Investor fears over an unexpected Fed announcement on Wednesday apparently evaporated with the market racing higher ahead of the Fed announcement.
The markets shook off any Fed fears after mixed economics led credence to the idea that the Fed will not say anything negative to disrupt the markets. Add in some positive earnings reports and suddenly a short squeeze was born.
Putting a wet blanket on any unexpected Fed moves was the Durable Goods report for September. New orders declined -1.3% after falling -18.3% in August. This was well below the consensus estimates for a +0.6% rise. The weakness was broad based with core capital goods orders declining -1.7% and orders excluding defense goods declined -1.5%. Core capital goods shipments fell -0.2%.
Orders for computers, machinery and electronics declined and suggested business activity was slowing. The bright spot in the report was a +7.4% gain in defense orders after a +4.9% rise the prior month.
The weakness in the Durable Goods orders, even though not nearly as bad as the -18.3% decline in August, should keep the Fed on "worry watch" for a weakening of the U.S. economic cycle.
Offsetting the weakness in the Durable Goods orders was a surge in the Richmond Fed Manufacturing Survey, which rose from 14 in September to 20 in October. New orders rose from 14 to 22 and backorders rose from 6 to 9. Inventories declined from 23 to 15 suggesting further manufacturing strength in the months ahead.
On the negative side the employment component declined slightly from 17 to 14 and hours worked fell from 10 to 9. Capital expenditure plans dropped sharply from 38 to 25.
The Richmond Services Survey rose from 21 to 27. Excluding retail the index rose from 18 to 28. The six month outlook rose from 22 to 27.
The combination of the manufacturing and services gains in the Richmond region far outpaced the weak readings in other regions. This is positive for the Fed's outlook that the economy is continuing to improve at a modest pace. The index is very close to a post recession high.
While the Richmond numbers were surging the Texas numbers were not. The Texas service sector outlook for October declined from 27.5 to 18.0. The revenue component fell from 26.9 to 14.0 and selling prices fell from 8.0 to 6.6. Capital expenditure plans declined from 14.5 to 11.1. The hours worked component fell sharply from 6.9 to 4.1 suggesting some rising unemployment issues in Texas. However, the employment component rose from 11.9 to 12.3. The hours worked is a shorter term number while the employment component is more forward looking. The recovery in Texas is still well above contraction territory but slowing.
Consumer confidence for October rose sharply from 89.0 to 94.5 and the highest level since 2007. When you consider the Ebola scare plus the market correction this spike was very unexpected. Both internal components posted gains but the six-month expectations component roared ahead with a jump from 86.4 to 95.0 and the highest level since February 2011. The present conditions component rose only slightly from 93.0 to 93.7. About the only reasons you can apply to this expectations spike is the expected election outcome and falling gasoline prices. Everything else was negative. Europe, Ebola, market crash, etc were all producing negative headlines during the survey period.
Even more confusing is that the sharp rise in expectations was not accompanied by positive buying trends. Those respondents planning on buying a car declined from 12.1% to 10.8%. Homebuyers were flat at 5.1% while appliance buyers declined from 51.5% to 49.1%. Only 16.5% felt jobs were plentiful with 29.1% saying jobs were hard to get. Both numbers were nearly unchanged from the prior month.
The Fed will be relieved to see confidence climbing rapidly because eventually this will translate into consumers spending money and boosting the economy.
The economic calendar for Wednesday is dominated by the FOMC announcement. There is almost zero doubt that they will not end QE. The only uncertainty is what they will do about the "considerable period" terminology. A survey of 39 economists and analysts believe the Fed will keep the language until the December meeting. That suggests the market could be volatile if they elect to drop it at this meeting. Everything else they might say is already priced into the market.
You may remember the "taper tantrum" when they first floated the idea of cutting QE purchases. We are not likely to see a QE event this time because the end of QE in October has been telegraphed for the last 8 Fed meetings and by Fed speakers including Yellen. Ending QE this week is not a surprise to anyone. What happens over the next month is the real unknown.
Those same survey participants don't believe the Fed will raise rates until July at the earliest. They expect a .9% interest rate by the end of 2015, 2.0% at the end of 2016 and 3.3% at the end of 2017. The Fed has been so transparent that the majority of investors are no longer surprised by any Fed actions.
The GDP numbers out on Thursday are expected to show +3.1% growth for Q3. This has been correlated by numerous analysts so the potential for a negative surprise is low. However, that means a surprise, if it does occur, could create some volatility.
Twitter (TWTR) was the big disappointment for the day with a -10% decline after reporting disappointing earnings on Monday after the close. Analysts were quick to downgrade the stock when subscriber growth slowed. Twitter said it had 284 million active users and that was below some estimates. That was up +23% from Q3-2013 but up only +5% from Q2-2014 compared to +6.2% growth from Q1 to Q2. Twitter guided for Q4 revenue between $440-$450 million and the midpoint was below the consensus estimate of $448.2 million.
The results were not all bad with mobile ad sales rising +114% to $361.2 million and beating estimates by $10 million. Despite the rising sales RBC Capital cut their price target from $65 to $47, Nomura cut the target from $55 to $45 and lowered them from buy to hold.
Cummins (CMI) posted earnings of $2.32 compared to estimates for $2.28. Revenue of $4.89 billion was well above estimates for $4.71 billion. They raised revenue guidance for the full year to grow 10-12% compared to prior guidance at 8-11%. That puts the midrange at $19.2 billion compared to analyst expectations for $19.02 billion. The strong earnings came from sales of vehicle components in North America, Europe and China. The company said customers are upgrading their fleets and buying more trucks. Compared to prior guidance from Caterpillar about slowing sales this was a breath of fresh air. Shares rallied +7% on the news and helped fuel the market rally by boosting economic sentiment.
Buffalo Wild Wings (BWLD) rallied +13% after reporting earnings of $1.14 compared to estimates of $1.06. Revenue rose +18.3% to $373.5 million and topped estimates of $371 million. Same store sales rose +6%. More than 190 stores now have tableside tablets allowing customers to play games while waiting for food and they are also installing an app that lets customers pay at the table rather than waiting for a waitress to collect the money and process credit cards.
After the bell Facebook (FB) reported advertising revenues that rose +64% to $2.96 billion. Overall revenue rose +59% to $3.2 billion. Mobile ad revenue rose to $1.95 billion or 66% of the total for the quarter. That is up from 62% in Q2 and 59% in Q1. The company had 1.35 billion average monthly users, up +14%. Daily users rose +19% to 864 million. Monthly mobile active users rose +29% to 1.12 billion. Earnings of 43 cents beat estimates for 40 cents.
Unfortunately the conference call did not go well and shares plunged from the nearly $81 close to trade at $72. On the call the company said 2015 revenue could grow 40-47% but expenses could rise 50-70%. When quizzed about why expenses were rising so sharply they said they were investing in their recent acquisitions and investing in more people to build out new features. Investors were not happy and shares collapsed.
Gilead Sciences (GILD) reported adjusted earnings of $2.05 compared to aggressive estimates of $1.92. Revenue rose more than double from $2.71 billion to $5.97 billion. However, sales of their Hep C drug Sovaldi hit $2.8 billion in Q3 compared to estimates of $2.97. Q2 sales were $3.48 billion. Sales slowed in Q3 because of the impending announcement of Harvoni, which is an all oral form of Sovaldi and includes the two corresponding injection drugs that were necessary with Sovaldi alone. The all oral Harvoni does not require the other drugs so many patients were holding off on treatment until Harvoni was available. Sovaldi costs $86,000 for the 12 week treatment and Harvoni is $94,500. Analysts were not concerned about the dip in Sovaldi because they expect a strong surge in sales in 2015 once Harvoni becomes wildly available. RBC Capital said they expect $15 billion in Hep C drug sales for Gilead in 2015. That is up from nearly zero two years ago.
The company raised the lower range of full year revenue estimates from $21 billion to $22 billion and left the upper range unchanged at $23 billion. Analysts were expecting $24.3 billion. Clearly analysts were too aggressive in their expectations for Sovaldi sales during the changeover to Harvoni. Shares of GILD fell -$4 in afterhours. I view this as possibly your last buying opportunity before this stock soars in 2015. They reported a $2.73 billion profit in Q3, up from $788 million in the year ago quarter. If they boost their sales by $15 billion on Hep C alone in 2015 that profit is going to more than double if not triple. Where else can you get growth like that?
Panera (PNRA) shares declined -$6 after the close after they reported earnings of $1.46 compared to estimates of $1.44 but they cut Q4 and full year guidance on rising ingredient costs. They lowered the full year range from $6.65-6.80 to $6.60-6.70. Same store sales rose +2.1% and better than the +1.7% estimates.
Electronic Arts (EA) reported earnings of 73 cents compared to estimates of 53 cents. Revenue of $1.22 billion beat estimates of $1.16 billion. They raised guidance for fiscal 2015 from $1.85 to $2.05 and revenue from $4.10 billion to $4.18 billion. EA said they were seeing continued growth of generation 4 consoles (PlayStation 4 and Xbox One) and solid results in products for the older consoles. Shares were volatile after the close but ended down only -$1 in afterhours.
Wynn Resorts (WYNN) reported earnings of $1.95 compared to estimates of $1.84 thanks to a +9% revenue surge in Las Vegas that offset a -5.6% decline in revenue from Macau. The corruption crackdown in China has put the squeeze on high rollers and many of them are going low profile to avoid showing up spending lavish amounts of money. Overall revenue declined -1.4% to $1.37 billion. They also announced a 20% hike in their quarterly dividend to $1.50 and added a special dividend of $1 for a total of $2.50 for the quarter. Shares spiked to $194 on the news but returned to $185 and their closing price in afterhours.
With 49% of the S&P reported more than 73% of companies have beaten on earnings, 8% reported in line with estimates and 19% missed estimates. This has been a good quarter despite only 49% beating on revenue. Earnings growth is just slightly over 5%.
Highlights for Wednesday will be ADP, Visa and WellPoint. Thursday is the big day with GoPro, Expedia, Starbucks, MasterCard, Linkedin and First Solar.
IBM has been known as a serial purchaser of its stock as it tried to manage earnings by reducing the number of shares outstanding. They announced another $5 billion buyback today on top of $1.4 billion still unspent from the prior authorization. As buybacks go for IBM that is chicken feed. They announced $20 billion in 2013, $12 billion in 2012, $15 billion in 2011 and $18 billon in 2010. They have bought back more than half their shares over the last 20 years. They have repurchased more than $125 billion in shares just since 2005. With shares at three year lows I am surprised today's announcement was only $5 billion. In the seven years ending in 2013 IBM earned about $100 billion and paid $20 billion in dividends and bought back $100 billion in stock in a frantic race to continually lower the outstanding shares and boost earnings per share. If they had taken that money and developed their business the stock price would probably not be at three-year lows today.
Tesla (TSLA) was in the news again after Elon Musk took exception to some sales numbers reported in the Wall Street Journal and he went to Twitter to express his comments. The WSJ article said "Tesla probably delivered through September 10,335 Model S cars in the U.S. market, down -26% from the same period in 2013. Meanwhile production increased by 10%. With Tesla's goal of 35,000 cars in 2014, Tesla would have to sell 17,500 cars in the USA. At the current pace the automaker will miss that target by a wide margin." a href="http://online.wsj.com/articles/tesla-unveils-lower-cost-lease-plan-1414427518" target="new">WSJ article
Musk tweeted that September sales hit a "record high" worldwide and North American sales were up +65% from last September. That appeared to be a rebuttal to the WSJ article BUT they may both be right.
Analysts said the U.S. sales may not be surging because of the lower number of cars available for sale. Tesla is sending more cars overseas because of high demand and the desire to get a lot of cars on the roads as an advertising tool for future sales.
Shares rose +9.5% on the Musk tweet.
It was a very good day in the markets with all the indexes posting strong gains. The Nasdaq 100 and the Dow Transports both closed at new highs. The winner by far was the Russell 2000 with nearly a +3% gain of 32 points. This was short covering on a major scale. Once it broke over the 1,120 resistance level the rocket boosters fired up and it was a race to the close. I hesitate to pound the table too much on this Russell rally because of the short covering component but this was a very big move. It would not surprise me to see a decent retracement on Wednesday once reality returns.
The close at 1,149 was above both the 100 and 200 day averages so technicians are probably cussing their charts tonight. In theory that is bullish but in reality we will probably dip back below those levels tomorrow.
The Dow Transports exploded past the prior highs to close at 8,759 and a new historic high. The low oil prices plus full planes and overbooked trains are a tough combination to beat. The ramp up from the October lows has been nearly vertical. The transports should be due for a rest but they are currently showing no weakness. I mentioned last week that I expected a new high and I think there is still room to run once it consolidates.
The S&P punched through the strong resistance at 1,962-1,967 and raced to the next major resistance level at 1,985 where it ended the day. This is going to be another resistance battle and given the earnings results after the close. The futures are down -5 points and we should see some profit taking at the open tomorrow.
Fortunately intraday support is not far below at 1,970. However, if by chance we were to give back all the gains for today that would be severely negative for sentiment. The 1,955-1,957 level would be the key. If that level holds on the initial decline we should be ok. While I don't expect to see that level again you never know what to expect around a Fed meeting.
A punch through 1,985 faces even stronger resistance between 2,000/2,012.
The Dow powered to a +187 point gains to close just over 17,000 but the real resistance is now 17,150. The resistance waypoints have been falling like dominoes but the next one is going to be the toughest.
Not to beat a dead horse but a lot of these index gains today were short covering. We need to consolidate these gains before I expect the indexes to move higher.
The Nasdaq 100 ($NDX) closed at 4,107 and a new 14 year closing high. You can thank all the regular names for the gain but Apple added more than 8 points of that +60 point spike.
The Nasdaq Composite punched through strong resistance at 4,485 and then closed above the next resistance level at 4,545 with a +78 point gains. This was a huge move but unfortunately much of it was short covering. If the Nasdaq can push over 4,600 we should be off to the races for a yearend rally. Intraday support is now 4,530.
I am thrilled by the market rebound from the October lows. However, we have come too far, too fast and today's short squeeze was probably a climax spike. We need to see traders take profits and consolidate at these levels before we have a chance of punching through to new highs.
The Fed meeting should not produce positive volatility because the expectations are already priced into the market. That means we could be at risk for a sell the news event.
I would be a dip buyer on any material dip because I believe we are going higher by the end of December. However, there is significant resistance at the market highs on the Dow, S&P and Nasdaq. We know there will be a large number of people that will exit when those levels are reached and happy to get their money back after enduring the October decline. We need to get past this profit taking before we make new highs.
Volume today was moderate at 6.7 billion shares and barely more than the prior two days. Rallies on low volume should not be trusted.
Enter passively, exit aggressively!
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