Early Friday morning Japan announced another massive QE program and the markets surged to new highs.

Market Statistics

Thank you Japan for having such a bad economy that Haruhiko Kuroda, the head of the Bank of Japan, was forced to take extraordinary measures to keep Japan from falling back into deflation. The recent consumption tax hike to 8% and another hike to 10% planned for October 2015, caused the Japanese economy to decline -1.7% in Q2 with inflation falling back towards +1% again. The bank cut its 2015 expected growth rate from +1.0% to only +0.5%. The bank is going to buy an additional ¥30 trillion in Japanese Government Bonds (JGBs) a year and will also purchase shares in ETFs and REITS. The bank said it would continue the purchases until the inflation rate reached 2%, currently 1.2% and falling. The new BOJ spending on QE will rise to ¥80 trillion annually ($712 billion), up from ¥50 trillion a year.

In addition the $1.26 trillion Government Pension Investment Fund (GPIF), the world's largest, will slash its holdings of government bonds from 60% to 35% and shift that money into equities. GPIF will allocate 25% of its assets to Japanese equities, 25% to foreign equities and 35% to domestic bonds. The remaining 15% will be for international bonds. GPIF Announcement PDF

Basically the BOJ and GPIF are going to be adding about $414 billion in bond and equity purchases with much of that in foreign equities. Since the U.S. market is the largest and most liquid that means we are going to be the beneficiary of the Japanese QE. Analysts believe this could be something in the range of $200 billion flowing into the U.S. equity markets.

The Japanese Nikkei was up +1,000 points intraday and closed with a gain of +755 at a 7-year high. The S&P futures exploded higher overnight when this QE surprise was announced. The futures exploded higher from 1,990 to 2,016 in the first few minutes after the announcement to setup a major short squeeze at the opening of the U.S. markets.



The Japanese Yen collapsed with a massive -2.76% drop in one day to close at a 7-year low. The dollar spiked nearly +1% in reaction to the Yen's decline.


Some analysts believe the new QE program is so big it could be a "Bear Stearns moment" for Japan. They believe this massive QE for a country the size of Japan, with a GDP less than one-third the size of the U.S. this is going to be a disaster. Japan is a bug in search of a windshield as John Mauldin is fond of saying. Their outstanding debt is more than one quadrillion yen or $10.5 trillion and more than twice their GDP as of December 31st. The BOJ typically buys around 70% of the government debt and the rest is bought by Japanese banks and pension funds. This is eventually going to result in a monumental financial crisis and every holder in Japan is going to be wiped out.

There is no mathematical way for Japan to pay off its debt and it is rising by trillions of yen every year as more debt is sold to pay the interest on the old debt. Eventually getting cash advances on your credit card to pay the credit card bill will leave you with enormous debt and no credit. When that happens to Japan the result is going to be earth shaking. The really bad part is that everyone knows it and they are just buying time by kicking the can down the road in hopes of a sudden economic explosion that extends their eventual fate by a few years.

Today that QE announcement is positive for U.S. markets. Eventually it will be very bearish because the more outlandish the Japanese QE becomes the more likely everyone will begin to see that the emperor has no clothes and the house of cards will collapse.

The Japanese news and the Virgin Atlantic SpaceShipTwo crash were filling the headlines and the economic news was largely ignored. The SpaceShipTwo exploded over the Mojave Desert after being launched from the mother ship WhiteKnightTwo. One pilot was killed and the other severely injured. This was the 55th flight for the SpaceShipTwo and the 173rd flight for the WhiteKnightTwo, which landed safely. The smaller SpaceShipTwo is carried up to 50,000 feet where it is dropped from the mother ship just before firing its rockets to take it up to 350,000 feet. Observers said the ship exploded just after the rocket motors were ignited.

SpaceShipTwo is the smaller vehicle suspended under the wing of WhiteNightTwo. The rocket is fired when the vehicle is dropped from the parent aircraft.


SpaceShipTwo was the vehicle that was planning to take paying passengers into space starting sometime in late 2015. More than 700 people have put down the required $250,000 deposit to reserve a launch position in the future. Richard Branson said the accident meant they would probably lose one or two flyers but others would take their place. He said the deposit was refundable and had not been used for design and construction. I suspect quite a few potential riders are having second thoughts today.

In economic news the Employment Cost Index (ECI) rose +0.7% in Q3 with wages rising +0.8%. Employee benefits rose only +0.6%. Headline growth over the trailing 12 months rose to 2.2% and the fastest pace since Q4-2008. This report was ignored by the market.

The separate Personal Income report for September showed wages rose only +0.2% and the slowest rate since last December. Wage income also rose +0.2% and the slowest since April.

More importantly the PCE and the Core PCE rose only +0.1% each. The trailing 12 months inflation represented by the PCE is now +1.4% and the lowest since March. The trailing Core PCE has been flat at 1.5% for the last five months after dipping to 1.2% in February. The PCE is the Fed's preferred inflation indicator and it is not rising. Their target is 2% and with energy prices in the tank it is only going lower in the short term.

Moody's PI Chart

The final revision of Consumer Sentiment for October rose slightly from 86.4 to 86.9 and the highest level since July 2007. The present conditions component declined from 98.9 to 98.3 but the expectations component rose sharply from 75.4 to 79.6. The impending elections, falling gasoline prices and improving job market were credited with the gains in expectations. Job growth has averaged 245,000 per month over the last six months and the best gains since August 2005.


Next week the calendar is headlined by payrolls. The ADP report on Wednesday is expected to show a gain of +7,000 jobs over September while the Nonfarm Payroll report on Friday is expected to show a decline of -15,000 jobs from the September pace.

The ADP report is from actual employer data that ADP collects when it processes the payrolls for tens of thousands of businesses. The Nonfarm data is a calculated guess by the BLS and can be revised continually over the next year. Far too much credibility is given to the Nonfarm report but that is what the market fixates on and so that is what matters. There are multiple investigations currently underway on bogus numbers in the BLS reports but you don't hear that on the evening news.

The ISM Manufacturing on Monday is expected to be flat. The mixed results from the various Fed surveys suggest that manufacturing strength is spotty across the entire U.S. so no gains are expected.


Stock Split Calendar

Stock news was kind of sparse despite the strong market gains. The big announcements from Thursday after the close were the only major market movers. The two big energy stocks in the Dow helped to push it higher despite falling production and lower oil prices.

Exxon (XOM) shares rallied +$2.26 after reporting earnings of $1.89 ($8.07 billion) compared to estimates of $1.71. The gains came from +38% higher profits in their refining division as a result of lower oil prices rather than a surge in production. Revenue declined from $112.37 billion to $107.49 billion. Oil and gas production fell -4.7% but the oil giant said it was still on track to produce 4.0 million barrels of oil equivalent per day for the full year. The drop in oil prices knocked -4.4% off the profits in the exploration and production division.

The key statistic here is that Exxon spent $42.5 billion in 2013 on capex and they have cut that to $37 billion for each of the next 3 years and they still lost -4.7% of their production. New oil is harder to find and produce and new wells deplete faster than legacy wells. All the E&P companies are on a treadmill to keep drilling new wells faster to keep ahead of rising depletion. That treadmill just keeps increasing in speed every year.


Chevron (CVX) reported a 13% rise in profits to $2.95 ($5.59 billion) compared to estimates for $2.55 on revenue of $54.68 billion. Production fell -1% to 2.57 Mboed as new wells failed to offset declines at old wells. Their refining division posted profits of $1.39 billion and nearly four times the profit from the year ago quarter thanks to lower oil prices.

Chevron has some major production boosts coming in the next three years as several mega projects are completed. Capex for the first nine months was $29.0 billion and right in line with the same period in 2013. Upstream E&P projects accounted for 93% of capex spending.


GoPro rallied +13% after reporting a strong earnings beat on a 45% increase in sales. A new lower priced product for 2015 is expected to be a hit and provide an entry level buyer a platform to step up to a premium product once they get the hang of action photography.


Linkedin (LNKD) rallied +13% on earnings of 52 cents compared to estimates of 47 cents. Revenue rose +45% to $568.3 million and also a beat. The company is rapidly building out its content business now that publishing is available to all members. Membership rose +6.1% to 332 million users. More than 75% of new members came from outside the USA. Advertising revenue rose +45% to $109.2 million and premium subscriptions rose +43% to $114.5 million. Mobile accounted for 47% of its traffic.


A lesser known name, MercadoLibre Inc (MELI), rallied +21% after reporting earnings of 76 cents compared to estimates of 65 cents. Revenue was a blowout at $147.9 million compared to estimates for $131 million. Sales were up 20% year over year. Bank of America upgraded MELI from underperform to buy and the stock rocketed higher. Rarely do you see a rating jump from sell to buy in one upgrade. MELI hosts an ecommerce platform in Latin America. Think of it as a Latin America version of Ebay, Amazon and Craig's List combined.


Earnings for next week contain a lot of symbols most people won't recognize. However, there are some high profile companies. Herbalife on Monday, Tesla, Priceline, Alibaba and Michael Kors follow on Tuesday. Qualcomm, Nuskin, SolarCity and Whole Foods on Wednesday. Disney, First Solar, Monster and Nvidia on Thursday. Berkshire and Humana on Friday. Berkshire was listed in many of the earnings calendars as reporting on the 31st but they have now updated it for next Friday.

Probably the two most anticipated events are Alibaba and Tesla on Tuesday. The BABA earnings are either going to be a huge win or a huge disappointment. Option prices are out of sight so betting on the outcome would be expensive.


Guidance from companies actually issuing guidance in October was positive. Not all companies give guidance so this is a fraction of the total. Of the 720 companies that issued guidance in October 141 raised guidance. A total of 388 guided in line with estimates and 191 issued negative guidance. Despite the number of companies giving negative guidance that was still much better than the normal 2:1 negative to positive average. I can't put the graphic with the symbols in the newsletter because it grew to twice its prior size over the last week. If you want to see the list of 720 companies and their guidance just email me and I will send it to you.

Crude prices have been volatile but they are holding over the $80 support level. Production by OPEC rose +53,000 bpd to 30.974 mbpd in October. This was a 14-month high and was led by Iraq, Saudi Arabia and Libya. The prior month production was 30.921 mbpd. Iraq production rose +150,000 bpd to 3.3 mbpd. Saudi production rose +100,000 bpd to 9.75 mbpd. The increase was to feed their two new refineries, Yasref and Satorp. Libyan production rose +70,000 bpd to 850,000 bpd and the sixth monthly increase and the highest since June 2013. It is only about half what it was while Qaddafi was in power. Angolan production declined -170,000 bpd to 1.7 mbpd but they are preparing to produce 2.0 mbpd in 2015. OPEC is scheduled to meet on Nov 27th to discuss production quotas. They last cut quotas in 2008 during the financial crisis. U.S. production rose to a 31 year highs at 8.97 mbpd and the most since the EIA began keeping records in 1983.

U.S. drivers consumed 372,414,000 gallons of gasoline per day last week or 2.61 billion gallons for the week.

Gasoline prices nationwide are now under $3.00 with some cities as low as $2.64 as in Rockhill SD. AAA says the drop in the price of oil is saving Americans $187 million a day or $500 a year for the typical consumer. For every penny drop in gasoline prices U.S. consumers will save $1 billion a year according to AAA. With gasoline prices so low even store managers are topping off their tanks. Being unsure of when it will go back up they are taking advantage of the low prices to fill their underground tanks instead of just enough to make it to the next delivery. The low prices mean more money available for holiday shopping.

Wholesale gasoline prices declined to $2.15 at the close on Friday. If oil dips below $80 I would expect wholesale gasoline to go below $2. That would be the lowest level since 2010. That would put the price of retail gasoline around $2.80 nationwide.



Gold and silver prices fell to four year lows as the dollar exploded higher as a result of the FOMC ending QE and Japan increasing QE. Gold dropped -$60 in three days to close at $1,173 on Friday. This is just below critical support at $1,175. Some analysts are now predicting a 50% retracement from the $1,925 high, which would put gold at $962.50 if they are right. Central governments around the world are ramping up their purchases of gold at this already low number. Russia bought 37.2 metric tons in September to raise their total reserves to 1,149.8 tons. That was a $1.5 billion buy. Russian reserves have tripled since 2005.

India imported $3.75 billion in gold in September, up +450% from September 2013. China imported 1,500 tons in 2013 and reports claim they have already bought 2,200 tons in 2014. China does not disclose their purchases but they just opened a new gold vault in Shanghai that will hold 2,000 tons. It is rumored that China wants to hoard all the gold possible so they can control the pricing of this commodity. If they were to back the RMB with gold it would wipe out the dollar and most other currencies making China the dominant reserve currency. Chinese citizens currently own more than 6,000 tons.

The drop in silver prices has created a surge in silver coin sales. The U.S. Mint said sales of the Silver Eagle coin jumped +40% in October to the highest level in 21 months. Sales surged to 5.79 million ounces and the most since January 2013. That was the month that set an all time high at 7.5 million ounces. In September sales totaled 4.14 million ounces. Coin dealers said sales of silver coins of all types had more than tripled over the last month. Sales of Gold Eagle coins rose +16% to 67,500 ounces and the most since January.

Gold and silver miners have already begun shutting in high cost production and demand will exceed supply in 2015. This price decline is related to the spike in the dollar and weak European economy rather than a lack of demand for the metals.




Markets

Advancing issues on the NYSE totaled 2,363 compared to 717 decliners. That represents a 3.3:1 ratio. The Nasdaq had 1,921 advancers to 816 decliners for a 2.3:1 ratio. Considering the markets hit new highs neither of those numbers were particularly strong. Volume was 8.2 billion shares and the biggest day of the week.

Friday was the fiscal year end for many equity funds plus it was month end for everyone else. Given the recent dip there were probably funds holding more cash than they wanted to show on their year end statements and they were forced to throw it at the market so they could claim they were fully invested at the new market highs. This was a "hold your nose and buy" event brought on by the Japanese triggered short squeeze and the fiscal year end.

There was a $1.5 billion imbalance in buy orders at the close on the NYSE. This is a sure sign it was funds trying to get in before the fiscal year end closed. This was NOT retail investors.

Since the October 15th lows the Dow rebounded +9.6%, Nasdaq +12.4%, Russell 2000 +12.7% and the Dow Transports +13.7%. The Dow, S&P, Russell 1000, and Russell 3000 all closed at new highs. The Nasdaq closed at a 14 year high and the Dow Transports missed a new high close by -4 points.

While there was a significant outside influence by the Japanese news, Friday's rally was only one day out of the last 15 days that pushed us up to this level. We should not apply too much importance to the Friday news but we should not belittle it either.

November begins the best six months of the year for the market and quite a few investors plan on buying October dips for the end of year rally and the normal gains in Q1. For many the October dip was over too fast. Many investors were hoping for a little deeper decline and once the rebound began it was so fast that many investors were still waiting for an opportunity to get in. The S&P declined -9% from September 19th to the October 15th lows but the majority of that decline came in only 6 days starting on October 9th. The sharp drop ended with a capitulation event on the 15th and it has been straight up ever since for a +11% gain. The S&P had only gained +11% from February 11th to September 19th over a span of seven months. It lost those gains and then recovered them in a little more than three weeks. Bull market corrections are short, sharp and scary and investors were just recovering from the scary part when the rebound was already underway.

Rebounds from corrective drops typically stutter step with a couple days of gains and then a retest of the lows. This second dip is the one that is bought the strongest and we never got a second dip. That left many investors on the sidelines holding their cash and waiting. As the S&P moved over the 1965-1970 resistance levels it became a race to get invested before the market broke out to new highs.

Now, here is the hard part. Did the Japanese news trigger a buying climax that will fail or a breakout that suddenly has new life? Obviously nobody knows for sure and it will be a week or so before the answer appears.

The market is extremely overbought because there have not been any consolidation dips on the way up. This suggests there should be at least a temporary dip in our immediate future. However, the historical trends favor the bulls. After a midterm election the markets post average gains of 8% over the next three months and +14% over the next six months. November is the start of the best six months of the year, which covers every year, not just midterm years.

The Fed claims they ended QE but it is not really dead. They have $4.2 trillion in treasuries, bonds and mortgage backed securities in their portfolio that they have acquired over the last five years. A large portion of those mature every week and the Fed reinvests those proceeds every week. If $10 billion in securities mature they use those proceeds to purchase $10 billion in the same type of security. Last week their holdings rose +$4.87 billion as the last of initial QE purchases were made. They will now keep that portfolio steady until at least the end of 2015 or longer according to analysts. QE purchases will no longer rise but they will continue on a daily basis for at least another year. This will keep the stimulus flowing through the market despite new QE purchases being officially over.

The rebound has been so strong that more than 25% of the S&P stocks are at 52-week highs. That is a huge number given the strength of the October decline. A whopping 74.8% of the S&P are already back over their 50-day averages after falling to only 13.4% in mid October. This is an extreme example of volatility.


The cumulative advance/decline line on the S&P is breaking out to new highs after hitting two month lows in October. This is a very bullish sign.


Regardless of the reason the major averages all closed at new highs and new highs tend to produce more new highs. There is something about that new high candle that seems to pull money off the sidelines faster than flies to a picnic.

With the economy running at a 3.5% GDP growth rate, the Fed sitting on its dovish roost on the sidelines, earnings coming in better than expected, the midterms likely to configure the Senate to prevent additional regulation and taxes, the Ebola fears fading, ISIS headlines regulated to the old news category, employment rising, gasoline prices falling and the holidays ahead the markets have no reason to decline. Of course they don't actually need a reason but you get the idea.

I would like to believe the markets will continue higher but next week is going to be a battle ground between those that believe this was a climax top and those that believe we are going higher. I have read the arguments for both sides and I am not closing any bullish plays. I am tightening the stop losses but I believe the trend is our friend until it changes.

Lastly, I would be a buyer on any pullback for the reasons I stated above. We are due for some profit taking and it could happen at any moment. The Nasdaq and Russell have some very bearish candles.

Those funds that window dressed their portfolios going into fiscal year end can just as easily undress next week to put cash back into account to capitalize on future buying opportunities. Equity funds hate to buy tops. They would rather wait until the next dip to put that money to work. I doubt anyone would deny that Friday was a top but the only question is it "THE" top.

I expect profit taking and dip buying in the week ahead.

The sprint was so fast that real support is well back at 1,985 but the round number at 2,000 would probably be a speed bump to the downside. Following that would be the 50-day at 1,968.


The Dow was dragged higher on Thursday when Visa (V) gained +$21 on earnings and added about +147 points to the Dow. That caused a massive short squeeze in the Dow ETFs while the rest of the indexes struggled along with modest gains. When the Japanese news broke on Friday another short squeeze was born. Add in further gains by Visa and decent gains by Exxon and Chevron and we were off to the races again.

The Dow closed at 17,390 and a new record high. Also closing at a record high was the Dow utilities and the Dow Transports missed it by only -4 points after setting a new high on Tuesday. This triplicate of new highs on the Dow indexes is another Dow Theory buy signal. In theory this means we should move higher. New highs on all three indexes at the same time are fairly rare and should be noticed.


Dow resistance is now 17,500 followed by 17,750. Support should be the convergence of the 50/100 day averages at 16,913.



The Nasdaq exploded through prior resistance highs to gap open to 4,639 and the high of the day. The index held its gains to close at 4,630 and gain 64 points BUT the candle for Friday is very bearish. This is a bearish "hanging man" candle. Ideally the tail should be twice the length of the body but this one is close enough. Basically it means the market gapped open and eventually held its gains but there was some intraday volatility. This is a typical candle for a market gain that was driven by a short squeeze. Everybody was forced to buy at the open and there was no follow on buying during the day to push it higher. Coming after several days of strong gains makes it even more bearish.

In theory this suggests the Nasdaq will retrace some of its gains this week. I went all the way back to 2000 on the Nasdaq and these were the closest comparisons to Friday's candle. The first one is from September 1st, 2000 and the second from January 6th, 2009. Neither was as bearish as the one from Friday on the far right.

Consider that these are the only two similar patterns dating back 14 years and this current one is the most extreme. The odds are very good the Nasdaq is going lower before it goes higher.


Initial support is well below at 4,525 with resistance at 4,700. That is a huge range but we moved from 4,400 to 4,600 in just the last week so anything is possible.



The Russell 2000 gained +4.9% for the week to come to rest at 1,173 and just under strong resistance at 1,175. The Russell candle is identical to the Nasdaq and suggests we will see some profit taking next week.


Fundamentally the market could be poised for a strong rally into December. Technically we are very overbought and the candles on the Nasdaq and Russell are begging to be shorted. I expect some profit taking now that we are in a new fiscal year for mutual funds and they may want to remove their yearend window dressing and raise some cash.

Just when the Fed was taking away the punchbowl the Bank of Japan provided another one to keep the party going. However, we all know what happens when there is a never ending supply of free booze. The party eventually gets sloppy and everyone ends up with a really bad hangover.

Random Thoughts

It is daylight savings time again. Fall back an hour on Saturday night.

President Obama has scheduled a photo op with Janet Yellen for Monday and the day before the midterm elections. Reportedly they are going to talk about the long term outlook for the U.S. economy but cynics believe this is just a last ditch effort for an unpopular president to be seen doing something important before the election in hopes of boosting the democratic candidates currently running away from him.

Very good link of important charts from some of the brightest minds in the business. Most Important Charts in the World

Goldman Sachs analyst David Kostin said the S&P will hit 2,050 by the end of the year and 2,150 over the next 12 months. The 2,050 target is a repeat of his revision up from 1,900 a couple months ago. He is expecting $116 in earnings for 2014 and $125 for 2016. The consensus earnings predictions for 2015 have already been cut by -2% but they are still healthy. He does not believe the U.S. economy will be dragged lower by the weakness in Europe, China and Brazil.

Historically November is the third best month of the year for the Dow and S&P since 1950. Since 1971 it is the third best for the Nasdaq and since 1979 the third best for the Russell 2000. The Dow and S&P have gained in 12 of the last 16 midterm Novembers with an average gain of +2.5% for the Dow and a +2.7% gain for the S&P. The Russell 2000 gained in 6 of the last 8 midterm Novembers with an average gain of +3.9%.

Japan has had to scramble fighter aircraft 533 times in the first six months of 2014 to repel Russian aircraft intruding on Japanese airspace. This compares to 308 in the first half of 2013 and this year ranks as the most intrusions since 2003. Japan claims it does not know why Russia continues to provoke Japan and Russia will not admit to the incursions. A Japanese official said the incursions were meant to send a message not only to Japan but to the U.S. as Japan's closest ally. What an exciting world we live in when Russia can cause problems the world over and just deny they exist.

Russia is also flying nuclear bomber drills around Europe and the North Sea and not using their onboard transponders. Since Oct 28th NATO air defenses have detected and monitored four groups of TU-95 Bear bombers and fighters practicing nuclear launch routes around Europe. Russia Sending Nuclear Messages

Russia and the Ukraine signed a deal last week to supply gas to the Ukraine through March of 2015. Russia will get $4.6 billion for the gas in installment payments. This deal is critical because it keeps the Ukraine from running out of gas for heating and prevents them from siphoning off gas that is destined for the rest of Europe. In 2013 Poland received 10 Bcm (billion cubic meters) from Russia, Germany 40 Bcm, Italy 25 Bcm, Turkey 27 Bcm and the United Kingdom 12 Bcm. In the past when Russia cut off gas supplies to the Ukraine the pipelines across the Ukraine to Europe remained open. Ukraine would siphon off needed gas leaving the rest of Europe with shortages.

Russia needs to sell all the gas it can because it is losing a ton of money on cheap oil. Russia needs Brent crude to be over $100 in order to pay the country's bills. Iran needs $135, Saudi Arabia $95, Nigeria $118 and Venezuela $120.

Hedge-fund assets under management, as of the end of the third quarter, total more than $2.82 trillion dollars.

The number of billionaires in the world has doubled to 1,646 since the financial crisis ended in 2009.

The Bank of Japan's quantitative easing program, relative to size of the economy, is three times bigger than the Federal Reserve's QE.

The most common name in the world is Mohammed.

Americans spend more than $2.08 billion on Halloween candy each year and $2.5 billion on costumes. More than $300 million is spent on costumes for pets. Add in just under $2 billion for decorations and roughly $7 billion will be spent on this holiday. 49% of retailers have Halloween programs. 158 million people will participate in Halloween activities. More than 86% said they would spend less on Halloween this year with 32.7% buying less candy and 18.1% making a costume rather than buying one. More than 25% said the weak economy was impacting their Halloween plans. The average consumer will spend $75.03 on decor, costumes, candy and supplies. More than 78% are planning on buying discounted candy after Halloween and 57% are planning on buying discounted decor for use next year.

Did you notice that retailers switched from Halloween candy and costumes to Christmas themes almost overnight. Walmart and others had Christmas ads up and running Saturday morning.

Only 23 shopping days until Thanksgiving and 53 shopping days until Christmas.

Enter passively and exit aggressively!

Jim Brown

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