The markets are losing momentum at the old highs but should you be worried?
The markets rallied strongly on Monday but gave back half their gains at the close. The markets opened higher again today and sold off slightly into the close. Does this mean the February rally is over? Should you be worried?
I don't think so but you can never know for sure. I warned in the weekend commentary that the markets would likely pause ahead of the Yellen testimony to the Senate on Thursday. That will be the pivotal news event for the week. She is going to be attacked on the Fed transcripts from the recession months that were released last week and she will be grilled on the sharply declining economics over the last month. This will be must see TV. This could be a very ugly session and investors are taking profits ahead of this event. This is weighing on the market.
The economic reports today added to Yellen's woes. The Richmond Fed Manufacturing Survey collapsed with the headline number falling from +12 to -6 and contraction territory. The new orders component imploded from +14 to -9 and backorders slipped even further into negative territory falling from -2 to -8. The employment component fell from +14 in December, +6 in January to zero for February. The workweek component fell -13 points from +8 to -5 suggesting there was a shrinking of demand and worker hours were cut. The gap between new orders and inventories plunged from +2 to -22. Capital expenditure plans fell from 27 to 9.
In the corresponding Richmond services survey the headline number was flat at zero for the second consecutive month.
This is one report that was directly impacted by the weather in the Richmond area. Respondents said buyer traffic declined sharply as a result of the weather and we should see a corresponding rebound in April when spring weather appears.
The Texas Service Sector Outlook Survey declined from 16.8 in January to 6.8 in February. Revenue was the only component that changed materially with a drop from 18.1 to 9.8. The other components were flat with only minor changes.
Consumer confidence fell more than expected in February falling from 80.7 to 78.1. Respondents expressed pessimism over new jobs after two months of very weak employment and worries over weaker business conditions. The present conditions component rose slightly from 77.3 to 81.7. The expectations component declined from 80.8 to 75.7. Buying plans declined for homes from 5.4% to 4.8% of respondents. Appliance buyers declined -1% to 45.5% and auto buyers rose slightly from 12.3% to 12.9%.
I thought it was interesting that the present conditions component rose despite the never ending storms and sharply higher heating bills. I understand the decline in the expectations component since the economics have been terrible for the last month. Consumers never seem to conform to conventional wisdom but I would expect confidence to rebound sharply once the weather warms up.
The calendar for Wednesday has only one material report and that is the new home sales. The annual sales rate is expected to decline from 414,000 to 400,000 and that is due to the weather depressing buyer traffic and slowing construction of new homes.
Analysts will be twiddling their thumbs waiting on the Yellen testimony on Thursday. Friday's highlight will be the GDP revision and China PMI.
There was a lot of stock news today and at the risk of seeming like a broken record I will start with Tesla (TSLA). This stock has turned into a bear's worst nightmare. Like all the great momentum stocks from the year 2000 Nasdaq rally it continues to move higher in leaps and bounds that mystify fundamental analysts and crush the shorts.
Tesla shares rocketed higher with a $30 gain to $248 after Adam Jonas, an analyst for Morgan Stanley, raised his price target from $153 to $320. Shares traded as high as $259 before declining slightly at the close. The reason for the upgrade was the pending announcement of a "gigafactory" to make battery packs that could cut costs by 40-60% for Tesla. The factory is rumored to be able to produce more than one billion batteries a year. The announcement by Tesla is expected to be soon and could be extremely positive. Jonas said given Elon Musk's vision the battery factory could go beyond batteries for Tesla cars and produce battery packs for dozens of other industries including the solar industry.
The battery pack in a Tesla stores enough energy to run an average house for up to 4 days. Couple this with a solar system or simply with grid electricity and you have a whole house battery backup for up to 4 days. Obviously in this application the size of the battery pack would vary depending on the user's requirements.
The point to the upgrade is that a Musk powered battery factory is probably going well beyond just providing battery packs for cars. Musk created Solar City (SCTY), Space X, PayPal and has dozens of other ideas in various stages of development. A bet on TSLA stock today is not just a bet on Tesla cars but on Elon Musk and his vision for the future.
It did not hurt that Consumer Reports also voted the Tesla Model S as the number one car in America today with a score of 99 out of 100 points. Sometimes everything just works and Musk is on a roll. TSLA shares are up +600% over the last 12 months. Now they need a stock split to bring the price back down for the average retail investor.
While on the Elon Musk topic Solar City (SCTY) shares collapsed in afterhours on Monday after they released only revenue numbers and no earnings and delayed the actual earnings until March 3rd due to a change in accounting procedures. Shares dropped -$5 to $73 Monday night. Today with the TSLA upgrade and the potential for the battery factory to add to future SCTY products the stock soared to not only recover the $5 lows Monday night but spike as high as $83 intraday and close at $80.75 for a +3% gain.
On Monday they reported Q4 revenue of $47.3 million that beat estimates of $43.4 million. When they report earnings next week they are expected to earn 55 cents.
Also in the solar space First Solar (FSLR) reported earnings after the bell today and it was ugly. The company reported adjusted earnings of 89 cents compared to estimates for 98 cents. Revenue was $768 million compared to estimates of $973 million. The earnings were sharply below the year ago quarter at $1.74 and $1.08 billion.
Guidance was also bad. The company said it expected to earn between 50-60 cents on sales of $800-$900 million in Q1. Analsyts were expecting 84 cents on $893 million.
FSLR said results were reduced by sales of a collection of solar projects in Canada to an investment partnership led by GE Energy Financial Services. This reduced revenue from the asset sale. The company also took a charge for an idle plant in Vietnam. Shares of FSLR fell -11% in afterhours.
DreamWorks Animation (DWA) also reported earnings after the close and the stock fell sharply. DWA reported earnings of 20 cents but that included a charge of 12 cents related to the performance of the movie Turbo. Analysts were expecting earnings of 32 cents so that appears to be in line with estimates. However, revenue declined to $204.3 million and missed estimates of $223.2 million. In the year ago quarter they lost 98 cents per share after the "Rise of the Guardians" failed to generate sales. Shares of DWA declined more than 10% to $32.45 in afterhours.
Home Depot (HD) shares rallied +4% to $81.10 after the company reported earnings of 73 cents that beat estimates by 2 cents. On a comparable 13-week basis sales rose +19.7%. Q4 had 14 weeks compared to 13 in Q4-2012. Overall sales declined -3% to $17.696 billion and were slightly below estimates. However, same store sales, those opened more than a year, rose +4.9% in the USA. The company ended the quarter with nearly $2 billion in cash and announced a +21% hike in their dividend to 47 cents. HD expects 2014 sales to grow +4.8% and generate operating cash flow of $8.8 billion.
Zulily (ZU) had a very good day with shares gaining +36% after reporting that sales rose +100% to $257 million. Active customers grew to 3.2 million at the end of Q4. Earnings were 10 cents compared to estimates for 4 cents. Guidance for 2014 rose +62% to sales of $1.1 to $1.15 billion. Zulily is an online retailer that sells closeout and specialty items to registered customers through online specials and email blasts. You can't even view the specials on zulily.com unless you give them an email address.
The powerful gain in ZU was nothing compared to the gain in Intermune (ITMN). Shares of ITMN rallied +171%, that is not a typo, after the company reported its drug Esbriet successfully fought off a deadly lung disease in a clinical trial. After a year of treatment patients with idiopathic pulmonary fibrosis saw the mortality rate cut by 48%. Fewer than 17% experienced worsening conditions while on the drug. The results are expected to force FDA approval even after being turned down on their first application in 2010. The drug is already in use in the EU and Canada.
Bitcoin owners may need several successful stocks like Intermune to recover their recent losses. The electronic currency, sometimes referred to as "Ponzi Coin" lost big this week and closed at $510 today on serious challenges to its viability. The largest Bitcoin exchange, Mt Gox, went dark after shutting down operations over the last several weeks. The website disappeared for several hours but was eventually replaced by a single sentence message saying MtGox had "decided to close all transactions for the time being in order to protect the site and our users. We will be closely monitoring the situation and will react accordingly."
The short and somewhat confusing message came after customer accounts had been frozen for weeks while rumors swirled about problems in the Bitcoin community. Reportedly a trojan virus names Pony had infected hundreds of thousands of computers around the world and successfully stolen information on user's electronic wallets that held Bitcoins and other electronic currencies.
Reportedly MtGox had 744,000 bitcoins worth $369 million stolen by hackers. This news came after several other trading sites were shutdown after being hacked and Bitcoin accounts stolen. Since Bitcoins are basically only an electronic number the theft of that number is as good as stealing an actual coin. It can be used anywhere and there is no recourse to the original owner. Reportedly there are only 12.4 million bitcoins in circulation.
A "Crisis Draft" that was leaked appeared on the Internet that suggests the theft from MtGox occurred over a five year period because of vulnerable code that handled the exchange functions. It describes the assets and liabilities of MtGox and their plan to shutdown the existing website for a month or more and then rebrand it as simply Gox with an entirely new backend to handle the exchange function. Part of the strategy plan was to drive down the cost of Bitcoins as far as possible and use their available cash to buy coins on the market and replace customer coins. This is why Bitcoins were quoted at only $150 on the MtGox site last week when other exchanges were quoting $700+. Crisis Strategy Draft
Part of the draft includes a breakdown of their financials showing 624,408 customer Bitcoins missing along with 120,000 owned by MtGox. On the asset side they only have 2,000 bitcoins in something called the Hot Wallet.
I believe MtGox is done. Anyone with an account there is wiped out unless they can find a backer but who would want to step into a situation like that. I can't confirm it but there are rumors the Hong Kong office was vacated over the weekend and is empty.
MtGox Financials as shown in the document above.
While Bitcoin owners were losing a fortune a California couple found one. An unnamed couple out walking their dog found six cans of gold coins from the 1840-1850s and later. The woman saw the remains of a rusting can sticking out of the ground and discovered it was full of gold coins. As they looked harder they found a total of six cans and pots totaling 1,427 coins with a face value of $27,000 with the total value of the discovery well into the millions. Some of the coins are so rare and in such uncirculated condition they could be worth over $1 million each. The moral to the story is to pay attention to your surroundings next time you go for a walk. Investigators have named this the Saddle Ridge Hoard and say it could be the largest discovery of coins in history.
In the ongoing Ukraine problem researchers found 157 three ring binders of documents dumped into the river behind the presidential palace after the president fled the country. Inside the palace there were trash cans and sinks full of ashes where documents were hastily burned in order to hide possible corruption, fraud, money laundering and misuse of government funds. Teams of volunteers were attempting to salvage and recover documents and have vowed to post images of them online at YanukovychLeaks.org. Just from a cursory examination researchers claim they have evidence of widespread theft of government funds and bribes to officials. Researchers recovered several boxes of partially burned documents and theorized the president was in such a hurry to leave he could not burn everything and ended up throwing the rest of the documents in the river in an attempt to destroy them.
Late Tuesday the U.S. Dept of Transportation issued an Emergency Order requiring shippers of oil by rail from the Bakken region to test every load to insure it is labeled correctly before entering the rail system. The tests will determine the explosive potential of the oil and require the correct labeling of the tank cars. Trains have to follow different rules regarding routes, speed and braking depending on the volatility of the products they are carrying. This labeling should force trains to go slower and follow alternate routes that avoid population centers where available. It will also reduce the amount of oil traveling by rail at any given time because the trains have to fit into the schedules of other freight and passenger trains along their route. This could reduce the supply of oil coming to market in the short term. WTI prices declined slightly ahead of the news.
Natural gas prices finally crashed ahead of the expiration of the March contract on Wednesday. Options on the contract expired today. The monster short squeeze has run its course and the April contract has been trading significantly lower at $4.60 per Mcf even when the March contract was well over $6. With four more weeks of winter we are sure to see some more withdrawals from storage but unless winter last longer than expected the potential gas shortage will not appear. There is another cold wave bearing down on the Midwest and Northeast so winter is still with us.
Where did all the bears go? Despite the minimal declines in the markets today there are no real sellers. The harsh winter weather has created another kitchen sink quarter for earnings and the decline in estimates has been completely ignored. Likewise with the economic numbers the weather has been a convenient excuse and nobody seems to care.
What analysts have been preaching is the coming explosion in activity once the winter weather passes. They claim the pent up demand is going to be significant and consumers are going to swamp the malls once the weather turns warm. I have to agree with them on that point. Many consumers are secure in their homes and not venturing out into the freezing weather. I know I will be thrilled when spring appears. Lately I have been celebrating 40+ degree days with sunshine as though they were 75 degrees in May.
The indexes appear to be struggling at strong resistance but I believe that is a factor of the Yellen testimony weighing on the market. All the major indexes did put in a lower high today but not a lower low. There is nothing in the charts that tells us to run for cover. Until conditions change this is simply a pause at resistance. The longer we stay here and test that resistance the better chance it has of failing with a breakout to the upside.
We do have the seasonality issue to deal with. Typically once earnings are over there is a small decline in the market as traders take profits and position themselves for the next earnings cycle. This produces a decline in the last week of February and the first two weeks of March. I would welcome that decline as a buying opportunity.
The S&P failed to close over resistance at 1,848 on Monday despite spending most of the day well over that level. Today the index lost a minor -2 points to close at 1,844. It is hard to determine much about market direction with the S&P only moves 2 points. As I said above I think traders are waiting for the Yellen testimony to pass.
Support on the S&P is 1,840 followed by 1,835. Both levels are light with stronger support at 1,825. Resistance remains 1,848-1,851.
The Dow only declined -27 points and you can thank the $3 spike in Home Depot for it not being worse. The gain in Home Depot offset the -$3 decline in Goldman Sachs. Only 11 Dow stocks were positive but the majority of the declines were fractional.
The Dow has stalled at the 16,200 resistance level but the index is holding well above initial support at 16,100, followed by stronger support at 16,000. Unless something changes dramatically the trend remains pointed higher. However, the Dow is still in danger of a H&S top. We need a sharp move to the upside to erase this possibility.
The Nasdaq continues to pressure long term uptrend resistance currently at 4,300 but it has been unsuccessful in punching through that level and holding its gains. We have traded higher for the last two days but the closing swoon has kept that resistance intact.
The Nasdaq only lost -5 points with a 32 point range. That shows there is plenty of indecision at this level but dip buyers are alive and well. Support is 4,275 followed by 4,230 and resistance 4,300.
The Russell 2000 lost only .6 of a point. That is hardly a bearish performance. For the second day it traded up to 1,180 and within 1 point of new high territory. As long as the small caps are holding their gains the market sentiment remains bullish. If the Russell was to roll over it would be a signal of trouble ahead.
While the indexes are still showing bullish sentiment they are somewhat overextended. As we enter a seasonal period of light market weakness we could see a decline in the coming weeks. It is entirely possible the market will find an excuse for a decline in the Yellen testimony. However, it could just as easily find another reason to rally.
When the market wants to go down it will always find an excuse. It may not be the one we anticipate and more often than not it will be totally unexpected. Don't get married to your positions. Keep your stops tight and be prepared to move to other stocks if a buying opportunity appears.
Enter passively, exit aggressively!
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