The excitement over earnings appears to be fading after several high profile companies disappointed. Even a sudden burst of merger mania could not lift the indexes back into positive territory ahead of Apple earnings.

Market Statistics

The morning started negative after UPS reported earnings that beat estimates but missed on revenue and said negative things about the U.S. economy. UPS reported earnings of $1.39 compared to estimates for $1.37. Revenue of $14.24 billion declined -0.4% and missed estimates for $14.41 billion. The company said full year earnings could be at the higher end of estimates from $5.05 to $5.30 per share. That would be a 6-12% increase over 2014. They will hire 95,000 temporary workers for the holiday season.

That would seem like a bullish report but the company said the U.S. economy had been "soft" over the last quarter and the strong dollar was impacting revenue. UPS said revenue would have been 1.8% higher without the dollar impact. UPS has had two consecutive fourth quarters that disappointed investors. The company said holiday shipments would rise 6-12% but FedEx said shipments would rise 12.4%. Using the midpoint on the UPS estimate suggests UPS growth is lagging FedEx. Shares were down -3% on the news.


JetBlue Airways (JBLU) warned it would make less money per mile in October than it did in 2014. The company said it expected to earn $80 million from bag fees, up from $65 million. However, passenger unit revenue will decline -2% in October before improving later in the year. JetBlue sees capacity rising 8.5% to 10.5% in Q4. The warning sparked fears of excess capacity in the sector. Shares fell -9% at the open on the profit warning but recovered to end down -3%.


Spirit Airlines (SAVE) added to the gloom when it warned of a "volatile pricing environment." Spirit posted earnings of $1.35 that beat estimates by 3 cents. Revenue rose +10.6% to $574.8 million and beating estimates for $571.8 million. Despite the good earnings, shares fell 9% on the pricing warning.


Helping to cause the volatile pricing environment was the announcement by American Airlines (AAL) that they would offer cheap airfares to match the discount carriers. American shares are breaking out of a four-month base on the news much to the dismay of the discount carriers.


The multiple hits to the transportation sector sent the Dow Transports ($TRAN) down -3% earlier in the day. With transports crashing it is hard to maintain a positive trend on the Dow Industrials. The comments from UPS about a soft U.S. economy and the rising capacity and volatile pricing in the airline sector knocked the transports to a three week low. Railroads were also weak with Union Pacific (UNP) dropping -5%, KSU -4.5% and CSX -4%. Even a decline in oil under $43 could not save the index.


The Dow crashed to a low of -80 intraday after IBM warned that they were being investigated by the SEC for revenue recognition for how it accounts for business transactions in the USA, UK and Ireland. The company said it learned of the investigation in August and they have been cooperating with the SEC on the matter. However, you have to wonder why they did not disclose the investigation when they reported earnings earlier this month. The investigation was already two-months old when they reported. Why wait until now? IBM shares fell -$6 on the news.


The economic reports did not start the morning off in a good mood. The Durable Goods report for September showed a decline of -1.2% after a -3.0% decline in August. There was a bit of good news. That -3.0% was revised higher to only -2.0% but that was a small consolation. Nondefense orders declined a whopping -7.6% suggesting the weakness was widespread. Backorders declined -0.6% suggesting October will also be weak.

Consumer Confidence for October declined from 102.6 to 97.6. Consumers are starting to worry about the economy after two months of declining jobs. The present conditions component declined from 120.3 to 112.1 and the expectations component declined from 90.8 to 88.0. Those respondents that believe jobs are plentiful declined from 24.8% to 22.2%. Respondents that believe business conditions are good declined from 28.1% to 26.5%.

Buying plans were mixed. Those planning on buying a car declined from 13.1% to 10.6% but prospective homebuyers rose from 48.8% to 49.3%.

Confidence is still high relative to the last several years but well off the 104 high back in January.


The Richmond Fed Manufacturing Survey for October rose slightly from -5 to -1 but remains in contraction territory. Counting the zero reading in August this is the third month without any manufacturing growth. New orders rose from -12 to zero or flat with last month. Backorders rose from -24 to -7 and a definite improvement. Inventories rose from 21 to 25 suggesting sales are slowing. However, this is the pre-holiday period so this could be normal stockpiling.

The separate services survey rose from 10 to 18. The wage component declined from 20 to 14 but the employment index rose from 12 to 17. Expected retail demand declined from 33 to 10 and that cannot be good ahead of the holidays. Retail employment rose from -19 to -12 suggesting employers are cautious on adding extra help for the holidays.



The calendar for Wednesday has only one important event and that is the FOMC announcement. While most analysts are now projecting hikes in 2016 there are still a few that believe December is a possibility. It will be interesting to see if the Fed leaves the "appropriate to hike in 2015" language in the statement.

The estimates for the Q3-GDP on Thursday ticked lower on the Atlanta Fed forecast to +0.8% growth. What the government bean counters say on Thursday could be materially different since they recently changed the way they calculate the number in order to "smooth" out the volatility. That means they do not like to see negative numbers so they are modifying their seasonal adjustments to average out the results. This report could be a market mover.



After the bell Apple reported earnings of $1.96 that rose +38% and beat estimates for $1.88. Revenue of $51.50 billion rose +22% and beat estimates for $51.11 billion. The beat came even after an -8% revenue hit on the strong dollar. Cash on hand rose +33% from the comparison quarter to $206 billion.

iPhone sales were 48.04 million compared to estimates for 48.6 million and 39.3 million in the Q3-2014 quarter. iPad sales were 9.88 million compared to estimates for 10.5 million and sales of 12.3 million in the year ago quarter. Mac sales rose +3% to 5.71 million but still the slowest growth rate since Q3-2013. However, that was the most Macs ever sold in a quarter. More than 62.2% of Apple's revenue came from the iPhone.

NOTE: The September quarter only had 2 business days when the 6s models were available for sale.

Apple did not disclose sales of the Watch. The "other products" segment, which includes the Watch, rose +61% to $3.04 billion.

Apple guided for revenue of $75.5-$77.5 billion in Q4 compared to analyst estimates for $77 billion. Since Apple usually guides low that suggests the possibility of an $80 billion quarter in Q4. Tim Cook said Apple's sales to businesses rose 40% this year to $25 billion. Cook said businesses/enterprises were a "major growth vector" for Apple. Chinese revenue doubled from $6.29 billion to $12.52 billion. The iPhone has become a premium brand in China similar to Prada and that allows them to maintain their premium pricing. iPhone shipments to China rose +70%.

Analysts are forecasting sales of 78 million phones in the current quarter. That would be more than the 74.46 million sold in Q4-2014 despite this being an upgrade cycle rather than a new product cycle. Cook said he expected unit volume to grow this quarter so the forecasting will be volatile as the holidays progress. More than 70% of existing iPhones currently in use are model 5s or older. That gives Apple a very large upgrade base for the holidays.

Apple shares closed at $114.55 and traded in a range from $110.81 to $118.33 after the report before closing slightly lower at $114.26.


Twitter (TWTR) shares imploded after reporting earnings of 10 cents compared to estimates for 5 cents. Revenue rose +57.6% to $569.2 million compared to estimates for $559.4 million. The problem came in the guidance and the user growth. The company projected revenue of $695-$710 million compared to analyst estimates for $739.7 million. Twitter had 320 million active monthly users, up from 316 million but missing expectations for 324 million. User growth was the slowest since the company went public in 2013.

There were some positive factors. Advertisers exceeded 100,000 for the first time and Twitter began making money from logged out users, or those without accounts that visit the website. Revenue did rise +57.6% and that was totally ignored.

The weak guidance knocked TWTR shares for an 11% loss of -$4.19 in afterhours.


Alibaba (BABA) shares rallied +4% after reporting earnings of 57 cents that beat estimates for 54 cents. Revenue rose +32% but mobile revenue rose +182% and accounted for 62% of total revenue. Gross merchandise volume rose +28% to $112 billion. Apparently, Asian shoppers are addicted to online spending.


Earnings due out on Wednesday include Amgen, GoPro, and Anthem. Thursday is the next big day with Linkedin, Mastercard, Starbucks and MGM Resorts.


Rite Aid Corp (RAD) saw its shares spike +42% after news broke that Walgreens Boots Alliance (WBA) was close to a deal to acquire the chain. After the bell Walgreens announced it would acquire RAD for $17.2 billion or $9 in cash.

Competing shares of CVS rose +2% on the expectations for WBA/RAD to be forced to divest some stores in order to get it approved by regulators. Walgreens has 13,200 stores and Rite Aid more than 5,000.

Express Scripts (ESRX) shares fell -$1.50 because they had always been expected to be an acquirer of Rite Aid.

McKesson (MCK) shares fell -4% because they have a pharmacy distribution deal with Rite Aid. Amerisource Bergen (ABC) shares rallied because they have a similar deal with Walgreens and that would probably be extended to the Rite Aid stores after the acquisition.


Fairchild Semiconductor was up +5% intraday on rumors they were in talks to be acquired by STMicroelectronics (STM). There were no confirmations and shares faded into the close.


GM shares declined slightly on news of a 1.4 million-vehicle recall. This is the second time for the same problem for some of these cars made between 1997-2004.

Ford (F) declined -5% after reporting earnings of 45 cents that missed estimates by a penny. The company cautioned that year-end sales promotions could cut into profit margins in the current quarter. Ford is launching a "Friends and Neighbors" discount program next week to boost sales in Q4.


Crude prices fell to $42.58 intraday and a two-month low but rebounded on the normal Tuesday afternoon short covering ahead of the inventory reports. The drop in crude prices caused a -3% decline in the production sector. This will continue to push gasoline prices lower, which are currently $2.19 but many states already have prices under $2.



Natural gas prices dipped under $2 to $1.95 intraday before rebounding to $2.09. Natural gas in storage has risen to 3,814 Bcf and will likely exceed 4,000 Bcf (4 Tcf) in the coming weeks. That will be a new record. Inventories are +434 Bcf over year ago levels. Gas prices are flirting with a decade low under $2. The decline in active rigs has not slowed the amount of gas being produced and projections for mild weather in the Northeast over the next month means continued weak demand.



Markets

Despite the fear over Apple earnings and tomorrow's Fed announcement, the markets held up relatively well. The Nasdaq 100 ($NDX) is only 40 points away from a new high. I would never have expected to say that just a couple weeks ago. The big cap tech stocks are leading the market higher thanks to aggressive window dressing by fund managers. Every fund manager wants to show those stocks in their portfolio when their fiscal year ends on Friday.

With Apple earnings out of the way with no apparent disaster this should allow funds to make their final buys of the week on Wednesday, assuming the Fed does not muddy the waters.


The biotech sector helped lift the Nasdaq with a +3.5% gain for the day. The winners and sinners list is heavily populated with biotech winners.



The Nasdaq Composite is lagging the Nasdaq big caps but still holding its gains at 5,030 and well above support at 5,008.


The S&P-500 is struggling somewhat thanks to the big drop in IBM -6, PCLN -11, CMI -10, AKAM -10, MCK -8 and UNP -5. Resistance at 2,075 has held for two days and we closed under light support at 2,068 today.

This appears to be simply consolidation after three weeks of big gains. This was helped by the losses above and the dozens of post earnings declines. The lack of a material bout of profit taking suggests fund managers are still involved. Unfortunately, they are not buying the small caps and that is still troubling.


The Dow was helped by UnitedHealth (UNH) and Boeing (BA) but their gains were offset by the losses in IBM. Pfizer and Merck were both fractionally positive after earnings and that help could be missing tomorrow.

As long as the Dow remains over 17,500 the rally will remain healthy. Should we fall under that level it could produce some selling that knocks us back to 17,000. We do not want to go there so keep your fingers cross the Fed announcement is neutral.



The Russell 2000 small caps lost -1.22% of -14 points to close at 1,141 and well under resistance at 1,165 and prior support at 1,150. This is not a good sign with major resistance having held and the index only 10 points from a four week low.

For whatever reason the small caps are being kicked to the curb in favor of the large cap tech stocks and that suggests fund managers are looking for liquidity in hopes of a quick exit if the market weakens.


Futures are flat in the overnight session and Apple has given investors no reason to run to the sidelines. They may not have given them a reason to jump into Apple shares as well but that could change once the analysts start revising their forecasts.

If you bought the dip this week I would tighten your stop losses and hope that Wednesday is positive and the Fed is neutral. I would not chase any prices higher after today. Keep what you are holding and look for window dressing to fade late in the week. I could be completely wrong but that is my bias and I am sticking with it.

Sometimes the best trade is the one you do not make.

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Enter passively, exit aggressively!

Jim Brown

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