Monday's sharp decline turned into a one day wonder as the Dow rallied back to another new high.

Market Statistics

It was a turnaround Tuesday with the Dow surging to a new high and the rest of the indexes posting solid gains after an ugly decline on Monday. The Nasdaq lost -62 points on Monday but rebounded with a decent +28 point gain today.

The motivation for the rebound came from positive news from ShopperTrak on Black Friday sales. ShopperTrak said retail sales for the long Thanksgiving weekend fell -2.1%. This was in stark contrast to the headline news on Monday from the National Retail Federation (NRF) saying sales fell -11%. Retail stocks were crushed on Monday with Best Buy (BBY) falling -5.5% and JC Penny (JCP) falling -6% as examples.

Both companies said the numbers were impacted by earlier sales in Black Friday week and stores open on Thanksgiving. These events pull forward sales which would have normally occurred over the Black Friday weekend.

ShopperTrak retained its forecast for a +3.8% rise in sales for the holiday period and the NRF is projecting +4.1%. This is the biggest boost since 2010. Analysts are pointing out the changing retail trends and suggesting we can no longer rely on Black Friday weekend sales as a predictor of future holiday gains. Retail trackers may have to switch to an 8 day period from Saturday before Thanksgiving through Sunday after Thanksgiving to get a better picture of sales trends.

The economic reports from the week suggest the economy is improving. The ISM Manufacturing on Monday declined only fractionally from 59.0 to 58.7 with the forecast for a drop to 56.0. New orders and order backlogs both rose while inventories declined. This suggests the U.S. manufacturing sector is still healthy and has not been materially impacted by the slowdown in Europe or the strong dollar.


The Construction Spending report showed a jump in spending from -0.1% in September to +1.1% in October to $971 billion. Analysts had only expected an increase of +0.5%. The headline number is now +3.3% above year ago levels. Public construction spending rose +2.3% to $279 billion with a +1.3% rise in private residential spending to $354 billion. This report was market positive.

The ISM New York business report rose from 657.2 to 663.4. The current conditions component rose from 54.8 to 62.4, a whopping +8 points in one month. However, the employment component declined from 64.4 to 48.4 and back into contraction territory. The revenue component imploded from 71.9 to 53.1 and expected demand declined from 78.1 to 68.8.

Clearly the current conditions component rescued the index from a nasty fall but it does suggest we could see weakness in future months. This report is normally ignored.

The most bullish report of the day was the vehicles sales for November. Sales soared to an annual pace of 17.2 million compared to 16.5 million in October. Sales of domestic cars rose from 13.0 million to 13.7 million while imported cars rose only slightly from 3.4 to 3.5 million. Sales of the Jeep Cherokee rose +67%, Chevy Silverado truck +24% and the Honda CRV +43%. Sales of the Chevy Volt declined -30%, Toyota Prius -13% and Ford Taurus -37%. While the trend is still early the drop in gasoline prices has definitely boosted sales of trucks and SUVs while compact car sales have declined.

Gasoline prices averaged $2.76 today and it was the 68th consecutive day that prices have declined. Many analysts are now predicting $2.50 gas on average by the end of December and sub $2 in many Gulf coast states. This is going to seriously boost truck and SUV sales and prompt additional holiday spending by consumers.

New York Fed President William Dudley and Fed Vice chairman Stanley Fischer both spoke this week saying the drop in gasoline prices was going to be a mini stimulus program and consumers would definitely be spending more on the holidays. Both men suggested the boost to the economy from lower gasoline prices would allow the Fed to hike rates in the middle of 2015. This is contrary to recent analyst comments claiming the low oil prices would further depress inflation and keep the Fed on hold until 2016.

Dudley did warn the Fed should continue to be cautious about raising rates. He said, "When interest rates are this low the risks of tightening a bit too early are likely to be considerably greater than the risks of tightening a bit too late."

The job data starts tomorrow with the ADP Employment. This could be the pothole in the rally road if it comes in much lower or higher than expected. If it is lower the analysts will start projecting slower economic growth and worry that Europe is weighing on the USA. That is a bad news is good news story since it will keep the Fed on the sidelines longer. If the number comes in a lot higher then it is good for the economy but the Fed could act quicker. The Goldilocks number would be in the +220,000 range.

The Fed Beige Book is expected to be market positive with a continued upgrade to the economic conditions around the country. Some weakness in a couple regions is expected but overall I expect that conditions have improved.

The Nonfarm Payrolls on Friday is expected to show a gain of +235,000 jobs. The range of estimates in a Bloomberg survey was from 140,000 to 275,000. Either of those numbers could create some market volatility. The Goldilocks number here would also be in the +220,000 range.


MasterCard (MA) must be feeling the joy of the season with all those Black Friday purchases on credit cards. They raised their dividend +45% to 16 cents and announced a $3.75 billion stock buyback program. The company has $275 million remaining on its existing $3.5 billion buyback program they announced last December. The dividend will be paid on Feb 9th to holders as of Jan 9th. Since MasterCard went public in 2006 the stock has gained +1,800%. Shares recovered from a morning loss on news of the announcement.


The first post oil crash acquisition is now in the books. Berkshire Hathaway's Lubrizol business bought two units from Weatherford International (WFT) for $750 million. The Integrity Industries drilling fluids business and Engineered Chemistry, which provides additives for fracking, were the two units purchased. Lubrizol was purchased by Berkshire in 2011. Lubrizol has been actively making acquisitions with the last a pipeline flow improver from Phillips 66 in February. Lubrizol has been expanding its influence in the fracking community by increasing its offerings in the fracking fluids space.

Buffett has been asking the CEOs of the companies in the Berkshire portfolio to make their own acquisitions because it takes the pressure off Buffett to spend his growing pile of cash, now over $60 billion.


Iberia Capital upgraded Baker Hughes (BHI) today with an outperform rating and a $65 price target. Two weeks ago Halliburton (HAL) agreed to buy them for $78.62 based on the Halliburton share price at the time. There has been some fade from that announced price because the acquisition is for 1.12 shares of Halliburton plus $19 in cash or $64.19 based on today's prices. Baker Hughes closed at $56.70 today because the acquisition should not close until the second half of 2015.


Biogen's (BIIB) Alzheimer's drug BIIB037 was allowed to move directly from Phase I trials to Phase III testing and bypassing Phase II. The company said the drug had a significant effect on cognition among patients in the 54 week Phase I trial along with a decrease in amyloid deposits on the brain.

The CEO said the company was going to start the Phase III testing "very aggressively" because the data was encouraging enough to skip the Phase II process. Even with an aggressive testing schedule the drug will not be available to the public until 2018-2019. A Robert Baird analyst said there were some safety concerns with the drug but they might be handled with a lower dosage program. BIIB shares rallied +6% on the news.


North Korea is now a prime suspect in the successful hacking of Sony (SNE) and the distribution of confidential internal data to multiple new outlets. North Korea declared war against Sony in June after the country found out Sony was going to release a James Franco-Seth Rogan comedy about a plot to assassinate Kim Jong Un. The Korean foreign ministry said all North Koreans were determined to "mercilessly destroy anyone who dares hurt or attack the supreme leadership of the country, even a bit."

The hackers stole multiple movies from Sony including the Brad Pit movie "Fury" and a remake of "Annie," "Still Alice," "Mr Turner," and "To Write Love on Her Arms" and made them available on the Internet. Fury was downloaded more than 500,000 times since the Nov 25th attack. Variety.com said downloads could reach 1.2 million this week. They also released a list of Sony's top employees, rate of pay, identification numbers, dates of raises, home addresses and dozens of other items of personal information. Writers have jumped on this data to show that of the top 17 highest paid employees making over $1 million a year there was only one female.

The hack attack also crippled some computer systems at Sony with the picture of a skull appearing on company computer screens. The picture had a hashtag for "Guardians of Peace" and a warning that private data would be released unless demands were met. Researchers found Korean language in the software left behind in the attack. A FireEye (FEYE) subsidiary has been hired to help clean up the systems and prevent future attacks.

Lions Gate Films had the "Expendables 3" film stolen and placed on the Internet where it was viewed by more than 2 million people before the movie was available in theaters.


Amazon (AMZN) sold its biggest bond offering ever today with a $6 billion sale. The retailer sold $1.5 billion at 4.95% for 30 years at 205 basis points over 30-year treasuries. They also sold $1.25 billion at 3.8% for 10-years and 4.8% for 20 years. Lastly they sold $1 billion in 2.6% for 5 years and 3.3% for 7 years. The bonds were rated Baa1 by Moodys.

Jeff Bezos was interviewed at a conference and was asked about earnings. He said something like "we don't run the company to manage quarterly earnings. We are still a startup and building for the future. Startups have a lot of earnings volatility because of their expansion expenses." Bezos says he only spends about 6 hours a year on investor relations because he is totally focused on building the company. Shares were flat on the day.


Hedge funds are closing at the fastest rate since the financial crisis. In the first half of 2014 more than 460 funds have closed. If that pace continued in the second half it could exceed the 1,023 closures in 2009. Funds are posting disappointing returns with an average of +2% YTD in 2014 and the worst performance since 2011.

The $37 billion Brevan Howard Asset Management LLP closed a $630 million commodity fund last week after it lost -4.3% YTD. Personally I don't see how any commodity fund could have made money this year unless they shorted everything in sight in January and then turned off their computers.

Funds are not having any trouble finding capital despite their poor performance. Dan Loeb opened Third Point LLC for new money briefly on October 1st and raised $2.5 billion. Bill Ackman also raised $2.7 billion in October for a new fund. Ackman has produced a 42% return YTD. For more information on fund closures click here

The CME raised margins on crude futures for the fifth time in the last two months. Starting at the close today the margin on a WTI futures contract rose +16% to $4,895 for speculators and the highest since the $4,950 back on January 29th 2013. Margin for natural gas, gasoline and diesel futures also increased.

When volatility increases in various commodities the CME will raise the margin to make it more expensive to trade in an attempt to slow the volatility and reduce their risk. The CME is responsible for making sure there is enough collateral at risk in case of a default by the investor.


Gasoline futures hit a five-year closing low at $1.82 at the close today. Feel free to jump for joy!


Harold Hamm, CEO of Continental Resources lost $12 billion or more than half of his wealth over the last three months because of the drop in oil prices. Continental is an active shale driller in the Bakken and the company closed all its hedges a couple weeks ago when he basically called a bottom in the oil market. Unfortunately he was wrong.

He said on Monday that U.S. drilling is likely to slow dramatically since nobody wants to drill an unprofitable well. "Drilling will slow until prices recover. That is the way it ought to be." Hamm said the U.S. has the upper hand in battling OPEC. "We can adjust quickly. It is a lot easier to adjust company activity than it is for countries to adjust. When you have people starving or social policies within countries that people are used to, it is hard to adjust those."

Hamm claims Continental can continue to post profits at $50 a barrel. He said, "People need to calm down and take the long view and there is no need to panic at this point."


Over the last three years the energy sector has seen more than $90 billion in junk-rated debt sold to fund drilling expenses. That debt has fallen an average of -13% since crude began falling in June. Halcon (HK), Goodrich Petroleum (GDP) and SandRidge (SD) are three out of 21 borrowers that operate in the most expensive shale fields in the USA. They will be unprofitable at $60 WTI but their cash flow has already been severely disrupted.

A money manager at Alliance Bernstein said the company is worried there will be defaults because far too much money had been chasing the high interest loans in the oil sector. HK 9.75% bonds worth $1.15 billion have lost -33% since oil prices began to decline in June. $750 million in SandRidge notes have declined -29% and Goodrich debt has fallen -37%.

Those companies will have to quickly curtail drilling to preserve cash because there will not be any new debt offerings to help them out. Companies are able to borrow vast amounts of money based on the value of their proven reserves. Those reserves are worth a lot less today at $68 than they were at $102 a barrel back in June. The lender geese with the golden eggs have disappeared and companies are going to be forced to sell assets to raise cash to pay debt and future drilling expenses.

Analysts believe as many as one-third of drillers could default over the next year because of rapidly declining cash flow if oil prices remained at this level.

Companies have sold $1.5 trillion in corporate bonds YTD in 2014 and that is a record. Medtronic sold $17 billion on Monday and the largest sale in a year. So far borrowers have sold $1.168 trillion in investment-grade notes and $344 billion in junk bonds. This beats the $1.146 trillion of high grade and $348 billion in junk sold in 2013. The average yield has risen to 3.85%.

Markets

The Tuesday turnaround propelled the Dow to a new closing high at 17,877 but the other indexes failed to keep up. The S&P recovered to 2,066 with the record high close at 2,072 last Wednesday. The historical record shows that December is the best month of the year and investors are going to be betting on that trend to continue.

If there was anything the Monday dip showed us it is that dip buyers are alive and well. The opening lows were the lows for the day and while the indexes did not simply sprint higher every intraday dip was a higher low suggesting buyers were getting anxious about missing the rebound.

The S&P decline was halted at 2,050 on Monday and that is now our line in the sand as support. Resistance is that past high at 2,072.


The Dow chart is very bullish. The Dow finally managed a close well over that 17,825 level that held us back all last week. The Dow still closed at resistance but it was a material improvement over last week. If the Dow moves higher from here it is going to trigger additional short covering and a lot of price chasing into the end of December.

Support is now 17,725, 17,775 and 17,800.



The Nasdaq failed to rebound to a new high despite some strong gains from BIIB, REGN, NFLX and ALXN. A big drag on the index was Priceline with a -$15 loss after an analyst downgrade.

Both the Nasdaq 100 and the Nasdaq Composite pulled back from their recent highs to use prior resistance as support. This was a textbook reversal and rebound. The key here is whether the rebound continues on Wednesday. This will be a critical day for market direction with the ADP Employment report a potential trigger.

Support on the Nasdaq Composite was rock solid at 4,725. That becomes the focal point on any future decline. Any move below that level would trigger significant selling.





The Russell 2000 rebounded +1.24% today but remains well below resistance at 1,188. New support has formed at 1,155 giving us a 48 point range for the rest of the week. The Russell has lagged the big cap indexes as it normally does in late November. I got a cute cartoon from Hedgeye today that illustrates how the Russell has been a drag on the market.



I think the Monday dip was good for the market. Everyone waiting on the sidelines for a new entry got their wish. However, most of them probably procrastinated and missed it. Fortunately for us they will be the ones chasing prices higher for the rest of the week.

I am somewhat concerned about the payroll reports but any dip should be bought just like it was on Monday. I remain in buy the dip mode until proven wrong. Watch the 4,725 level on the Nasdaq Composite for a possible change in trend.

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Jim Brown

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