Investors voted their disapproval on the lack of a Fed rate hike by cashing in all the gains they made over the prior four days. The Dow closed down -290 points to end with a 48-point loss for the week and erase the gains made on expectations of a rate hike.
Traders had convinced themselves the Fed was serious about raising rates in September and that would have been a vote of confidence in the economy. Instead, the Fed turned into the global central banker and warned that events in China/Asia needed to be play out before the Fed would hike rates.
While the Fed's indecision rekindled the market uncertainty, it is not likely to last. Janet Yellen's comments left the October meeting on the table but now there is little or no chance of a rate hike in 2015. The Fed warned that lower commodity prices because of the economic weakness in Asia were depressing inflation. They are correct in that conclusion but the problem is not going to be rectified in the next four weeks.
Low commodity prices take months to be felt in consumer prices. The low commodity prices over the last six months are just now being seen in the CPI. The Consumer Price Index has declined for the last three months and went negative in August. This is the impact of declining commodity prices and those commodities are still declining. This means it will be months before the CPI begins to rebound and if the Fed is truly data dependent it will be months before they can hike rates.
I want to congratulate my friend Art Cashin for having it right all along. All year he has steadfastly stated his belief that the Fed will not hike in 2015. With many analysts arguing with his position that took some fortitude to stick to his conclusion in his appearances on CNBC. Good call Art!
With China in the tank and dragging the rest of the Asian markets lower, it should weigh on the Fed's decisions for the rest of the year and into 2016. Remember, the IMF, World Bank and the Bank of International Settlements all warned the Fed not to hike because of increasing weakness in the emerging markets. Analysts now believe the ECB could announce additional QE at their October 22nd meeting and that Japan's central bank will increase QE when they meet on October 30th. By not hiking, the Fed left the door open for those banks to further weaken monetary policy. If those events occur, the Fed will be trapped for an even longer period before they can raise rates.
With the average U.S. economic cycle between 5-7 years and this one already six years old; we could be in a recession ourselves before the Fed is able to hike rates. Many analysts believe the global economy is already headed into a recession that will become evident in 2016.
The Fed brought uncertainty back into the market and now we will have to agonize over the October and December meetings even though the potential for a hike at either meeting is less than 25% today.
Some analysts were blaming the Fed for taking on a third mandate in their actions. In addition to keeping inflation at a reasonable pace and ensuring full employment they were said to have taken on China's economic health as a mandate. However, the Fed's action/inaction based on global events is not new. Since 1970 there have been seven geopolitical events that caused a Fed reaction.
1973 Arab Oil Embargo
1979 Iranian Revolution, Oil Embargo
1981 Latin American Debt Crisis
1995 Mexican Debt Crisis
1997 Asian Currency Crisis
1998 Russian Debt Default, Long Term Capital Mgmt Collapse
2011 Greek Debt Crisis
2015 China Economic Decline, Yuan Devaluation
The economic reports in the U.S. on Friday were not important and were ignored by the market.
Next week there is a flurry of reports with several that will be watched but will not move the market unless the numbers are significantly different than expectations. The home sales reports for August are expected to be down because the selling season has passed. The Richmond Fed reports on Tuesday will be of interest but not market movers.
The GDP revision on Friday will be important. Because of a spike in inventories, the Q2 estimate rose to +3.7% growth in the last revision. It is not expected to change on Friday. However, the Q3 GDPNow from the Atlanta Fed is projecting only +1.5% growth for this quarter and less than half the last Q2 growth rate. This suggests the Q2 number could be out of line. After an anemic +0.68% print for Q1 and a +1.5% forecast for Q3 there is an anomaly in the Q2 spike. A lot of that came from an inventory buildup that will have a negative impact in quarters to come as that inventory is depleted.
The Japanese markets are closed until Thursday and could be a problem for the U.S. markets. The PMI in China could be a market mover on Wednesday.
Peabody Energy (BTU) announced a 1:15 reverse stock split to be made at the close on September 30th. This will reduce the outstanding shares from 278 million to only 19 million. This was done to avoid being delisted by the NYSE for trading under $1. While this will solve the listing problem, it will give them a higher stock price and shorts will gang up on Peabody again. Full Stock Split Calendar
The earnings cycle is starting to heat up as we near the end of Q3. The most watched event for next week is probably going to be Nike on Thursday. Nike depends on China for manufacturing but it also sells a lot of apparel in China. Analysts believe sales of big-ticket items in China have probably declined because of the economy/market but they do not believe it has had any impact on normal consumer goods. Apple's CEO Tim Cook said last week that sales of iPhones were booming in China. Thursday's earnings will be a clue for the rest of the earnings cycle.
Earnings estimates for Q3 are moving lower every day. So far, 91 S&P companies or nearly 20% have warned on Q3 results. S&P earnings are expected to decline -4.4% with revenue declining -2.9%. Much of that decline is driven by a horrendous -65% drop in the energy sector and a -10.5% drop in the materials sector. That is due to the decline in commodity prices. On the positive side consumer discretionary earnings are expected to rise +11.6%, financials +7.9% and healthcare +7.3%.
On Friday Barclays cut its earnings growth forecast for the S&P for 2015 to zero. They blame the stronger U.S. dollar and emerging market headwinds. They cut their earnings estimate for the S&P from $123 to $117 for 2015. In July, Goldman Sachs slashed its 2015 earnings outlook from $122 to $114 citing economic conditions and low oil prices.
Shares of Adobe Systems (ADBE) rallied in a bad market after the company reported earnings of 54 cents, a rise of +93%, on sales of $1.22 billion up +21%. Both numbers beat estimates of 50 cents and $1.21 billion. After initially declining -3% Thursday night after the release it appears investors reconsidered on Friday. The problem was what analysts thought was weak guidance. Adobe guided for the current quarter to 59 cents, up +64% on sales of $1.3 billion, up +21%. Analysts were expecting 64 cents and $1.36 billion.
The company has now converted the majority of users to the subscription model with 73% of revenue now coming from subscriptions. Jefferies raised the price target to $92, S&P Capital IQ to $82 and Pivotal research is targeting $95.
Linkedin (LNKD) shares rallied +3% to $203 on no news. On Wednesday, Brean Capital upgraded the shares from sell to hold saying most of their prior concerns had played out. The analyst raised the price target from $172 to $184. Something else must be in play here to send shares over $200 in a bad market. Facebook (FB) shares were also fractionally positive as were Twitter (TWTR) shares at +2%.
Facebook unveiled Signal, a discovery and curation feature for journalists to help them with their newsgathering process. Facebook said it would help journalists "source, gather and embed newsworthy content, across news, culture, entertainment, sports and more - all in one place." Signal is a clear attack on Twitter. Facebook said, "We have heard from journalists that they want an easy way to make Facebook a more vital part of their newsgathering with the ability to surface relevant trends, photos, videos and posts on Facebook and Instagram for use in their reporting."
The push into newsgathering will also provide more page views in their normal content flow as users click on articles interesting to them. Facebook already has "Instant Articles" in association with the New York Times and FB Newswire powered by Storyful. Twitter is also developing a news curation feature called Project Lighting. This will also be available to readers that are not Twitter users.
Portola Pharma (PTLA) soared +9% to $57 on no news. This was more than likely continued short covering after the company said on Tuesday its Annexa drug had been assigned the coveted FDA - Breakthrough Therapy classification. Andexanet Alpha is a recombinant protein designed to reverse the anticoagulant activity of Factor Xa inhibitors. I have no clue what that means in English but apparently investors were impressed. The company was also mentioned as a potential takeover target because of its pipeline of potential drugs.
Freeport McMoran (FCX) completed its $1 billion secondary offering announced on August 10th by selling 96.7 million shares. The company also announced it had filed a supplement to sell an additional $1 billion in shares through designated agents at market prices agreed to with the agents. The company reiterated its plan to spin off a minority interest in Freeport-McMoran Oil and Gas when market conditions warranted. This was previously announced but the collapse in oil prices kicked it to the back burner. Shares fell -10% on the news of the second $1 billion offering. I would bet the buyers of that first $1 billion offering were not too happy about another one just a couple weeks later.
La Quinta Holdings (LQ) saw its shares plunge -15% on Friday after the CEO unexpectedly resigned. He will be replaced on an interim basis by the CFO. The CEO Wayne Goldberg had been with the company 15 years. His non-compete only covers a four-month period and he received his full severance package of $7 million plus $11 million in vested shares. Citigroup cut the price target from $21 to $6 saying the departure was a "mystery" and a "further explanation" should be provided to assure investors. JPM cut their price target from $23 to $3. The company also lowered its guidance due to softness in Texas among other reasons.
Auto parts maker Johnson Controls (JCI) said it was cutting 3,000 workers as a cost reduction push. The company employs 130,000 globally. The cut is expected to save $250 million annually. The company said earlier it was spinning off its auto seating business and would sell another business that manages spaces for corporations. JCI currently makes car batteries, heating and air conditioning systems, instrument panels, door panels and floor consoles.
Chipmaker Qualcomm (QCOM) said it was cutting 1,300 jobs in San Diego and has already cut hundreds more in other states. Qualcomm said it had sent out 60-day notices as required, telling employees their last day would be November 20th. The company is supplying outplacement help and severance packages. The company also cut 130 jobs in San Francisco, 158 jobs in Boulder Colorado and 65 in Andover Mass. Previously Qualcomm said it was cutting 15% of its global workforce of about 31,300 employees over the next year. Watch out for a new 52-week low in the days ahead.
Alibaba (BABA) turned 1 year old on Friday. The Alibaba IPO was the largest ever on the NYSE with a valuation of $168 billion. The initial price was $68 and shares rose to $120 in November before slipping to trade under $60 in the August flash crash. The company has been fighting fraud allegations claiming many of the goods sold on the Taobao website were fake. Another report claimed vendors were paying people to leave positive feedback. Barron's published a very bearish article the prior week saying shares could fall another 50%. The paper said the integrity of its financial numbers was seriously doubted.
Alibaba has a 1.6 billion-share lockup expiring on Sunday. That is roughly 64.1% of all shares outstanding. Jack Ma has pledged he would prevent the majority of those shares from being sold. Further research shows that Softbank owns 800 million, Yahoo 384 million and founders 300 million. How many of those are in the 1.6 billion being released on Sunday is unknown but probably a lot. Those three groups of shares will not be coming to market since all are long-term holders.
Molson Coors (TAP) shares rallied for the third day on expectations the company will benefit from the Anheuser-Busch InBev acquisition of SABMiller. In order for the companies to merge they would likely have to divest some major assets and TAP would be the likely buyer. Molson Coors needs to bulk up as the various beverage companies continue to merge. Currently TAP is the 23rd largest global brewer. However, earnings for TAP are expected to decline in 2015 because of losing market share to companies like Constellation Brands and their wine and spirits offerings. With giants merging all around them there is always the possibility of somebody taking a run at acquiring TAP.
Volkswagen AG (VLKAY) is in serious trouble. It was announced on Friday the company intentionally installed software on diesel models from 2009-2015 that would provide incorrect readings to EPA testing equipment in order to pass the clean air requirements. Yes, INTENTIONALLY installed software to beat the tests. The EPA said 482,000 diesel cars sold between 2009-2015 had the illegal software. The EPA could fine Volkswagen up to $37,500 for each vehicle. That would be an $18 billion fine. The EPA said VW used hidden software, called a "defeat device," to turn on smog equipment only during testing. The EPA said it had notified Volkswagen of the discovery and the company must come up with a plan to recall those cars and remove the illegal software. Shares declined -4.5% on the news.
Apple (AAPL) shares were down only fractionally on Friday thanks to two headlines. It was learned that Apple's car project might be a lot farther along than previously expected. The Guardian said Apple executives met with the self-driving officials at the California Dept of Motor Vehicles to learn the regulations regarding self-driving cars.
The Apple car project, code named Titan, is headed by Steve Zadesky, a former Ford engineer and staffed by former Mercedes and Tesla employees. Apple has a standing offer for a large signing bonus to any Tesla employee that defects to Apple. Apple has been hiring auto engineers and executives for three years and are targeting a 1,000+ team. Development work is being conducted at a secret lab in Sunnyvale California. Numerous firms have been trying to uncover the details of the secret project and one by one, minor details are starting to be uncovered. There was a report on CNBC on Friday claiming the car could appear within weeks.
The second headline was a ruling in a court case between Apple and Samsung. An appeals court granted Apple an injunction against Samsung and the company will have to make changes to its phones if it wants to continue selling them in the USA. Samsung vowed to appeal again and the fight will continue. However, Apple has won every round to this point after being awarded $1 billion a couple years ago in this same patent case.
Crude prices spiked on Wednesday when inventories unexpectedly declined -2.1 million barrels. Traders were expecting the normal post Labor Day build in inventories. Also, the EIA report showed another decline in production from 9.135 mbpd to 9.117 mbpd. While that is not a big drop, it was the sixth consecutive week of declines after the 9.61 mbpd peak in April. That represents a production decline of -493,000 bpd in three months. Imports also declined about 270,000 bpd to 7.19 mbpd and well below the 8.04 mbpd in mid August.
The inventory decline and the drop in imports are only temporary and the normal seasonal refinery slowdown is beginning now. Over the next two months, we should see inventories increase significantly and prices decline.
OPEC recently predicted that oil prices would only rise $5 per year until hitting $80 in 2020 and $100 oil would not return until 2030-2040. The cartel said non-OPEC supplies would likely decline -1.0 mbpd by 2017 to 58.2 mbpd.
A year ago in November OPEC was projecting $177 oil by 2040 and saying the world will have to discover and produce another 21 mbpd over the next 25 years. Forecasts can change very quickly in both directions. This one seems almost comical today but a year ago it made perfect sense.
On Thursday, Japan's exports declined for a second month and increased fears that China's economic decline was worse than expected and was damaging the other Asian economies. That would reduce oil demand.
Nothing is ever guaranteed but the historical trend for oil prices over the next two months is negative.
Active rigs for the week ended on Friday declined -6 to 842 and another decade low. That is now -24 rigs below the 2009 low at 866. Oil rigs declined -8 to 644, down -965 from the 1,609 peak in September 2014. With oil rigs continuing to fall and producers going into cash conservation mode we should see production continue to fall.
The Dow declined -290 on Friday and the S&P -32. That brought both indexes back to where they started the week and right back into congestive support since the August crash. The S&P did not make it back to 1950 and support from last week so there is a minor cushion for Monday.
Historically a post Fed move occurs on the day after the announcement as investors on the wrong side of the decision square positions. Friday was also a quadruple expiration and that added to the volatility. September positions had to be closed and that spiked the volume to 10.96 billion shares. Declining volume was 4:1 over advancing while declining issues were 5:2 over advancing.
There were significant market on close orders at the NYSE and while we closed near the lows for the day, it would have been a lot worse if the orders had not paired up in the last few minutes of trading.
Trading was orderly and there was no fear. To illustrate the Dow declined nearly -300 points and the VIX gained only 1 point to 22.28. If there had been any real fear the VIX would have been a lot higher.
This suggests once the expiration pressures fade and trades are settled next week that the markets could rebound. However, Friday was still a reaction day and the real positioning for the end of the quarter will begin next week.
The forced selling caused by redemptions has depleted cash reserves held by managers. They may not have a lot of cash to put to work. However, the lack of a rate hike could energize some investors to put money back to work for the end of the year.
We really have to focus only on the charts and trade what the market gives us rather than what we expect to happen. The S&P rallied right into the resistance zone from 1990-2005 ahead of the FOMC announcement. The post meeting spike punched through that zone for only a few minutes and then crashed back to close at the low of the day. Friday was never in doubt and the S&P gapped down to 1,962 at the open and closed at 1,958. The short-term uptrend was broken but support at 1,950 is still in play. That is followed by 1,912.
Can we retest the lows from August? Absolutely, but at this point I doubt it. I will reconsider that question in my Tuesday evening commentary.
The Dow chart is identical to the S&P with a break through resistance on Wednesday afternoon, spike after the Fed and then collapse. Near term support is now 16,335 followed by 16,030. All 30 Dow stocks were negative but Nike was down only fractionally ahead of earnings on Thursday. Apple also held its ground after winning the ruling over Samsung and the self-driving car news.
The daily Dow chart is starting to look more like a continuation pattern rather than a potential rebound. The next two days will be critical for market sentiment. If the Dow dips to support and then retests resistance it should bring investors back into the market. If support fails, we could be in for a retest of the flash crash lows or even worse.
The Nasdaq dipped to 4826 at the open, rebounded +50 points to 4878 and then dipped back to 4825 at 1:30. Another small rebound appeared and back to close at 4827. Those three halts at what I will call the 4825 level is going to be the line in the sand for Monday. If that level holds, we should be in good shape. If it fails, I would look for look for interim support at 4795-4800 and then 4760.
I was encouraged by the strength in some of the biotechs and the social media stocks. Even Netflix failed to roll over and die with only a -$1.59 loss. Whether this is a preview of next week or just an expiration anomaly, we do not know.
I would be hard pressed to say the Nasdaq chart was bullish but at least it is not bearish. The majority of the rebound gains are still intact.
The Russell 2000 only gave back -1.46% on Friday and finished the week with a minor gain of 5 points. The Russell declined to prior resistance at 1165, which should now be support. There was a -2 point bleed right at the close to end the day at 1163 but close enough for me. This is the key level for the Russell. How it responds to 1165 next week will set the tone for the market.
I wrote earlier in the month that the first two weeks of September were normally positive and the last two weeks after the September option expiration were normally bearish. While I would like to hope for a rebound next week, I fear any gain could be fleeting. This is one of the most common historical trends in the market and now that the Fed has told us they are worried about the global economy, the warning could send some cautious investors to the sidelines. The S&P has only posted a weekly gain five times in the last 17 years.
If we do get an early week bounce, I would be very skeptical of any stall at resistance. September's end of quarter declines often lead to bottoms in October. Be prepared with a shopping list is we start heading back to the August lows.
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The AAII Sentiment Survey for the week ended on Wednesday showed a significant drop in bearish sentiment and a corresponding spike in neutral sentiment. Since the early part of the week was bullish, it is easy to understand the reasoning. Some of those respondents are probably wishing they had not been so quick to give up their bearish stance.
Russia's central bank bought 30 metric tons of gold in August. That is the biggest purchase since March when it purchased 30.5 metric tons. Holdings increased from 41.4 million ounces in July to 42.4 million at the end of August. They bought 13 tons in July and 24 tons in June. Russia is the 6th largest holder of gold and has more than tripled its hoard since 2005.
Why is Russia buying gold? Sanctions are hitting them hard and they could be storing up value in case of new sanctions in the future. However, Russia and China, both big gold buyers, are working on creating an alternative to the dollar and a gold backed currency would have immediate appeal and be a serious blow to the dollar.
Gold is also cheap today with prices at a six-year low. It is a good time to buy if you plan on holding a long time. Once the Fed starts hiking rates and the dollar spikes along with those hikes, the price of gold will decline assuming a lack of geopolitical headlines to move it higher.
Russia is calling America's bluff all over Europe and now in Syria, which was the poke in the eye to America. The U.S. and NATO are updating their battle plans in case Russia tries to annex a Baltic country. Unfortunately, the odds are not good. In 16 war game exercises with eight different teams at the Pentagon the U.S. and NATO were unable to defend the Baltics. Putin can walk in at any time and we cannot stop him with conventional weapons. Baltic Battle Plan Loses
On Friday, President Obama opened Cuba to trade from America by allowing company executives to travel freely to Cuba without restrictions. He also issued rules allowing exports of software and telecommunications equipment to the island. Companies will be able to establish subsidiaries to do business in Cuba. The new rules make it nearly impossible for any successor to undo the initiatives.
Under the new rules, companies like UPS and FedEx could have service from Cuba. Deere & Co could open showrooms for tractors. The new rules allow U.S. companies to hire Cubans, enter into joint ventures with Cuban companies and with the Cuban government and legally establish a physical presence in Cuba.
The new rules abolish the $2,000 per quarter limit to transfers made by U.S. residents to Cuba. The new rules go into effect on Monday.
China is buying about 500,000 bpd of crude oil in excess of its daily needs. The country is rapidly filling its strategic petroleum reserve and adding to the size of that reserve. Currently China has 218.9 million barrels of storage with about 200 million barrels currently stored. They are currently building another 132.3 million barrels of storage and have an additional 148.8 million barrels of capacity planned by 2020. When finished this will give them 500 million barrels of strategic reserves compared to the 700 million currently used by the USA. Their current 500,000 bpd filling program is helping to cushion the excess supply on the market. When Iran begins shipping oil again much of it will go to China and their filling rate could increase. They get a significant discount from Iran because of the low quality of their oil.
The White House is currently negotiating a truce with China over cyber security. Talks have been ongoing for a couple months and increased their urgency over the last several weeks with a goal of announcing a deal when Chinese President Xi Jinping visits Washington this Thursday.
The deal would be a commitment by both countries that each will not be the first to use cyber attacks to cripple the other's critical infrastructure during peacetime. It would NOT protect against attacks against U.S. companies, U.S. government and the military as we have seen in recent months.
Do we seriously believe that China will honor any agreement if they determine it is in their best interest to do otherwise? This is the equivalent of signing the nuclear deal with Iran that lets them self regulate their nuclear activities. Letting Iran take its own soil samples and send them to the IAEA for testing is beyond ridiculous. You have to wonder what exceptions will be in the U.S./Chinese cyber weapon agreement.
Hedge fund billionaire Ken Griffin bought three floors of the new 220 Central Park South condo tower under construction in Manhattan. He purchased 18,000 square feet that will contain the main living quarters and separate units for staff, household help and guests. The sales price for three floors was more than $200 million. Citadel is also rumored to have leased 200,000 square feet at 425 Park Avenue, an office tower under construction between 55th and 56th street. The lease rate would be $300 a foot according to a broker. If both deals close, it would break two records for the most expensive condo and the most expensive commercial space.
Griffin and his wife are going through a divorce and court records claim Griffin earns $100 million a month.
If you are disappointed that Griffin snapped up your ideal home, do not worry. There are more than 20 homes in the U.S. for sale for over $100 million each so shop on! $100 Million Homes
The week after option expiration in September has a terrible history. Since 1988 the Nasdaq has averaged a .9% decline and -1.46% decline for the Russell 2000. The S&P has only posted a weekly gain five times in the last 17 years. The last few days in the quarter typically follow the performance of the week after expiration. The chart below from the Stock Trader's Almanac shows the performance of the indexes since 1994. Septembers to Remember
Ryan Detrick posted another chart showing the next three weeks have been the worst weeks of the year since 2005. Worst Three Weeks
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"All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident."