Cancellation of the EU Finance Ministers meeting on Wednesday and a flurry of negative earnings soured market sentiment.
Tuesday was the day everyone dreaded. All the headlines were bad. EU Finance Ministers cancelled their summit for Wednesday suggesting there will not be a comprehensive plan for resolving the EU credit crisis as promised. In the U.S. there was a flurry of earnings warnings and poor guidance that erased the positive earnings sentiment from last week. U.S. economics also turned negative with the Consumer Confidence hitting a 30 month low. There was no area traders could point to as a beacon of hope and the market decline reflected that loss of confidence.
The European crisis flared up again as various countries refused to go along with the new plan unless other countries agreed to changes. For instance, part of the new plan calls for the pension age to be raised to 67 for anyone born after 1964. Italian lawmakers are kicking back on that provision as well as others and there is fear Berlusconi is in danger of being voted out of office. He has survived prior scandals and multiple confidence votes but should a new vote be triggered today analysts believe it would fail. The fight against the austerity measures have strengthened Berlusconi's political opponents and his key party allies of the Northern League are threatening to withhold support. If a confidence vote was forced and Berlusconi lost power, Italy could be mired for months in the vacuum as rival opponents fought to gain control. This would delay any austerity moves.
The ECB has been buying billions in Italian bonds in an effort to keep Italian borrowing costs low but the rising political confusion and failure to enact the new austerity measures has caused a new spike in interest rates that could eventually create an even bigger problem than Greece.
The broader EU is demanding these austerity concessions from those nations in trouble before the EU leaders will approve the comprehensive plan. With Italy on the brink of disaster and not likely to approve the required austerity measures the EU leaders cannot get the plan approved.
The comprehensive plan was supposed to deal with the debt crisis by writing off more of Greece's debt, raising bank capital levels and boosting the powers of the EFSF. The ten EU countries that do not use the euro currency won't sign off on the move to force banks to raise new capital without the other two parts of the plan in place.
The meeting of the finance ministers was to iron out the details of the plan before the full meeting the EU leaders late Wednesday. When the meeting of the finance ministers was canceled it virtually assured there would be nothing positive coming out of the EU leaders meeting. The market did not like the news after being promised for the last week that a comprehensive plan would be presented today.
Market sentiment was already ugly after some high profile earnings warnings and unexpectedly weak economics. The October Consumer Confidence came in at 39.8 and the lowest level since March of 2009 compared to estimates for a rise to 47.0. This compares to the 46.5 reading in September. The headline number has fallen -20 points in just the last three months.
The present conditions component fell to 26.3 from 33.3 and is approaching the recession lows of 21.9. This is not a good sign. The expectations component fell to 48.7 from 55.1 and the recession lows were 27.3.
There is one caveat that confidence has declined in October in 19 of the last 21 years for cyclical reasons. However, the magnitude of the last three months decline is scary. Those respondents who felt jobs were plentiful declined from 5.6% to 3.4% and a cycle low.
More than half of the responders expect the stock market to be lower a year from now. Those who believe the market will go lower are at the highest since Oct-2008.
This report could be the result in a change in methods that took place earlier this year. By comparison the Consumer Sentiment report only showed a small decline. The Bloomberg weekly index has been trending higher for several weeks and the Rasmussen daily index has been flat.
Consumer Confidence Chart
Mass layoffs for September declined to 1,495 events from 1,587 in August. The workers impacted declined to 153,229 from 165,547. Manufacturing layoffs declined by nearly 10,000. The minor decline in total layoffs is not enough to trigger optimism about next week's Nonfarm Payroll numbers.
The Richmond Fed Manufacturing Survey came in with a headline number of -6.0 for the second month. The unchanged reading was slightly disappointing although the internal components improved. New orders were -5.0, up from -17.0 in September. Any number below zero represents contraction so orders improved but are still declining.
Backorders improved to -15.0 from -23.0 but obviously still significantly negative. The worst component was employment, which fell to -7.0 from +7.0 and the lowest level since Nov-2009. That does imply the Nonfarm Payroll numbers will be weak. The best component was the capital expenditure plans, which rose to 13.0 from 5.0.
Richmond Fed Chart
The Case Shiller Home Price Index for August improved slightly from -4.1% to -3.8% relative to the prior three month period. This is a lagging report and was ignored.
The economic calendar for the rest of the week still contains some critical events. The EU leaders summit on Wednesday is going to be a letdown but that was priced into the market today. The GDP on Thursday is going to be important with whisper numbers near +3%. That could be a real disappointment.
A real problem for the market was the sudden flurry of negative earnings announcements and guidance. Everything was working so well last week but that has suddenly reversed.
Texas Instruments (TXN) reported earnings of 60-cents compared to estimates of 57-cents but issued a warning for Q4. The company said global economic uncertainty would hurt Q4 results in almost every market segment. TXN predicted earnings in Q4 of 28-36 cents and analysts were expecting 54-cents. That seems grim except TI said those earnings reflect a 15-cents charge for acquisition related costs. That changes the forecast to 43-51 cents but still well below analyst estimates. TXN shares only declined -2% for one of the least declines of the day.
Netflix (NFLX) was the poster child of the early decliners with a -35% drop to $77 on news it had lost 800,000 subscribers as a result of its price change and conflicting strategy announcements. Netflix ended the quarter with 23.8 million subscribers after it bungled a switch to billing separately for the DVD service and the streaming service. Numerous analysts slashed price targets from highs in the $225 range to numbers in the $75 to $95 range plus changing their recommendations to neutral or sell. Netflix also warned on Q4 saying earnings could range from 36-70 cents compared to analyst expectations of $1.05. NFLX actually posted earnings of $1.16 for Q3 compared to estimates of 96-cents so the dual billing was actually a plus for earnings but the execution failures were the highlight.
Broadcom (BRCM) posted earnings of 48-cents but then warned revenue and profits would decline in Q4 due to "industry softness." Revenue is now expected to be $1.7-$1.8 billion compared to prior analyst estimates of $2.0 billion.
3M (MMM) posted earnings of $1.52 per share compared to analyst estimates of $1.61 and shares declined -6% on the news. MMM was responsible for more than 40 points in the Dow's decline. 3M also warned on sales and profits for Q4 and for 2012 so it is a miracle it was not down -20%. The company said the global economic environment was "challenging" and the debt crisis had impacted exchange rates and disproportionately impacted 3M because of their international exposure. 3M predicted full year 2011 earnings of $5.85-$5.95 compared to its prior forecast of $6.10 to $6.25.
AK Steel (AKS) posted strong earnings of 72-cents compared to estimates of 55-cents but they warned for Q4 because of weak economic conditions and the uncertainty in Europe. Today was a market where you did not want to show any weakness and despite their blowout earnings the stock was crushed for a -13% loss.
After the bell Amazon (AMZN) reported earnings of 14-cents compared to estimates of 24-cents and earnings of 51-cents in the year ago quarter and the stock was crushed in afterhours trading. Amazon also warned on Q4 earnings and said they could post a loss. Q4 revenue projections declined to $16.34 to $18.65 billion from analyst estimates of $18.15 billion. In Q3 sales rose +44% compared to +51% in Q2. The new forecast for Q4 suggests sales would only grow +27% to +44% and this is their busy quarter.
Amazon said it could post a $200 million loss in Q4 as it spends money on building the Kindle Fire tablets. Analysts were looking for $374 million in profits. The company said it was building 17 new fulfillment centers this year, two more than originally planned. They are also increasing the production of the Kindle Fire by "a few million units" citing strong demand. Jeff Bezos said preorders had more than doubled any prior Kindle launch.
Amazon shares declined -4% intraday to close -$10 at $227 but were crushed after the announcement to trade as low as $184.50 before rebounding to end trading at -203 for a -$34 loss for the day and that was +18 off the lows.
First Solar (FSLR) shares were crushed after the company announced "CEO Rob Gillette is no longer with the company." They would not say if he was fired or left on his own accord only he was no longer with FSLR. The company recently said it sold more solar panels in Q3 than the year before but profits had declined -62% because of lower prices received. First Solar is being killed by the $30 billion in subsidies China is providing to its solar companies to enable them to compete around the world. FSLR shares declined -25% on the CEO news.
First Solar Chart
It was a bad day in the market and the list of losers was full or major declines. Here are the top 15 decliners on the NYSE and Nasdaq.
Gold rallied to a new six week high with a +55 gain in regular trading and another +8 after the close to $1708. After weeks of holding just over support at $1600 the sudden breakdown in expectations in Europe and the flurry of negative earnings guidance on weak economic expectations suddenly made gold a safe haven play once again. Open interest in gold had been declining as equities rallied but that investor interest came roaring back when the earnings turned negative.
Given everything I reported above you would expect the markets to trade down again on Wednesday. With the $30 drop in Amazon and the earnings miss and warning from Broadcom you would expect the Nasdaq futures to be deeply negative. Surprise, the S&P and Nasdaq futures are both positive at 9:PM ET. If you are looking for logic don't look in the stock market.
I suspect fund managers are contemplating buying the dip to get one more bounce before their fiscal year end closes on Friday. Maybe some investors are still hoping for a miracle in Europe with the EU leader summit but I suspect they will be disappointed.
I told James to hold off on adding any new plays tonight because tomorrow is a coin toss and anything is possible. There is no reason to trade when there is no valid expectation of a specific move. The market is significantly overbought despite the -207 point drop today. It can always become more overbought but a bad headline from Europe could easily knock off another 400 points in just a couple hours.
The S&P topped out at 1256 on Monday and declined to close at 1220 today. That is well over strong support at 1200 but initial support at 1225 could be in jeopardy. Today's close is still more than 150 points (+14%) above the Oct 4th lows. That represents a major move without any material profit taking.
Because I think the overall U.S. economic picture is improving and today's flurry of earnings challenges are not in line with those reported in the first 30% of the cycle, I would buy a dip to 1200. A break under 1200 I would avoid until we found a trend. The last two months of 2011 could be positive because fund managers need to make some money fast. If the economics continue to improve I think they will pile on the market longs. That is just an opinion and not a fact. Hindsight is always 20:20 but foresight is always a guess.
Volume has been light at 7.6 billion shares on both Monday and Tuesday. There was no conviction to the upside on Monday or the downside today.
The Dow rallied to strong resistance at 11,925 on Monday but failed at that level at least temporarily. Initial support for tomorrow will be 11,625 and the prior resistance from last week. The Dow was handicapped by the 3M earnings warning. Ten Dow components declined more than $1 and only Cisco was positive.
The Nasdaq had a successful test of the 200-day on Monday but huge earnings misses on some high profile names knocked it back to a possible test of support at 2625. Futures are positive tonight despite the Amazon miss so anything is possible for tomorrow.
Nasdaq 2600 should be a level that holds unless the negative surprises continue.
Apparently the closing flush today was overdone with the futures positive overnight. I still believe there is a better chance of a negative headline out of Europe on Wednesday than a positive result. Maybe the market has already priced it in with today's drop but we won't know until the closing bell.
If we get a dip I would probably be a buyer because the worst that can happen in Europe is nothing. We have had 13 summit meeting with no material result over the last two years so one more will not be a major surprise. All the facts point to a meeting that ends without anything other than a promise of things to come so nothing new. Funds will focus on positioning for year end on Friday and that could produce buying.
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