The Dow Transports lost more than 2% as the airlines crashed and railroads derailed.
German carrier Lufthansa warned on passenger volumes because of ISIS fears and Delta said unit revenue fell -7% in July. Delta blamed the decline on a rise in capacity, low fares for last-minute bookings and huge swings in currencies. Lufthansa said recent terror attacks in Europe and heightened global distress had caused a "tangible impact on passenger volumes." The CEO said "our industry has to prepare for a difficult second half-year." "Forward bookings, in particular for our long-haul services to Europe have declined significantly."
Delta (DAL) shares fell -8%, United (UAL) fell -6%, American (AAL) -6% and JetBlue (JBLU) -6.5%. In North America, the airlines are also fighting the Zika epidemic with travel to Latin America slowing over fears of the virus.
The drop in the airlines and continued drop in the railroads because of low oil prices pushed the Dow Transports to a big loss and that weighed on the Dow Industrials and the market in general.
Also complicating the markets for Tuesday was a lackluster stimulus program from Japan. Prime Minister Shinzo Abe announced a $274 billion stimulus program but only $73 billion is actually new direct spending. The 28 trillion yen program is spread out over several years rather than provide a needed immediate injection into the economy. Part of the program is a 15,000 yen ($147) payment to 22 million low-income individuals, an increase in the number of child care facilities for working parents and compensation for employers for longer maternity leaves. The Nikkei fell -1.5% on the news as investors were hoping for a much stronger and more immediate program. This is the 26th stimulus program announced during the current decline in the Japanese economy. There was a new 2-month study commissioned on the impact of Japan's monetary policy after which they could launch a new program. The drop in the Nikkei contaminated the European indexes and there were losses all around.
There were a lot of lightweight economic reports today and none of them were market moving other than the auto sales for June. Sales rose from an annualized 16.66 million pace in June to 17.88 million for July thanks to dealer incentives that were the highest since Nov-2010. Estimates were for 17.4-17.6 million. However, the big three manufacturers struggled to put any gains on the board.
GM sales fell -1.9% in July to 267,258 vehicles. Ford sales declined -3% to 216,479 vehicles. Fiat Chrysler reported only a 0.3% rise to 180,727 vehicles thanks to a 22% increase in fleet sales. U.S. retail sales were down -2% to 155,855.
The NY ISM rose from 45.4 to 60.7 and the highest level since the 62.0 in December. However, three of the four internal components were still in contraction territory under 50. Employment did improve from 35.9 to 45.3 but remains in contraction. The six-month outlook fell from 59.5 to 56.8 but remained in expansion territory.
Personal income for June rose +0.2% and flat with May. Analysts were expecting a +0.3% rise. The PCE Deflator rose +0.1% after a +0.2% gain in May. Gasoline rose 2.4%, housing +0.3% and healthcare rose +0.2%. However, durable goods fell -0.3% and motor vehicles and parts declined -0.2%. The headline PCE inflation over the last 12 months is now 0.9% compared to the Core PCE over the same period at 1.6%. Declines in food prices actually lowered the headline number. Personal spending for June rose +0.3% after a 0.3% rise in May.
Semiconductor billings for June rose +1.1% and the biggest gain since October at +2.0%. Unfortunately this was down -5.8% from the same period in 2015. Weak overseas demand and financial volatility are slowing economic expansion and the demand for semiconductors. Of course, that is all relative since sales for June were $26.4 billion. Sales in the U.S. rose +0.9% but they are down -10.8% from year ago levels. Asia Pacific demand declined -0.8% and is 11% lower from the year ago period. Chinese sales rose 4.1% and they are up +1.7% year over year.
On tap for Wednesday is the ADP Employment report where estimates have declined -10,000 since last week to a gain of only 170,000. The Nonfarm Payroll estimate for Friday has also declined about 10,000 to 175,000 compared to the 287,000 reported for June. These reports will be critical for Fed thinking when they meet again in late September. They will also have the August jobs numbers before that meeting. Various Fed heads are starting to talk about rate hikes again although they are remaining elusive on the timing. I think it is just a conspiracy to try and talk up rates even though they know they will not be hiking until 2017.
Biogen (BIIB) spiked $28 at 2:30 on rumors Allergan (AGN) and/or Merck (MRK) were in discussions about an acquisition. The WSJ said the companies had held talks but they were only in the preliminary stages. Since Biogen had a market cap at the close of $72 billion it would be a whopper of a deal. Merck has a market cap of $162 billion and Allergan $101 billion. One analyst said it was very unlikely Allergan would actually be a strong bidder after they were shot down on the attempted Pfizer acquisition. The rumor and the spike in Biogen shares helped lift the Nasdaq off its intraday lows.
Deutsche Bank (DB) and Credit Suisse (CS) are being dropped from the Stoxx Europe 50 index for the first time since 1998. Both stocks have declined more than 50% this year as a result of negative rates and European economic weakness. The exchange operator said they were being ejected using a "fast exit" rule where a company on the index can be ejected if they fall to 75th or lower in the list of companies being considered for additions. That means there are 75 companies more in favor than DB or CS.
Electronic Arts (EA) reported earnings of 7 cents compared to estimates for a loss of 2 cents. Revenue of $682 million also beat estimated for $651 million. For the current quarter, the company projected a loss of 17 cents on revenue of $1.08 billion. Analysts were expecting $1.11 billion. Shares fell -$2 in afterhours.
FitBit (FIT) reported earnings of 12 cents compared to estimates for 11 cents. Revenue of $587 million also beat estimates for $578 million. They sold 5.7 million units in the quarter. They guided for the current quarter for revenue of $490-$510 million and analysts were expecting $497 million. They guided for earnings of 17-19 cents and analysts were expecting 17 cents. They also expect full year revenue of $2.5-$2.6 billion. Overall, it was a good report but shares only gained 75 cents in afterhours.
AIG (AIG) reported adjusted earnings of 98 cents on revenue of $13.13 billion. Analysts were expecting 91 cents. AIG is in the midst of a restructuring program and the CEO said we "have executed more quickly and smoothly than expected and our confidence in reaching our 2017 financial targets is high as our earnings become more sustainable." The return on equity rose from 6.8% to 8.6% and costs declined -7%. They are targeting a $1.6 billion cost reduction over two years. They bought back $3.2 billion in stock during the quarter for a total of $7.9 billion towards its target of $25 billion. The board authorized another $3 billion buyback for the current quarter and declared a dividend of 32 cents. Shares gained $2 after the bell. The consensus price target is about $65.
Endurance International (EIGI) posted adjusted earnings of 19 cents on revenue of $197.4 million. Analysts were expecting 33 cents on revenue of $299 million. EIGI registers, builds, sells and manages websites and domain names. They offer marketing tools, web payment interfaces and various cloud services, etc. They had 5.48 million subscribers on the platform at the end of the quarter. Shares fell -23% on the news.
Aetna (AET) reported earnings of $2.21 compared to estimates for $2.11. Revenue of $15.95 billion also beat estimates for $15.74 billion. Aetna had 46.3 million people receiving benefits at the end of the quarter. They guided for full year earnings of $7.90-$8.10. However, the company said Obamacare losses rose from $160 million in 2015 to $320 million expected for the full year. As a result, the company is no longer looking to expand into other states but is reevaluating its current participation in the 17 state exchanges it currently serves. With United Health and Humana already pulling out of the program it would leave Blue Cross as the only carrier in multiple states. Cigna is a smaller insurer and despite the expected loss this year they are still considering adding several states to their program but will not make the decision until later this year. Aetna shares gained $1.26 on the earnings.
Dow component Pfizer (PFE) reported earnings of 64 cents on revenue of $13.15 billion. Analysts were expecting 62 cents and $13.10 billion. The company reaffirmed full year earnings forecast of $2.38 to $2.48 per share. Drug sales were challenged and the outlook is for more of the same. Shares fell 2.5% on the news.
Dow component Procter & Gamble (PG) reported earnings of 79 cents compared to estimates for 74 cents. Revenue of $16.1 billion also beat estimates for $15.84 billion. The company guided for organic sales to rise 2% in 2017 and core earnings to grow mid single digits from the current year's $3.67 per share. The company said it was developing new products to specifically fight smells in workout clothes. The new Tide and Downy products will be called the "Odor Defense Collection." Although overall sales were weak last quarter the CEO said he was seeing improvements in China. Sales in China were flat compared to declines in prior quarters. Shares gained only slightly on the report.
Gun maker Sturm Ruger (RGR) reported earnings of $1.22 on a 19% increase in revenue to $167.9 million. The company said its modern sporting rifle, the AR-556, was responsible for one-third of all sales. They declared a cash dividend of 49 cents payable on August 26th to holders on August 12th. The company said gun demand was booming.
The National Shooting Sports Foundation reported today that FBI background checks surged 27.9% to 1,210,731 compared to July 2015 checks at 946,528. With Clinton promising to gut the second amendment, regulate semi-automatic firearms and slow down gun sales in general, you can bet the next 8-12 months will see new sales records set.
Earnings on the schedule for Wednesday will see Tesla, Jack in the Box, Humana, Tripadvisor and Ctrip.com as the headliners. There are no Dow components for the rest of the week and only four left to report.
Crude oil declined to $39.26 midday after a spike to $40.90 shortly after the open. The decline was sharp and there was no specific news. Shares closed at $39.56 but gained 20 cents in afterhours after the API inventory report showed a decline in crude inventories of -1.3 million barrels. Refined product inventories were basically flat.
Ironically, Exxon and Chevron were the top two gainers on the Dow.
The S&P finally broke out of its recent range from 2160-2180 and dipped to 2,147 intraday. For a few minutes, it appeared the markets were going into crash mode but buyers stepped in and rescued the indexes. The S&P rebounded 10 points to close at 2,157 for a loss of -14 points.
We now have a clear picture of resistance at 2,177 and the majority of support levels are back in the 2100-2128 range with 2,150 the intraday support from today. The market is still very overextended and we could easily continue lower simply from a lack of interest. However, volume was 7.5 billion shares and the highest since July 12th. Much of that was selling with decliners at 5,499 3:1 over advancers at 1,641. The volume was almost identical to the A/D ratio.
Normally this is where I would saw the volume rules. The heaviest volume is typically the indicator for market direction the following day. However, the dip buyers are alive and well even though we are moving into the seasonal weakness in August/September.
The Dow has been the weakest index as post earnings depression settles in on the 26 Dow stocks that have already reported. The earnings excitement has left the index. The Dow closed below support at 18,350 and this was the seventh consecutive day of declines for the index.
The Dow rebounded +67 points from the intraday low at 18,247 but still lost -91 points for the day. The Dow is still overextended and could easily return to support at 18,000 without damaging the current trend. That would only be a 3% decline and normal profit taking. A decline under 18,000 would target 17,400, which would be a 6% decline. We would have to drop back to nearly 16,500 to qualify as a 10% correction. I do not see that happening.
The Nasdaq declined almost to 5,100 before the Biogen spike changed the tone of the market. The index rebounded 28 points very quickly but then went dormant the last hour of trading at 5,140. The index is back in the prior resistance band after coming within 18 points of a new high on Monday. Like the other indexes, the Nasdaq remains overextended and derived much of its gains over the last week from the rally in the biotech sector. As long as that rally continues, it will provide support.
Resistance is now 5,200 and support 5,100.
The Russell 2000 dropped -17 points to close back under prior resistance at 1,205. This could be a launch point for a new rally or a failure point on any further decline. The Russell has risk back to 1,095 on any decline that is not normal profit taking.
I was going to say flat is the new down after three weeks of flat markets but today proved me wrong. I had a reader email me and ask "what happened? I thought the markets only went up." He was of course joking. It is just that we have not seen an actual market drop since June 24th.
While it is fun to joke about nonexistent declines, we should always remember, regardless of how bullish the market appears, it is never more than one headline away from a Jekyll and Hyde character change. The biggest declines are the ones that happen when we least expect them. With everyone expecting a decline into August, I would be very surprised if it was dramatic. Just keep your stop losses in place and prepare to launch new positions if we get an actual dip.
Enter passively, exit aggressively!
Send Jim an email
If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.