Traders have already left for the weekend and volume is the lowest of the year.
They would save everyone a lot of brain damage by just closing the markets for the rest of the week. With volume yesterday at 4.9 billion shares and only 5.6 billion today the indexes are just running in place while we wait for Friday's employment report and the start of the September madness next week.
There were no economic reports of importance to energize the market and gap lower at the open lasted most of the day with only a minor short covering bounce into the close.
The Consumer Confidence for August rose from 96.7 to 101.1 and the highest level since September. It was only the fifth reading above 100 in the past eight years. Analysts were expecting a reading of 97. The present conditions component spiked from 118.8 to 123.0 and the expectations component rose sharply from 82.0 to 86.4. Those planning on buying a car declined slightly from 11.1% to 11.0%. Those planning on buying a home rose from 5.1% to 6.4%, a big jump, and appliances up from 49.3% to 50.3%. Consumers planning on going on a vacation over the next six months rose from 43.4% to 50.7% an unusually large gain.
It would appear those consumers responding to the survey in August were a different mindset than those responding to the sentiment survey last week. Those who felt jobs were plentiful rose from 23.0% to 26.0% and those saying jobs were hard to get rose from 22.1% to 23.4%. Consumers expecting a raise rose from 17.2% to 18.8%.
If these confidence numbers continue to rise the outlook for the economy should improve also.
The S&P Case-Shiller Home Price Index showed prices rose 5.1% in June compared to the prior reading of 5.2%. The report was ignored.
The Texas Service Sector Outlook Survey rose from -1.3 to +6.5 for August. The internal components showed revenue fell from 10.3 to 6.5 but employment rose from 3.8 to 5.8. Costs rose significantly. Employment costs rose from 10.4 to 14.2 and input prices rose from 17.9 to 22.0. Selling prices declined from 3.8 to 2.4. Since it appears all the major components were moving in the wrong direction, I am surprised the headline number showed a gain.
Tomorrow we will get the first payroll report with the ADP private sector employment report. The expectations have risen from 165,000 to 171,000 since last Friday. The Nonfarm Payrolls on Friday have seen expectations rise from 160,000 to 180,000.
The Nonfarm Payrolls will be the key event for the week and the volume on Friday is going to be very anemic. This will be the focus report for the Fed and trigger decisions for the FOMC meeting two weeks later. Any reading materially over 180,000 would almost guarantee a rate hike.
The ISM forecast has not changed with 52.2 representing a minor decline.
The big news of the day was a wakeup call for Apple (AAPL). This was not the kind of call you want to wake you up. The EU demanded a $14.5 billion tax payment plus interest from Apple because of their business in Ireland. They employ 6,000 workers in Ireland. The EU concluded that Ireland had granted Apple undue tax benefits, which is illegal under EU rules. This allowed Apple to pay an effective corporate tax rate of 1% on its EU profits in 2003 and declining to 0.005% in 2014. Apple and Ireland agreed to a "tax arrangement" in 1991. Apple first relocated employees to Ireland in 1980 but increased their presence after 1991.
The EU official said they were sending a message to any taxpayer in Europe and they were currently investigating Amazon and McDonalds for similar tax liabilities.
The ruling is being protested by both Ireland and Apple. The Irish finance minister said Apple did not owe the money and was paying taxes according to the Irish tax rules in place. He said this was a power grab by the EU in trying to generate extra income by investigating large corporations with money in EU banks. According to the minister, each country in the EU is responsible for charging and collecting their own taxes as they see fit. The EU claim is unjustified and it is being made under an unfair competition clause rather than under a tax rules clause.
Everyone commenting on the situation said it was not about how much Apple pays in taxes but which government collects the money. An Apple spokesman said, "If the ruling is not overturned it would have a significantly negative effect on investment and job creation in Europe." I would not be surprised to see other EU countries begin talks about leaving the EU if this kind of regulatory oversight continues.
A UK official immediately welcomed Apple to move to the UK where they would be free from the onerous EU regulations. This is an example of the regulatory oversight the UK was trying to escape from with the Brexit vote. Unelected regulators in Brussels can pass any law or ruling they desire and the EU countries have to live with it.
Apple shares declined to $106 on the news.
The bottom finally fell out of the Hershey (HSY), Mondelez (MDLZ) acquisition talks. We tried to use a put on the Hershey spike back in June in anticipation of this event but we ran out of time. There was no way an acquisition was ever going to be completed. The Hershey trust owns 80% of the voting rights of the Hershey Company and the trust was created to fund a children's school and living conditions for people in Hershey Pennsylvania. The trust is so intertwined with the people in Hershey PA, that the Attorney General of PA also has veto power over any deal. The trust board is being reconstituted this year and next after the AG forced them to put term limits on the board members.
After two months of talks on how the companies would be structured and how the merger would work, they finally got around to price last week. Mondelez had offered $107 with Hershey at $96. When they finally began to talk price the Hershey CEO said it was not enough. After some soul searching by the Mondelez board they suggested the deal would be earnings neutral at $115 a share. When they passed that number to Hershey the board said no way they would even consider a number under $125. Mondelez immediately canceled the discussions saying there was no "actionable path" to continue the process.
Hershey shares fell -$12 on the news to $99.65 and only $3 above the price where it started in June.
United Airlines (UAL) soared 9% after they hired the president of American Airlines, Scott Kirby. On Friday, he was president of American and on Monday, he was president of United, a position they created just for him, but he will not actually start work until next week. This puts him in the line of succession for ailing CEO Oscar Munoz, who just returned to work after getting a heart transplant. Kirby's base compensation will be $875,000 plus an annual bonus, restricted shares and performance based stock awards. He also received a signing bonus of $5 million in stock options that will vest after UAL stock rises 25%. I hope for his sake the grant date was last week. He left AAL with $3.85 million in severance, plus an accelerated vesting of 259,000 AAL shares worth $9.34 million. He must be a smart guy because he graduated from the U.S. Air Force Academy with degrees in computer science and operations research and then received a masters in computer science from George Washington University.
The spike in United shares helped power the Dow Transports to a 50 point gain in an otherwise weak market.
Abercrombie & Fitch (ANF) reported a loss of 25 cents that was larger than the 20-cent loss analysts expected. Revenue of $783.2 million narrowly beat estimates for $782.7 million. Same store sales declined -4% in the quarter. Weak traffic forced higher discounts and reduced profit margins. The company warned that "traffic headwinds" would continue to weigh on sales for the rest of 2016. This was the 14th quarter of declining sales.
Fashion retailer G-III Apparel (GIII) reported earnings of 1 cent compared to estimates for 18 cents. Revenue of $442 million missed estimates for $485 million. The CEO said "We believe the risk of continued softness in the retail outlet environment has somewhat abated, as we have now liquidated inventory from the 2015 holiday season." The CEO also said expected cool weather trends would benefit retailers compared to the unseasonably warm weather in 2015. The company lowered full year guidance from $2.56 billion and $2.60 in earnings to $2.48 billion and $2.21 in earnings. Shares were crushed for a -21% loss.
DSW Inc (DSW) shares fell -10% after reporting earnings of 35 cents compared to estimates for 30 cents. Revenue of $659 million barely beat estimates for $658.7 million. However, same store sales declined -1.4%. The company reaffirmed full year estimates for $1.32 to $1.42. The severity of the selling was probably related to the ANF and GIII disasters. DSW was guilty by association.
After the bell, Palo Alto Networks (PANW) reported earnings of 50 cents that rose 79% compared to estimates of 49 cents. Revenue rose 41% to $440.8 million and easily beat estimates for $389.9 million. The company guided for the current quarter for earnings to rise 49% to 51-53 cents on a 34% increase in revenue to $396-$402 million. Analysts were expecting 56 cents and $402.9 million. Shares initially rise to $150 but then declined to close at $139, down -$4.
H&R Block (HRB) reported a loss of 55 cents compared to estimates for a loss of 53 cents. Revenue of $125 million missed estimates for $132.6 million. Block's business is highly seasonal and you cannot judge the entire year by a summer quarter. However, investors sold the stock and shares were down about 10% in afterhours.
There are limited earnings the rest of the week with a random collection of companies. However, the retailers will continue to hog the headlines. After today's retail disasters, those late week reporters are probably wishing they could delay their earnings until next week.
Boeing (BA) said it was not going to raise prices on planes in 2016 because they had a record order backlog. Previously they held prices flat in 2001 and 2009. Boeing has sold 336 planes in 2016 compared to 760 for all of 2015. Production is so backlogged that an order placed today would not receive delivery until 2022-2023. Nobody pays list prices for planes so refraining from an annual price hike is not that meaningful. It just means you are a little firmer on the negotiations. However, the flat list prices are an inducement for some buyers to put down millions of dollars in orders for planes they may not get until 2023. That is some long term planning.
Penske Automotive (PAG) is on a vertical ramp because the Chairman and CEO, Roger Penske, is pouring money into stock purchases. He purchased another 478,000 shares on Monday for $21 million. That is in addition to the roughly 1.3 million shares he has purchased previously in August. He has spent roughly $80 million buying shares in August alone. He now owns approximately 32 million shares with only 85 million outstanding. Every 2-3 days he announces another purchase. It appears he is trying to take the company private one share block at a time.
Crude prices are falling despite the harsh weather in the Gulf of Mexico. Oil production in the Gulf has been reduced by about 10% as platform operators begin to shut in production and evacuate the rigs. There has not been a hurricane in the Gulf in more than three years and that is almost a record. There are 781 production platforms in the Gulf and only six have been evacuated so far. Tropical Depression Nine is expected to make a hard right turn to the east and miss all but a few of the rigs on the far east of the oil patch. Winds are only about 35 mph but it is expected to strengthen as it reaches the warmer shallow water. The Gulf produces about 20% of the U.S. oil.
Crude prices are also falling because the OPEC headline spam about a potential production freeze agreement at the late September meeting in Algeria, is fading. There have been multiple comments from various OPEC countries about not participating in a freeze. It appears the effort is going to fail even before the meeting occurs. Crude oil has fallen to $46 as we near the end of the driving season.
Turn off the computer, play a round of golf and get a head start on the holiday planning. The market does not appear to be headed anywhere this week. The divergence between the small caps and the big caps is just enough to keep both categories from moving too far from their current levels.
The Russell 2000 and S&P-600 small cap index both posted fractional gains today while the big cap indexes posted minor losses. Art Cashin pointed out that market lore suggests the indexes are up 60-70% of the time in the three days before Labor Day. While that is not a hard and fast rule there does not appear to be any urgency to move in either direction.
The ADP Employment report on Wednesday could trigger some volatility if it comes in significantly different than the 171,000 estimate. If it comes in much hotter, it will scare traders into expecting a large number on the Nonfarm report and a higher chance for a rate hike. That could cause some selling. If the report comes in lighter than expected, we could see traders project the same thing for the Nonfarm and that would push the hike farther into the future. That could trigger some buying.
Having the payroll report the day before a three-day weekend is always a traumatic event but this time around, it is even more worrisome because Fed heads have already said a hot report would push them towards a rate hike. That means traders will adjust their positions after the ADP report or remove them entirely.
The S&P closed right above initial support at 2,175 and tight in the middle of the recent range. That is about as neutral as you can get and there is no indication of direction. The 2,150 level is still critical support.
The converging resistance on the Dow remains intact and support at 18,350 is also unbroken. The Dow closed in the middle of its recent range although it has made a series of lower highs. The last week has seen a slight downward bias but the emphasis is on slight.
The biotech sell off has slowed and that has helped the Nasdaq keep its losses to a minimum. The sector is still declining but at a much slower pace. The tech earnings for the week come on Wed/Thr and that could provide some limited volatility. It is hard to generate a big market move when there is nobody in the market.
The Nasdaq came close to testing support at 5,200 again today with a dip to 5,205. That is the critical support level that keeps the Nasdaq in a tight range similar to the Dow and S&P. If 5,200 breaks it could trigger a volatility event.
The Russell 2000 is still climbing slowly higher and has not broken out of its recent trend. The microscopically slow climb of three steps forward and two steps backward is like watching paint dry but we cannot knock the trend. The Russell gains are helping to keep the big cap indexes from collapsing.
The S&P has not had a 1% move in the last 37 sessions. In the month of August, there have only been back to back S&P gains TWICE. Think about that. The consolidation pattern has been so tight that we have been alternating gains and losses since July 15th.
This tight pattern has got to break soon and when it does we could easily see a 50 point move on the S&P and possibly more. While the bears are seeing this recent pattern as a top in the market, there is growing evidence there could be a breakout to the upside after Labor Day. Of course, now that I have stated that fact I have jinxed the market. The key here is the fund manager race to their fiscal year end on October 31st. Some 77% of fund managers are performing below their benchmarks. The job of a portfolio manager is survival of the fittest. Those that perform survive; those that do not are replaced.
Once the opening bell rings on Tuesday morning, they will be surveying the landscape, talking to their teams and deciding what to dump and what to buy to cram some performance into the last 60 days of their fiscal year. That means our consolidation pattern is about to end. We just do not know which way it will break first. However, before they can add new positions they will need to liquidate old positions. That is why September is normally volatile. I did catch a sentence from Jeffery Hirsch from the Stock Trader's Almanac, saying Septembers in election years were up 7 out of the last 12. That is hardly a robust showing but the last 12 non-election Septembers have been negative.
All this goes to prove that nobody knows where the market is going next week. We do know that volatility will eventually rise and our consolidation pattern will end.
Enter passively, exit aggressively!
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