The three major averages all broke out to new highs on better than expected economic news.
The rally started overseas when investor confidence in Germany rose for the first time in 11 months. The German ZEW report spiked to +11.5 in November after a -3.6 in October. That was very unexpected and suggests the gloom and doom over Germany's economic demise is overblown.
We also learned that Japan's Prime Minister Shinzo Abe cancelled a scheduled tax hike for next year as a result of the Japanese economy falling into a steep recession. The cancellation of the tax hike also boosted global equities. The fist tax hike last April is believed to have caused the recession.
Just before the U.S. markets opened the Producer Price Index for October rose unexpectedly by +0.2% after a -0.1% decline in the prior month. Strong demand in services offset a decline in prices for goods. For the trailing 12 months price inflation at the producer level is still lagging at +1.5%. The core rate, not counting food and energy, declined -0.1%.
The hidden number in this report was the -0.4% decline in goods prices. That was the 4th consecutive monthly decline and it is accelerating. Energy good led the decline with a -3.0% drop due to a -5.8% drop in gasoline prices. Offsetting these declines in goods was a +0.5% rise in services demand.
More good news came from the NAHB Housing Market Index. The headline number rose from 54 to 58 for November. This suggests that the drop from 59 to 54 in October was just a blip and may have been influenced by external headlines. Sentiment advanced in all regions with sentiment in the Northeast spiking 12 points to 51 and the first time over neutral territory at 50 since March 2006.
The single family sales component rose from 57 to 62 and the six month outlook rose from 64 to 66. Builders reported stronger buyer traffic and a higher number of signed contracts. That has failed to result in closed sales because of the difficulty of getting loan approvals.
Internet E-Commerce sales rose from $75.0 billion to $78.1 billion in Q3 or a gain of +4% from Q2. That was a gain of +16.2% over the $67.2 billion in Q3-2013. E-Commerce sales have risen in 23 consecutive quarters even when brick and mortar sales have declined. Amazon had sales of $20.58 billion in Q3 or roughly 26% of the E-Commerce total.
International capital flows exploded higher in September to $164.3 billion. That was up from $52.1 billion in August. While China and Japan were net sellers of securities in September but other countries and foreign investors were big buyers. Money is flooding out of Russia and Europe because for their economies and geopolitical concerns. The U.S. may not have a roaring economy but it is still the best house in a bad neighborhood.
Net purchases of corporate bonds rose to $20.7 billion after seeing outflows average outflows of $7 billion for each of the prior 5 months. That was a serious reversal.
The economic calendar for Wednesday has the FOMC minutes and the highlight of the week. Analysts will be parsing every word looking for the end of the "continued period" statement. Personally, now that Japan has fallen into a deep recession I seriously doubt the Fed is going to be a factor until late 2015 unless there is a strong rebound from Japan and Europe. They can't take a chance they will push the U.S. back into a recession with a premature rate hike.
Today was retail earnings day with multiple companies reporting. Dow component Home Depot (HD) reported earnings of $1.15 compares to estimates for $1.13. Revenue of $20.5 billion barely beat estimates of $20.467 billion. Same store sales rose +5.8% compared to estimates for 5.0%. Home Depot shares declined after the company reaffirmed full year guidance of $4.54 that was in line with estimates. Investors always want more. A perfectly good earnings report and the stock was trashed because they did not raise guidance. On the bright side the dip from Monday's close at $98 to the low of the day at $86 was an error and the stock closed down only -$2 at $96.
The NYSE looked into the -10% crash right at the close and decided it was a fat finger trade and all trades below $93.33 were cancelled.
Urban Outfitters (URBN) reported earnings of 35 cents that missed estimates of 42 cents. That was also well below the 47 cents earned in the year ago quarter. Revenue rose +5% to $814.5 million and also missed estimates of $818 million. Higher expenses, poor execution and sluggish performance at the Urban Outfitter branded stores caused the earnings miss. The Free People stores saw sales rise +25% and Anthropologie sales rose +4.2%. Same store sales declined -7% at Urban Outfitters.
Dick's Sporting Goods (DKS) reported earnings of 41 cents that beat estimates by a penny. Revenue of $1.53 billion matched forecasts. The company said sales were hurt by continued weakness in golf and hunting equipment sales. This has been a complaint before. Overall sales rose +1.1% but they were down -8.9% at the Golf Galaxy stores. They projected earnings for Q4 between $1.18-$1.28 with consensus at $1.21 so that was a slight improvement. Same store sales are expected to rise 1-2% in Q4. Shares traded fractionally lower on the news.
TJX Companies (TJX) shares fell about $2 at the open but recovered to close positive with a fractional gain. Earnings of 85 cents matched estimates but revenue of $7.36 billion missed estimates of $7.44 billion. Same store sales rose +2% compared to +5% in the year ago quarter. The company warned of currency translation issues and additional expenses that will be incurred in Q4 and guided to a range of 86-90 cents and analysts were expecting 94 cents. Considering the revenue miss and the guidance warning the shares performed great to end the day with a gain.
Jack in the Box (JACK) reported a 20% increase in earnings to 54 cents that beat by a penny and revenue of $344.68 million that beat estimates of $342.28 million. This was the third consecutive year of 30% earnings growth. Same store sales are expected to rise 1-2% in Q4 with a 8-10% rise in sales at Qdoba stores. JACK said their positive earnings growth was the result of strong sales at Qdoba stores. Shares gained $1 on the news.
Vipshop Holdings (VIPS) reported earnings of 8 cents that beat estimates by a penny. Revenue of $882.6 million beat estimates of $852.12 million. The company guided for Q4 revenue between $1.20-$1.22 billion and analysts expected $1.21 billion. Active customers increased by +9% to 9.5 million. Total orders grew +118% to 25.5 million. Shares declined -$1.25 in afterhours on the news.
Medtronic (MDT) reported adjusted earnings of 96 cents that matched estimates. Revenue of $4.37 billion beat estimates of $4.36 billion. Comparable sales growth was up +5% the the highest in six quarters. The company guided for the full year to a range of $4.00-$4.10, up from $3.62 in 2013. Medtronic said it was still committed to the $43 billion Covidien (COV) acquisition despite the changes to rules on tax inversions. Shares rallied 5% on the news.
The Keystone XL pipeline died in the Senate this evening when the votes totaled 59 to 41 in favor of passing. In order to pass it needed 60 votes. In order to overcome a presidential veto they would need 67 votes. The $8 billion pipeline will eventually be approved and built once the new crop of senators take office in January. There is no rational reason for not building the pipeline. We already have 2.6 million miles of pipelines in the USA. Another 450 miles is not going to be dramatic. The pipeline can transport 830,000 bpd of oil from Canada and the Bakken to the Gulf of Mexico and refinery row.
This is cheap oil from our northern neighbor and not a security risk. Shipping oil in tankers from the Middle East is very fraught with security risks in times of political stress. Remember the oil embargo back in the 1970s? Having more oil from Canada and the Bakken will only lower gasoline prices in the USA. We will still have to import more than 6.0 mbpd from overseas so this is not the answer to our energy security problem. It is however a step in the right direction. The oil is coming to America. It is currently coming by train and creating so much congestion on the railroads that crops can't get to market. Our shale glut is only scheduled to last another 2-3 years and then production will decline again. We need this pipeline and it will eventually be approved.
Russia is rapidly increasing its gold reserves. In Q3 they added 55 metric tons out of 96 tons acquired by global central banks. The bank of Russia said today Russia has purchased about 150 metric tons so far in 2014. That is twice the amount purchased by all the other central banks combined. Russia has tripled gold reserves since 2005 to 1,185 metric tons according to the most recent IMF data.
Why is Putin buying so much gold? What is he planning that he needs that large of a gold reserve? China, India and Russia have been accumulating gold and talking about a new currency. If those nations put forth a currency backed by gold the dollar would crash. The U.S. depends on the dollar being the official reserve currency for the world. It keeps countries buying dollars and keeps the dollar strong. If a gold backed currency representing 50% of the world's population were to appear life as we know it would end. I know that sounds harsh but it is true. What would our economy be like if the dollar was suddenly worth 75% less? We don't want to know.
There was also a rumor this week that the ECB may consider buying gold as a hedge against future inflation caused by the current stimulus programs.
If you are a really diehard runner, I mean a REALLY diehard runner, then the Badwater Ultramarathon is for you. The world's toughest foot race will return to Death Valley in 2015. The 135 mile marathon will be held in July in Nevada's Badwater Basin. The starting point is 282 feet below sea level and crosses three mountain ranges to California's Whitney Portal at 8,300 feet. Runners from 25 countries are expected to compete. The average temperature in July in Death Valley is 116 degrees. That does not sound like a marathon. It sounds like suicide.
Volume on the S&P has been 20% below the 30 day average. Despite the breakout to new highs across the three major averages the volume today remained low at only 6.1 billion shares. There is little conviction at these levels. The Volatility Index has actually risen over the last week despite the market gain.
I expected some profit taking this week but the minor decline on Monday did not qualify. Apparently I am the only one that believes we are overbought. The S&P finally broke through resistance at 2,040 to close at 2,051.80. The next material resistance is 2,075-2,100. The breakout puts to rest at least temporarily the concerns about a failure at that 2,040 resistance level. The breakout appears to have legs.
The Dow also broke out but finished well off its highs thanks to the fat finger trade in home Depot at the close along with a large number of sell on close orders. Those sell orders knocked -42 points off the high of 17,735 at 3:15 PM.
The Dow chart is not as bullish as the S&P but it is still a continued gain after two weeks of sluggish momentum and consolidation in place. Next resistance should be in the 17,800 range but traders seem to be focused on that 18,000 level. Support is now 17,600.
The Nasdaq 100 ($NDX) charged higher with a .67% gain to lead all the major indexes. I said last week the strength in the big cap techs was going to lead the market higher and that is coming to pass. Apple gained another $1.48 to a historic high at $115.48. The next challenge for the NDX is 4,250 and it should test that level on Wednesday.
The Nasdaq Composite crept just slightly over 4,700 to 4,702 and a new 14-year high at the close. This is serious resistance and we could easily see some backing and filling at that level on Wednesday. Any further gain should trigger additional short covering and it appears we could see that over the next two weeks.
The Russell 2000 continues to lag, which is normal for late November. There is something in fund buying patterns for late in Q4 that favors big caps. As long as the Russell does not implode we should be ok. Weakness in late November is ok but not a sharp decline.
I still believe we are overbought but don't fight a bull market. The dip buyers are alive and well and any decline will be another buying opportunity. The week before Thanksgiving is normally choppy but Thanksgiving week is normally bullish.
Enter passively, exit aggressively!
Send Jim an email