Monday saw a decent decline but there was no follow through. Rumors of a correction have fallen on deaf ears.
The Dow gained +89 today and the S&P gained +8. However, the NYSE Composite, Russell 2000 and the Dow Transports all lost ground. Which index is right?
The Dow jumped because of a +2.77 gain in United Health and +2.00 spike in IBM. Both were news driven. United Health rallied after Medicare and Medicaid said there would be a +3.3% hike in Medicare Advantage payments to insurers in 2014. Previously the plan had been to slash government reimbursements by -2.2%. The healthcare insurers all rallied on the news.
IBM rallied on a hit to Hewlett Packard (HPQ). Goldman Sachs downgraded HPQ from neutral to sell and lowered expectations for the company over the next several years. Goldman said all Hewlett divisions were seeing shrinking profit margins and falling revenues. Meanwhile IBM is receiving positive press almost every day. IBM is perfectly positioned to capitalize on the "big data" revolution and has launched a "government cloud" that is attracting customers like crazy. IBM is beating HPQ in the services sector in every area. IBM has spent $16 billion acquiring 35 companies over the last two years in order to capitalize on the move to big data. They see it as a $20 billion increase to their regular business. Blue chip tech investors have a clear choice and for the foreseeable future it is IBM.
The economics today were also positive and added to the Dow bounce. The Factory Orders report for February showed a +3.0% rise in orders after a -1.0% decline in January. This is the largest spike in orders since September. However, this is almost entirely due to Boeing's spike in orders for new planes. If you extract aircraft orders the headline number drops to only a +0.3% gain. Core capital goods declined -3.2% compared to the initial estimates for a -2.7% decline.
The headline news was positive and helped the market but anyone looking under the hood realized this was not a rousing jump in economic activity.
The ISM New York Index for March rose a microscopic +0.6 points to 573.3 compared to an average gain of 4.0 points over the prior three months. It was about as close as you can come to a decline without actually having one. It was the slowest pace of growth in five months. The current conditions component declined sharply from 58.8 to 51.2 and the lowest level since October.
The best component news was a rise in employment from contraction territory at 49.3 to expansion at 57.3. That is the fastest pace of hiring since May 2011. Offsetting that gain was a deterioration in expectations to no growth over the next six months. Also, the revenue component fell more than -10 points from 68 to 57.4.
Chain store sales spiked +4.7% last week after dropping -1.7% the prior week. Obviously this was fueled by the Easter holiday and should not be seen as a material change in the environment. The weekly average has been about +1% growth over the last five weeks. Analysts believe the weak performance has been due to the late winter storms keeping shoppers at home. Gasoline prices fell for the fifth consecutive week to average $3.71 nationwide. That is -15 cents off the 2013 highs six weeks ago.
Vehicle sales for March declined to an annualized pace of 15.3 million from 15.4 million in February. This rate is +8% higher than the same period in 2012. Autos accounted for 7.5 million units and trucks 7.8 million. Sales of imported cars fell to 22% of the total compared to the 30% high in 2009. The average age of a vehicle in the U.S. is 11 years so there is plenty of pent up demand. The high unemployment is the major drag on sales plus the inability to finance after buyer credit ratings were damaged in the recession. With tax refunds averaging $3,000 this year the auto dealers do not have to resort to high incentives to sell cars. Those that can finance a vehicle are finding low interest rates and that is helping sales.
The March payroll numbers start tomorrow with the ADP Employment report. The estimate is for a gain of 200,000 jobs. The various regional reports during the month have split about even with those adding jobs and those reducing jobs so the outcome could be a surprise to everyone. A Goldilocks number in the 150,000-175,000 range would be very market friendly. This is the first monthly report after the sequestration so any real declines in employment are still ahead. If the economy is continuing to add jobs but at a pace that does not lower the unemployment rate the QE program should not change. That would be market positive.
The Nonfarm Payrolls on Friday are expected to show a gain of +190,000 making the Goldilocks number there in the 150,000-175,000 range as well.
The ECB, Bank of England and the Bank of Japan will all make news on Thursday. The BOJ is expected to announce a bigger QE program and the ECB could cut rates. The BOJ could announce a +50% boost to its current QE program to 5.2 trillion yen a month. That equates to $55 billion. BOJ Governor Haruhiko Kuroda has pledged to do "whatever it takes" to end deflation in Japan. The bank is currently buying government bonds, ETFs and other risk assets at the rate of 3.4 trillion yen a month.
The ECB interest rate has been 0.75% since July. Eurozone unemployment rose to a record 12% in Q1. The eurozone economy has contracted for five consecutive quarters and is expected to decline -0.5% for all of 2013. However, that estimate was out before the Cyprus bank robbery and could be substantially lower when it is next revised. With the unknown impact from Cyprus, rising unemployment and five quarters of recession the ECB could announce some new monetary stimulation other than a rate cut. ING said they see no bottom in the falling employment. The report today said there were 19.1 million unemployed in the eurozone. The EU Commission is expecting unemployment to hit 12.2% this year and remain at 12.1% in 2014. The Manufacturing PMI for the eurozone came in at 46.8 and well into contraction. Germany's PMI is now at 49.
The U.S. may have been the cleanest shirt in the hamper at +0.38% growth in Q4 but it is definitely nothing to brag about.
Delta (DAL) warned that revenues slowed sharply in March as a result of the sequester. After rising +5.5% in January and +5.0% in February revenues rose only +2% in March. Delta said there was a sharp drop in last minute travel by government employees as a result of the sequester. Government contractors are a strong source of business travel and a cutback in government spending meant less travel by those contractors.
Revenue estimates for the full quarter declined from 4.5-5.5% to 4.0-4.5%. Last week Continental projected Q1 revenues between 5.4-6.4%. Shares of Delta fell -8%.
I expect we will see further warnings as other companies begin to relate their own stories of how the sequester has impacted business. The sequester excuse will be the catch all for whatever caused companies to miss earnings for Q1. Expect to hear "the sequester ate our earnings" a lot this quarter. Second to that excuse will be "European recession" followed by "Dollar strength reduced profits."
Apple (AAPL) shares rallied +2% intraday but declined to trade flat at the close after Goldman Sachs took the stock off its conviction buy list. Goldman lowered the price target from $660 to $575. Goldman put Apple on the conviction buy list around Valentine's Day and then tried to pump it up again a couple weeks later calling it the most undervalued stock within their coverage universe. The jam job failed so Goldman removed it from the list to avoid a black eye.
Apple shares rallied instead of sold off on expectations for a rebound in China after CEO Tim Cook apologized for the iPhone warranty. That took Apple off the negativity list in China and the Chinese press is even praising Apple for its transparency. The Foreign Ministry said Apple was worth respect after the event.
Apple shares have been falling on repeated analyst downgrades of expected sales. Quite a few now expect Apple to miss estimates in Q1.
Apple is expected to begin production in Q2 on the next iPhone, which is thought to be a refreshed phone similar to the current version. They are also working on a cheaper iPhone in a four-inch long device. That will lower margins.
Gold declined -$25 today to $1576 and could easily fall to support at $1550 after SocGen downgraded expectations for the yellow metal. SocGen head of commodities research Michael Haigh published a report titled "The end of the gold era" and the sell off was immediate. They believe the stronger dollar, rising U.S. GDP and higher real interest rates will send gold as low as $1375. "If the economic data continues to show improvement, gold as a shelter of wealth will suffer." He said there has been a -6% outflow of funds from gold ETFs in 2013 as investors moved to the equity markets where positive momentum was surging.
He may be correct in the short term but every time the Fed buys more treasuries it digs a deeper hole for the economy. Gold will rise again but probably not until the market and economy roll over.
Tesla Motors (TSLA) announced on Monday they would have their first profitable quarter in Q1 and shares spiked +15%. Today Tesla announced a lease program through Wells Fargo Bank (WFC) that will make the expensive electric car available to even more people. The Model S price tag starts at $62,500 after a $7,500 federal tax credit. The program is a lease finance option. Customers can sell the car after 36 months or they can elect to keep it and the car will be paid off after 66 months. Founder Elon Musk said he is personally guaranteeing the residual value of the cars. He is worth roughly $2.7 billion. He said "I will stand by the residual value of the Tesla S if Tesla Motors cannot." Musk had been teasing about the announcement for more than a week saying he was going to put his money where his mouth was in a very big way.
Musk is very confident the cars are going to continue selling. They sold more in Q1 than previously expected. They had projected to sell their full production of 4,500 for the quarter and sold 4,750 instead as they pushed few more out the door than expected. The high end models are selling so well they are going to halt production of the low end models. The difference is in the size of the battery and distance the car can travel. Apparently there were very few sales of the smaller battery models.
Tesla shareholders were not as excited about the lease announcement as Musk. Shares of TSLA declined -$1 in afterhours when the announcement was made.
Nasdaq (NDAQ) declined -13% after the company bought the eSpeed bond unit from BGC Partners (BGCP) and Cantor Fitzgerald. The purchase price was $750 million in cash and up to $1.2 billion if certain sales goals are reached. The Nasdaq must generate $25 million a year in revenue for the incentive payments to come due.
BGCP shares rallied +48% on the news.
The plot thickens in North Korea after the government said they were going to restart their nuclear facility at Yongbuon that was shut in a 2007 disarmament accord. This is part of the "nuclear war" promise by Kim Jong Un. The plant includes a uranium enrichment site and a 5-megawatt graphite-rod reactor. The restart is to pursue Korea's twin goals of economic and nuclear development. Korea has up to 41 kilos of plutonium, which would be enough for up to 8 nuclear weapons. U.S. Secretary of State, John Kerry said it would be a "serious step" if North Korea violates its obligations by restarting the nuclear reactor. Apparently a byproduct of this reactor is plutonium that can be used in weapons.
The S&P rallied +8 points to close at a new high at 1570.03. That erased Monday's decline of about 8 points. The next target the talking heads are focused on is the all time intraday high of 1576.09 from October 2007. We missed that by about 3 points today but it is meaningless in the greater scheme of things.
The S&P is slowly easing higher from prior resistance at 1565 and while today was a decent gain it is only one-point over Thursday's record close. The +8 gain appears impressive on the surface but that just recovered Monday's loss.
The S&P needs to add another 8-10 points on Wednesday to solidify its breakout. Otherwise the bears will be back and we could see a dip back to 1560 or even 1550 really quickly.
Nothing really changed in the market today. The slow creep higher is still intact and until the rate of climb increases or we get a couple of decent declines the trend is intact.
The lack of excitement will keep the uncertainty intact and that means we could see the slightest headline cause a big move.
Unlike the S&P the Dow did spike well above its recent congestion. In theory this is a valid confirmation of the new closing highs last week. However, it was caused by only two stocks. They lifted the index and by association quite a few others in the Dow but it was a two stock rally.
Historically April is the best month of the year for the Dow. Let's hope that trend continues. Support is now 14,500 followed by 14,400. The spike out of the prior range could produce some further short covering but we are handicapped by the Russell and the Dow Transports. They did not join in the move higher.
The Nasdaq rebounded +15 points BUT that was only half of the -28 it lost on Monday. Strong resistance at 3260 is still intact. The Nasdaq could not post stronger gains even though APPL, GOOG, PCLN, ISRG, BIIG, AMGN and other big caps were all positive. There was significant weakness in the smaller tech stocks suggesting investor confidence is fading.
The Russell 2000 Small Cap Index lost ground for the second day and closed at a three week low. This is not a bullish event. The prior support at 938 failed and the Russell closed near the lows of the day. Any continued decline threatens a test of support at 895. That would be a dramatic change in sentiment.
The weakness in the small caps weighed on the Nasdaq and further declines in the Russell should drag the Nasdaq lower.
Russell 2000 Chart
Like the Russell the Transports closed at a three week low and below support at 6100. The combination of the Russell and the Transports declining at the same time is very negative. One more day of declines could sour the entire market. These are the fund manager sentiment indexes and both are flashing a warning.
Dow Transports Chart
The mixed message of the market today was that blue chips were still thought of as defensive plays and safe for parking money. Small caps and transportation stocks were seen as risky bets. The window dressing from quarter end has turned into window washing as was expected to happen. The first several days of April are typically down.
The news that lifted the Dow this morning will be gone on Wednesday and Payroll reports will take center stage. The Teflon market could ignore good news, payrolls stronger than expected, and celebrate bad news of lower payroll numbers because QE will continue. It is tough to outguess the contrarian bias.
We need to stick with the trend until it ends and so far the trend is intact for April. Uncertainty may be growing but not yet strong enough to cause any real damage.
Enter passively, exit aggressively!
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