default in the Countrywide portfolio. Countrywide is going to try and convince 52,000 borrowers to refinance into prime loans or FHA loans in an effort to get the loans off their books and ease liquidity problems. They are going to offer 10,000 subprime borrowers who are behind in their payments due to recent rate resets a lower rate/payment in an attempt to prevent foreclosures. Somehow I think admitting that 500,000 loans are in default is probably not good for Countrywide's stock price or their guidance when they report earnings on Friday morning.
Whirpool (WHR) got caught in its own spin cycle after reporting a 50% jump in earnings but issued an earnings warning. 60% of Whirpool's sales come from the US and those sales are expected to drop by -8%. Whirpool said combined sales for all of 2007 would decline by -4%. JP Morgan said new product offerings had fallen short in the weakening consumer market. WHR fell -5% to $82. The problem is a feeling that this weakness is spreading throughout the consumer sector and complicated by the continued decline in housing. This continues to pressure Home Depot, Lowe's, Black and Decker and others in the housing sector.
Panera Bread (PNRA) fell -$5 in after hours when they warned on earnings for Q4. They said higher labor costs and lower margins were the reasons. In June Panera withdrew its guidance and said slower traffic and higher costs would produce earnings below street estimates for the rest of the year. Restaurant chain Brinker (EAT) posted weaker than expected earnings due to slower traffic and lower margins. The company said competition from fast food stores in a budget conscious environment were to blame. Brinkers posted a 21% drop in net income. Brinker owns the Chili's, On the Border, Macaroni's and Maggiano's chains. IHOP (IHP) posted a loss of 69 cents per share compared to a 62-cent gain in the comparison quarter. The results were weakened by a $35 million charge related to its pending acquisition of Applebee's. Excluding the one-time charge earnings fell to 60 cents but still well below analyst's estimates of 68-cents. Same store sales rose an anemic 2% mostly on higher menu prices and fewer customers. IHOP did not give negative guidance but investors were not excited knocking IHP for a -$3 loss intraday. Reading the menu of food chain results above it is tough to be bullish about overall consumer spending in this economy. Tough to support flat screen TV sales if they can't afford a $10 meal ticket.
Juniper (JNPR) posted earnings after the close that beat the street by a penny and raised guidance but it was not enough for investors who promptly knocked the stock for -10% loss in after hours. Juniper did not see the same telecom order declines that TLAB, ALU and ERIC have claimed but that news was evidently lost on traders. Everything they said in the earnings was positive but evidently not positive enough.
Research in Motion (RIMM) announced that it had struck a deal with Alcatel-Lucent (ALU) to sell the Blackberry 8700 model in China. RIMM stock spiked +11% in regular trading to $124.53 on the news. The company expects to sell millions of units in China and India and profits should continue to be strong. In keeping with tonight's post close trend RIMM gave back nearly $5 of that gain prompted by the decline in Juniper and AMZN. The sell off in the Nasdaq big caps after the close sent the Nasdaq futures down -13 where they appear to be holding at 7:PM.
Oracle said it was giving investors until Sunday to accept the $17 offer for BEAS but they are not expected to garner enough shares to pull off the acquisition. BEA Systems has rejected the deal saying the price was too low and the shares continue to hold in the $18 range and above the Oracle offering price. So far nobody else has emerged to produce a bidding war and once the Oracle offer expires so will the bid in BEAS stock.
Earnings that could excite the market on Wednesday include AMGN, GLW, CLB, GRP, LM, LSI, MER, R, OXY and WLP. There are numerous chip stocks and energy companies reporting and those could poison those specific sectors. The main focus of the market will be on Merrill Lynch on fears they will report earnings and write offs that are worse than they predicted several weeks ago. There are rumors flying but they have had every opportunity to confess again and passed. With the corporate credit sector improving their distressed loans should be improving not getting worse. Keep an eye on MER earnings for an early sentiment indicator.
I spent four days last week in Houston at an energy conference where the focus was on peak oil. Oil prices hit $90 during the conference and added to the presentation speculation. While most presenters are focusing on the 2009-2011 time frame for the beginning of global production declines there were a couple of big names saying we had already peaked. Those names included Boone Pickens and Matthew Simmons, author of "Twilight in the Desert." Both had statistics to back up their claims but both admitted it was tough to really nail down actual capacities from Saudi Arabia. Either way life as we know it is about to change drastically over the next three to four years and America is still ignorant of the coming disaster. Add in the increasing geopolitical tensions with Iran, Syria, Turkey, etc and nearly everyone expected to see $120 to $150 oil in 2008. Oil prices today declined to below $85 on the first day of trading for the December contract as the current month. Several analysts said the bid had gone out of the market and a short-term correction was imminent. In 9 of the last 10 years there has been a 10% correction between Labor Day and Thanksgiving and so far this year has escaped that event. That leaves plenty of time for the bulls to change sectors. 10% sounds like a bunch but that takes us back to only $80 and I doubt anyone would call that cheap oil. I will be providing an update on the entire peak oil scenario in the end of year renewal special. It is time for everyone to pay attention or pay the price and the cost of peak oil will not be cheap.
DDecember Crude Oil Chart - 90 min
S&P-500 Chart - Daily
In the week I was gone the Dow declined -5% on the worsening economic outlook as evidenced by the lowered earnings guidance from the early reporters. I said on Sunday Oct-14th that although I was bullish there was the risk of a 2-4% decline on profit taking from the post August rebound. The S&P had rebounded +195 points in that rally and gave back -75 in last week's drop. Strong support at 1490-1500 held and we appeared to be back on track at today's close. Those high profile earnings drops after the close have dampened that enthusiasm.
The S&P futures are down about 5 points and the Nasdaq futures about 13. Those are not big numbers and given the +10 spike in Amazon and RIMM we were due to see some profit taking. The key will be how much profit taking will appear and how tomorrow's earnings will factor into the market sentiment.
TThe constant discussion about next week's FOMC meeting has already begun and the number of major earnings reports will begin to slow. By the weekend it will turn into a Fed induced pity party and traders will be trying to read their crystal ball on Fed direction. The chance of another Fed cut was 90% at the close today according to the Fed funds futures. The guidance warnings and the weakening economics should be enough to keep the Fed in preemptive strike mode but slow their cuts to the 25-point rate. We had several major market analysts come out in recent days and predict a severe recession ahead. Those claims by people like Julian Robertson, founder of the Tiger Management hedge fund that was worth $22 billion at one point, produced market ripples that have not yet dissipated. Even though his fund declined and was closed several years ago he is still a respected investor but he is only one of the dozens currently predicting a recession. The Fed should not take their predictions lightly. Unfortunately another Fed rate cut will probably not prevent a recession since a housing recession has always produced a general recession. We may have lower rates ahead but investors have already started focusing more on the recession possibilities rather than the potential rate cuts. A recession does not necessarily mean a market decline but more often than not that is a result.
The current bull market is still expected to continue and I heard again today
several analysts predicting Dow 15000 by year-end. That is only a 1300-point
move but we are rapidly running out of year. There are only 45 trading days left
in 2007 and there is a lot of resistance between our current levels and those
lofty year-end targets. I would not be the first to suggest that the targets are
beginning to fade but the bulls love to climb that wall of worry. I for one
would be glad to
see it but I don't currently see a motive factor to push us
back over the recent highs. Weaker economics, weaker earnings and weaker
guidance are not normally bullish factors. At this point a break below Dow
13500, S&P 1490 would be a strong sell signal in my opinion. The Nasdaq
Composite rebounded to 2800 at today's close on the strength of those big cap
techs. That is very strong resistance and those same techs sold off in after
hours. I view the Nasdaq as the canary in the coalmine
this week. A strong move
over 2800 would be a buy signal for a year-end trade not necessarily a new bull
market. The Russell has collapsed and back under the resistance at 820 and again
at 830. I am not nearly as bullish based on the Russell because many fund
managers appear to have abandoned the Russell as a year-end trading vehicle in
favor of the high liquid big cap techs. If they abandon those techs over the
next couple weeks it could get ugly. Plan accordingly!