An ugly nonfarm payroll report and downward revisions to prior reports knocked the chance of an October rate hike off the table and turned December into only a minimal possibility. After a -258 point opening drop the Dow recovered to close up +200 points. Apparently, bad news is good news again.
The Fed took a lot of heat by not raising rates in October. Now that decision is looking like the right one or at least a lucky one. Even a blind squirrel finds an acorn occasionally and that decision was their acorn.
The estimate for the September Nonfarm Payrolls was for a gain of +203,000. The headline number came in at +142,000 and a serious -61,000 miss. In addition, the +173,000 job gain in August was revised lower to +136,000 and the loss of another -37,000 jobs. Analysts were expecting an upward revision of +60,000 jobs. The July reading of +245,000 was also revised lower to +223,000 and a loss of -22,000 previously reported jobs. Including the downward revisions and the estimate misses the Friday payroll report was -180,000 jobs lower than analysts expected. That is a huge miss.
The three-month moving average is now only +167,000 and under the "well over 200,000" the Fed wants to see before they can raise rates. That is the weakest quarterly average since mid 2012. It would require a gain of nearly 300,000 jobs in October to push the average back to more than 200,000. That is not likely to happen. The average for all of 2015 is +198,000 compared to +260,000 for all of 2014.
Normally when there is a bad number the analysts always point to some internal component as the silver lining in the report. There were no silver linings. A Jefferies analyst said, "It has been years since we have seen such an unambiguously bad report."
Average hourly earnings were flat after a +0.4% rise in August. The average workweek declined from 34.6 to 34.5 hours. The unemployment rate remained 5.1% except that 579,000 workers left the workforce to push the participation rate down from 62.6% to 62.4% and a level not seen since Oct 1977.
Goods producer payrolls shrank by -13,000. Mining (energy) lost -12,000 jobs and manufacturing shrank by -9,000 after a -18,000 loss in August. That is the largest two-month loss for manufacturing since 2010. The mining/energy sector has lost -102,000 jobs since peaking in December. Services jobs rose only +131,000 compared to +197,000 in September 2014. Government jobs rose +24,000. Retail rose +24,000 compared to the average of +27,000.
In the separate Household Survey, jobs actually declined by -236,000 to 148.8 million. The -579,000 decline in the workforce and the -447,000 decline in involuntary part time workers lowered the U6 employment from 10.3% to 10.0% and a post recession low.
The Fed Funds Futures collapsed after the report. The odds of an October hike fell from 18% to 8%. The odds for a December hike declined from 47.5% to 28.2%. January odds fell from 53.8% to 36.9% and March odds fell from 66.7% to 50.7%. April declined from 7.1% to 54.7% but is now the closest month with odds comfortably over 50%.
When you couple the weak payrolls with the weak national ISM Manufacturing data from Thursday it is a miracle the market did not implode. Global economic weakness and the strong dollar are crushing the U.S. manufacturing sector. The 50.2 print was only 0.3 above contraction territory and nearing a post recession low. Order backlogs declined from 46.5 to 41.5 and even deeper into contraction territory suggesting future manufacturing activity will continue to slow.
Factory Orders declined for the tenth consecutive month and the longest streak in history outside a recession. The ratio of inventories to shipments rose to 1.35 and the highest level since 2009. Rising inventories suggests slowing sales.
If the trend in job growth continues to decline over the next four months, the market is going to be talking about QE4 rather than rate hikes according to David Rosenberg at Gluskin Sheff.
The yield on the 3-month treasury declined to -0.02% suggesting investors are expecting more trouble ahead. The yield on the ten-year treasury declined to close at 1.989% and under the emotional 2% level. There is no rate hike on the horizon based on treasury yields. A couple more economic reports with weak numbers and we could be down to 1.8%.
After the factory orders, ISM, International trade data and payrolls the Atlanta Fed GDPNow forecast for Q3 sank from +1.8% on Sept 28th to only +0.9% growth on Friday.
The calendar for next week is nonthreatening with the only material event the FOMC minutes on Thursday. The ISM Nonmanufacturing report on Monday is likely to be disappointing but the ISM Manufacturing, Factory Orders and payrolls have already laid the sentiment groundwork so a decline will probably be ignored.
Acasti Pharma announced a 1:10 reverse split to avoid being delisted. It should be ignored. Full Stock Split Calendar
Wynn Resorts (WYNN) was the winner on Friday. On Thursday, it was reported that gaming revenue in Macau declined -33% in September for the 16th consecutive month of declines. Shares of WYNN hit a new six-year low. On Friday, there was a report out of China that the government planned to revive the slowing gambling industry in Macau. Support policies will be announced by the end of December. Wynn generates 70% of its revenue in Macau so that was good news. Shares spiked +23% on short covering. Unfortunately, the gain is almost invisible on the chart because WYNN shares had declined so badly over the last two years. The $12 spike is a good lesson on why you need to maintain stop losses on your option positions. That would have erased $12 in premium on any deep in the money put.
Tesla (TSLA) reported deliveries of 11,580 vehicles in Q3 and met its targets. Tesla expects to deliver more than 50,000 vehicles in 2015. That was up slightly from the 11,532 delivered in the prior quarter. Their nine-month total is now 33,157 and that suggests they have to deliver 16,483 in Q4 to meet the full year forecast.
Now that the model X is delivering, the company has two models in production for the first time. Elon Musk said orders for both the Model X and the Model S spiked last week after the first Model X was delivered. The publicity and rave reviews prompted more people to order the Model X. Those that do not want to wait for 9-12 months or longer to get the Model X transferred their deposits to the Model S. On the first delivery day on September 29th, Musk delivered six Model Xs. Musk got the first one, board member Steve Jurvetson the second and the fourth went to Google co-founder Sergey Brin. Shares were up +$8 on Friday.
Twitter (TWTR) shares rose 7% but there is still no CEO announcement. Analysts were expecting the big news on Wednesday but it did not appear. Shares rebounded on Friday after several analysts made positive comments on the stock. Deutsche Bank said it was "firmly in the bull camp" despite the lack of an announcement. The bank expects project Lightening, which will be called "Moments" to be delivered on Tuesday. DB said this could be the key to converting casual users into regular users. They also expect the CEO announcement and a restructuring of the board.
Wedbush initiated coverage with a neutral rating and a $30 price target. The analyst said the business model was flawed and casual users drifted away. However, as they eventually spend more time on Twitter their usage grows dramatically once they find a compelling reason to stay on the platform.
Twitter recently removed the 140-character limit on "direct" messages. Users can now send up to 10,000 characters. Reportedly, Twitter is considering removing the restriction on tweets as well. Interim CEO Jack Dorsey is monitoring a project code-named 140 Plus that would remove the restriction.
The company is struggling to find a way to involve the drive by readers. More than 500 million unique visitors come to the Twitter home page every month but they do not log in. if they can figure out some way to hook those visitors their usage numbers would explode.
Amazon (AMZN) decided to ban streaming products from Apple and Google that do not cooperate with Amazon's streaming infrastructure. Google Chromecast and Apple TV do not provide customers with the "optimal experience" for viewing Amazon Instant Video on their products. Other competitors including the Xbox and PlayStation to play well with Amazon so those products are not banned. Since there are thousands of retailers that sell Apple and Google products this is not likely to hamper sales for those companies. It might help Amazon sell a few more of their own streaming devices.
Google (GOOG/GOOGL) became Alphabet after the close on Friday. The shares will begin trading under the new name on Monday but the ticker symbols will not change. The core business will still be called Google and will operate as a wholly-owned subsidiary of Alphabet. Sundar Pichai will head Google. Alphabet will be run by Larry Page and each of the individual businesses in Alphabet will have its own CEO.
Oppenheimer upgraded Google to outperform with a price target of $700. The analyst said the concerns over the flurry of ad blocking apps is overblown. He said YouTube usage is growing at the fastest rate in the last two years. In Q2 the time spent on YouTube increased +60%. The target for his bull case is $905. Shares of Google rallied +$15 on Friday.
UBS added three firms to its "focus list" for Q4. They added Gilead Sciences (GILD) because of its top-selling drugs and strong pipeline. The stock closed at $98.28 with the consensus target at $125.
The bank added Eli Lilly (LLY) because it was poised to significantly grow earnings with new drugs for cancer and diabetes. With patent expirations behind it and a robust pipeline the company is poised to surge. Shares closed at $87.54 with the consensus target at $96.26.
The last company was WhiteWave Foods (WWAV). This is the leading packaged food distributor throughout North America and Europe. The company manufactures and sells foods under dozens of different brands. Shares closed at $41.78 with the consensus target at $53.89.
Of the group, I like Gilead the best. They have a PE of 9 compared to 45 for LLY and 51 for WWAV. Gilead has a very strong and growing free cash flow and they are poised to make an acquisition in the coming months to add to their pipeline.
They were crushed in the biotech selloff because their Hep-C drugs are $90,000 for a 12-week course of treatment. Since nothing is going to happen in the form of price controls until 2017, I think the selloff was overdone.
The earnings calendar is thin for next week with Yum Brands, Monsanto and Alcoa the only standouts. The following week will see a dramatic acceleration in the number of reports. Currently S&P is forecasting a -4.7% decline in earnings and -2.9% decline in revenue for Q3. However, if you remove the energy sector there would be +3.4% earnings growth. You can expect to hear that many times over the next four weeks. Four of the ten S&P sectors, energy, materials, consumer staples and information technology are expected to post negative earnings growth.
This is the week when oil prices were supposed to go down. However, Putin decided to move into Syria and support Assad and that produced worries over a bigger conflict with Russia and the U.S. getting into a skirmish. It also injected Putin into the Middle East in a more forceful way as Iran's ally. That means Saudi Arabia now has a bigger target on its back as the biggest producer in the region and the archenemy of Iran. With Russian military in Syria and Iranian troops headed for Syria the future of Iraq is even more uncertain.
With the U.S. withdrawing from the region, and Russia/Iran in control of Syria it would be very easy to include Iraq in their sphere of influence. Whether Iran understands it or not, Putin could end up as the controller of Iran, Iraq and Syria and the oil production from those regions. I know that is a lot to understand in one paragraph but traders immediately grasped the potential for higher oil prices thanks to Russian intervention.
Crude spiked to $47.10 on short covering on Thursday and although it retraced its gains on Friday, it refused to move under $44. When the Baker Hughes rig counts came out in the afternoon it spiked back to close at $45.55.
Baker Hughes said active rigs declined a whopping -29 for the week ended on Friday. That is the biggest one-day decline since the recession. The total active rigs fell to 809. Oil rigs declined -26 to 614 and a new 10-year low. Gas rigs declined -2 to 195 and a new 18-year low. This is the result of producers moving into cash conservation mode. Prices did not rebound as expected and they are forced to slash drilling expenses to keep from running out of cash.
The sharp drop in rigs suggests production will continue to decline. U.S. production declined -40,000 bpd last week to 9.021 million bpd. That is now -514,000 bpd below the April peak at 9.612 million bpd. That decline in production did not keep inventories low. Crude inventories rose +4.0 million barrels last week.
Fundamentally oil prices should be declining but the geopolitical events in the Middle East and the sharp drop in rigs could keep a bid under prices for weeks to come.
If you look at the short-term chart, it would appear the Tuesday low of 1,871 was a successful retest of the August low of 1,867. The rebound was instant and despite intraday selling, the S&P rallied back at the close each day starting on Wednesday.
The Dow gapped down -258 points on Friday morning. It appeared that bad news was going to send us to lower lows in the first week of October to match the historical pattern.
However, a series of buy programs hit the tape several times in the morning. Those programs lifted the indexes back into positive territory and created a serious short squeeze. We can tell the afternoon was a squeeze because the stocks with the worst declines in recent days were the biggest gainers and most of their gains were in the afternoon.
The Dow and S&P were helped by the short squeeze in energy stocks. Chevron rallied +4% and Exxon just under 3% to lift the Dow. Caterpillar, a company that has missed, warned and warned again surged +2% on no news.
Wynn Resorts spiked +23% on news that China may do something several months from now about gambling in Macau. It was clearly short covering rather than a change in the immediate fundamentals. Biotechs rebounded sharply after several brokers upgraded their favorite picks. The biotech index rallied +3.27%.
The Semiconductor Index ($SOX) rebounded +2% on the Micron earnings and guidance. Qualcomm spiked +3.55% on minimal news. On Thursday Samsung said they were going to use Qualcomm chips in "some" Galaxy S7 phones. The gain was short covering.
Alibaba (BABA) spiked +7%, Sohu.com (SOHU) +6%, Sina (SINA) +6% and Baidu (BIDU) +8% on news that the Chinese government "may" increase targeted stimulus to boost the lagging economy. The Chinese markets are closed for a holiday until October 8th. This was short covering ahead of the holiday and the potential for stimulus details.
I know everyone wants to believe that the rebound was due to a successful retest of the August lows. In reality it may be. Most bull market rallies begin with a strong short squeeze from very oversold conditions.
Market sentiment after Tuesday's low was very bearish. The AAII sentiment survey saw a big +11.2% spike in bearish sentiment. Those in the neutral camp fled to the dark side with a -7.2% decline in neutral sentiment. Bullish sentiment declined -4%.
Extremely bearish sentiment is a contrarian indicator. With 72% of investors either bearish or neutral there was a lot of cash on the sidelines or short. That was a lot of dry powder that could come back into the market at any time.
The series of buy programs at the open were likely related to end of quarter portfolio restructuring. Q3 is over and Q4 is now in play. Fund managers have very little time to buy some winners and hope they can recover losses in Q4.
Here is the test. The S&P closed at 1,951 and ever so slightly over resistance from last week. If the S&P can add to those gains on Monday and then break through that 1990-2005 resistance we should be good to go. Breaking through that heavy resistance surrounding 2,000 should convince even the strongest doubters that a Q4 rally has begun and the real short covering and price chasing can begin.
Support has been 1,900 for the last three days and a return to that level would negate the late week rebound.
The Dow is a similar chart to the S&P only the support at 16,000 was tested the first week of September and then again last week. That support test may be valid because the 15,370 low on August 24th was really a bad print. Numerous stocks had not opened or opened with serious imbalances and caused the panic low. The low the next day was 15,651 and came at the close. That was the real low, which should have been retested.
That has not happened and the Dow has moved sideways for the last month. The mid month pre Fed rally was sold hard when the Fed did not hike rates. For the last seven trading days, the Dow has retested the 16,000 level and it has held.
The key here will be to move back above those pre Fed highs at 16,666-16,750. I am not counting the post Fed intraday volatility spike. Those are not valid events and are caused by competing program trades.
A lot of the Dow laggards saw short covering on Friday and caused the +458 point rebound from the opening lows. That is not likely to be repeated on Monday. We need a day of "normal" trading so pressure from opposing forces can equalize and the real market direction can appear.
The Nasdaq received help from multiple sectors and surged to a +1.74% gain. Unfortunately, it is still a long way from resistance at 4,800 and 4,835. That is followed by even stronger resistance at 4,900. While it will not be an easy task for the Nasdaq to punch through those levels a rebound in the biotech stocks could help. A lot of tech stocks were severely beaten down and we saw short covering there on Friday. That could be a one-day wonder.
The Nasdaq is nearing some significant congestion and the tech stocks will need a catalyst to keep the momentum going. We are still a couple weeks away from the burst of earnings and we do not know if weak earnings are going to be able to provide the rally fuel.
Support is 4,560.
The Russell 2000 was the laggard last week with a decline compared to gains by the big cap averages. On the plus side, the support at 1,082 held and the index closed back over 1,100 on Friday. The Russell has a long way to go to clear resistance at 1,150 and 1,165. Since the Russell was the only index to actually make a lower low it should find some buyers because confidence will be stronger that the retest was valid.
The next week is typically bearish with lows seen in the first week of October. When Q3 and September are negative, the gains in Q4 are normally muted and occur only about 47% of the time. I would like to think that all the bad news is priced in and the market will continue to rebound from oversold conditions. That may be wishful thinking but I will keep my fingers crossed. If you made a shopping list in case of lower lows, I would reevaluate it to see if you want to buy now or holdout for a better buying opportunity. The key for me would be a decent gain on Monday over S&P 1,950. That could shift sentiment back into bullish mode and begin the price chasing.
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Bill Ackman's Pershing Square Holdings declined -12.5% in September. Being smart and rich with a building full of analysts is no guarantee of success in the market.
The demand for silver coins has exploded after silver hit a six-year low in August. The demand is so strong that the premium, the cost of the coin over the actual silver content, has surged to 34%. That means a one-ounce Silver Eagle costs an average of $20.10, if you can find them. Silver is $15.23 today. A quick check of Apmex.com shows a price of $20.84 to $21.84 depending on quantity. The mint is backordered and cannot make them fast enough. Both the U.S. Mint and the Canadian Mint are allocating production after temporarily selling out in July. The U.S. Mint allocation is now 750,000 coins a week after dropping to one million coins two weeks ago. In the last two weeks, all the available coins have been purchased in just the first two days. Dealers are quoting four-week delivery after receipt of your funds.
American Silver Eagles have sold 34,304,500 year to date, up +15% from record 2014 levels. The Perth Mint has a new one-ounce coin called the Silver Kangaroo. They sold a record 3.53 million coins in September, which was FIVE times higher than August sales simply because of the global demand for silver coins. The mint has suspended orders until they work through the existing backlog.
JP Morgan is reportedly buying bulk silver in large volumes. Demand was 22% higher than supply in 2014 and with the cost of mining silver now above the value, many mines have shutdown and others have curtailed production. Global demand was 1.07 billion ounces and production was 877.5 million ounces. The shortfall came from existing inventories but obviously that cannot last forever.
With demand for solar panels increasing dramatically the demand for silver will also accelerate. Silver is a key ingredient in silicon photovoltaic cells. According to IHS Cera solar demand is expected to grow by 30% in 2015 with 70 million ounces of silver used in the process.
I would recommend that any investor continue to hold a significant amount of physical silver in bars or coins because the long term price of silver will go a lot higher. Eventually inflation will return, the dollar will decline and silver will spike significantly. In the longer term, the dollar as a global reserve currency is in serious trouble and once our national debt exceeds $20-$22 trillion or even $25 trillion the value of the dollar is going to crash. Analysts expect the debt to rise $500 billion a year until the Fed normalizes rates and then climb $750 billion a year because of interest on the debt.
JP Morgan said 67% of mutual funds underperformed their benchmark in Q3, with more than one third underperforming by at least -2.5%. Those statistics are based on a universe of 2,300 funds with more than $5.5 trillion in assets. The -11% decline in healthcare was the primary cause of the underperformance since that was the hot sector going into Q3. Everyone owned it. Funds Underperform
Mutual funds and ETFs currently hold $18 trillion in investor capital. Jack Bogle of Vanguard was quoted as saying, "if everybody were to suddenly want their money back at once, it is not going to happen." The opening drop on August 24th was a preview of what would happen if everyone hit the sell button at the same time. More than 1,200 stocks were halted for trading under the circuit-breaker rule. ETFs with no ability to get quotes on their underlying stocks went into free fall with some dropping 20-40% below their net asset value in a matter of seconds.
Eventually some event is going to cause investors to hit the panic button and it will not be pretty. Are You Ready for the Bear?
The Dow just suffered its third straight quarterly decline for the first time since 2009 when it suffered six negative quarters. Before that, you have to go back to 1978 for a similar streak. In its 119 year history the Dow has only had 20 streaks of three quarters or more of losses. This is a rare occurrence since this has happened only three times in the last 43 years. Dow Losing Streaks
The global markets just suffered the worst quarter since 2011. More than $11 trillion in wealth was erased from the world markets.
There are fewer bulls today than in March of 2009 when the market began a six-year rally. Only 25% of financial advisors are bullish today according to an Investors Intelligence survey. When Lehman imploded, only 22% were bullish because of fears about a collapse of the entire banking system. Conditions are nowhere near as grim today as they were during the Lehman collapse but the bullish sentiment is almost that low.
Ed Yardeni of Yardeni Research, pointed out that the Investors Intelligence ratio of bulls to bears declined to 0.7 and the fifth consecutive week under 1.0. "In the past that has been a very reliable buy signal." Investors too Bearish
Investor Carl Icahn posted a video to his website last week warning investors of danger ahead. He said the low interest rates have created bubbles everywhere and there is trouble brewing. Back in 2007, he warned of trouble ahead but was not very forceful in his comments. This time around, he decided to go all in with the warning in hopes of preventing significant losses by investors that heed his advice. Danger Ahead Video
Time flies way too fast. In a little over two weeks, Marty McFly will arrive in the future on Oct 21st, 2015. Seems like yesterday it was 1985 and we were watching Back to the Future. Now we are living in it.
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"Doubt is the father of invention."
Galileo Galilei (Italian physicist and astronomer, 1564-1642)