The markets surged out of the gate this morning on a flurry of acquisitions and mergers.
The initial opening gains were reversed into temporary losses but by 11:30 the major indexes were back in positive territory. This was a big cap rally day with the smaller cap indexes, S&P-600 and S&P-400 both closing fractionally lower after making new highs on Friday.
The reason the market went negative right after the open was a sharp drop in the ISM Nonmanufacturing report. This is the services sector of the economy and represents 88% of GDP and the headline number fell from 55.5 to 51.4 for August. This mirrored the ISM Manufacturing decline we saw last week. The consensus estimate was for a minor decline to 55.0 and they missed it by a mile.
This was the lowest level since January 2010. This was not a good report despite the fact it remained over 50.0 and slightly in expansion territory.
New orders fell from 60.3 to 51.4 and the biggest drop since 2008, employment from 51.4 to 50.7 and business activity 59.3 to 51.8. Imports fell from 53.0 to 50.5, exports from 55.5 to 46.5, order backlogs from 51.0 to 49.5 and inventories declined from 54.0 to 48.0. None of the components posted even a minor gain.
For the headline number this was the third decline in the last four months. Only nine industries reported growth compared to 15 in July. Thirty-two percent of respondents said their inventories were still too high based on current business conditions.
The decline in the components suggests there will be an even lower headline number for September and this close to 50 it is possible we could see a contraction in September.
The unexpectedly bad ISM report pushed estimates for a September rate hike even lower. On Friday, there was a 21% chance as indicated by the Fed Funds Futures and the CME FedWatch Tool. That declined to 18% today. There is almost no actual chance of a rate hike in September. The December meeting probability declined slightly from 54% to 52% and some analysts were rating the odds even lower than that.
The only positive report was the global Semiconductor Billings for July. Billings rose from +1.1% in June to +2.6% in July to $27.1 billion. This was the largest gain since September 2013. Billings in the U.S. rose 6.7% with China sales up +9.8%. Strangely, the Semiconductor Index was negative for the day. The index did make a new high on Thursday so this was simple profit taking.
The calendar for Wednesday is headlined by the Apple iPhone 7 announcement at 1:00 and the Fed Beige Book at 2:00. Apple's announcement will generate far more headlines and air time than the Beige Book.
Given the drop in the ISM Manufacturing, ISM services and anecdotal reports about the weak retail sector in August, I am not expecting good things from the Beige Book. However, the Fed officials that put it together always try to spin the news positive whenever possible.
Apple is expected to announce the iPhone 7 and possibly some other items as well. The iPhone 7 announcement is expected to be underwhelming. The "space gray" color option will be replaced by "dark black" regular finish and a glossy black finish called "piano black," which is expected to only be available in the high end models. The minimum memory size will be 32Gb and the upgrades will be to 128Gb and 256Gb. The phone will have a dual lens 12 megapixel camera system, one for wide angle and one for telescopic but they will both work together. This is expected to give you the capability of refocusing pictures after they have been taken. The phone will be more water "resistant" but not water "proof."
There will not be a headphone jack and that is sure to anger many people with high-end headphones that will now be almost useless. However, Apple is including an adapter that will plug into the "lightning" jack and allow you to plug your wired headphones into the adapter. That sounds very clunky and I am sure it is just a way to get everyone temporarily over the shock of no jack on the phone.
The new A10 processor is expected to be 2.4 Ghz and a big jump over the current A9 at 1.85 Ghz. It is also expected to be a drag on battery life. The camera's flash will have 4 LEDs, 2 warm and 2 cool for better color rendition.
Most consumers are likely to be unimpressed. If you are tuned into the Apple product family, you probably already know there will be a radically new iPhone released next year for the 10-year anniversary of the product. The people buying an iPhone 7 either do not know there is a big new redesign on the horizon or their current phone is on its last legs and they just have to have a new phone now.
Apple is also going to start overhauling the App Store next week. They are going to review all the existing apps and remove all the outdated apps plus the ones that do not conform to current requirements, have crashes in their history log, etc. In order to get back into the App Store, developers will have to bring apps current and then resubmit the apps to be reviewed again under the current rules. Quite a few of the oldies but goodies are going away.
Apple is also expected to release a new operating system that includes more "core" apps like News, Photos, and Messenger.
Apple shares were fractionally lower ahead of the event. Typically, Apple shares decline on the announcement. Active traders may want to pick up some puts on Wednesday morning. The September $107 puts with 10 days until expiration were $1.19 at the close. Apple shares could easily drop to $105 or so without any unexpectedly good news in the announcement.
Monsanto (MON) is closer to a deal with Bayer (BAYRY) but it is not yet agreed. Bayer raised their offer to $127.50 a share with Monsanto at $106 today. Monsanto confirmed the receipt of the "nonbinding" proposal and said it was in "constructive negotiations" with Bayer. What puzzles me is the lack of any material movement on Monsanto stock. Analysts believe the bid price would still have to be raised but that is even a better reason to own the company.
I looked at call options on Monsanto several times since the discussions have been in progress. Several weeks ago, the prices were high and the bid-ask spreads were $2-$3. Today the October at the money calls are $2.65/$2.93. If they a moving closer to a deal and the price is expected to go higher, then those calls are a bargain. The fly in the soup is the clause "a deal may not be concluded" in all the various press releases. That means the calls go to zero the instant a "no deal" headline crosses the wires. If you are willing to risk $3 on a potential $20 gain, then jump right in.
Danaher Corporation (DHR) said it was acquiring Cepheid (CPHD) for $53 a share in cash or roughly $4 billion including debt. Cepheid is a molecular diagnostics company that develops tests to screen for diseases. This will be a good fit for Danaher because they already have a testing business that produces $5 billion in annual revenue. Shares rallied 52% on the deal.
EOG Resources (EOG) said it was buying privately held Yates Petroleum and some of Yates subsidiaries in a deal valued at $2.5 billion in order to increase its assets in the Permian Basin. EOG will issue 26.06 million shares and pay $37 million in cash. The company will also assume $245 million in Yates debt and $131 million in cash from the Yates acquisition.
Yates has 1.6 million acres under lease. This raises EOG's position in the Permian to 574,000 acres. It doubles their Powder River acreage to 400,000 acres. It gives EOG a foothold in the Emerging Northwest Shelf of 150,000 acres and creates a combined 424,000 acre position in the Delaware Basin. The Yates acreage gives EOG immediate new inventory of 1,740 premium drilling locations. EOG defines "premium location" as a well that will produce a 30% return after taxes assuming a $40 oil price. EOG will add additional rigs to begin drilling these locations in 2017. Yates currently produces 29,600 boepd with 48% crude oil. They have proved reserves of 44 million barrels. EOG currently produces 551,000 Boepd.
EOG shares surges 7% on the news.
Enbridge Inc (ENB) is buying Spectra Energy (SE) for $28 billion in a stock for stock transaction. Spectra has more than 21,000 miles of pipeline in North America. Spectra shareholders will receive 0.984 shares of Enbridge for every share of Spectra they own. The merger will create the largest energy infrastructure company in North America with an enterprise value of $127 billion. The combined company expects to increase the dividend by 15% in 2017. The combined companies have $37 billion in pipeline projects in development. The transaction is expected to close in Q1.
Dave and Busters (PLAY) reported earnings after the bell of 50 cents compared to estimates for 44 cents. Revenue rose 12.4% to $244.3 million and beat estimates for $243.1 million. However, they cut same store sales expectations for the full year from 3.25%-4.25% to 2.25%-3.25%. Shares fell $3 in afterhours.
After the close AMD announced plans to sell $600 million in stock and $450 million in convertible senior notes. The combined proceeds of $1.02 billion will repay current borrowings and outstanding notes. Any remaining proceeds will be used for normal corporate uses. Shares fell back to $7 after the announcement.
Chipotle Mexican Grill (CMG) spiked in after hours when news broke that Bill Ackman's Pershing Square fund had acquired a 9.9% stake in the company. In an SEC filing, Pershing said Chipotle's shares were "undervalued, offered a strong brand, a differentiated offering, enormous growth opportunity and visionary leadership." Ackman needs to buy a winner after his losing positions in Herbalife and Valeant.
Casey's General Store (CASY) reported record earnings of $1.70 but that missed estimates for $1.79. Shares fell $10 on the news.
Twitter (TWTR) shares rose again on multiple stories being floated about a potential acquisition or even being taken private. There is a board meeting on Thursday and that has the trader sphere all in a twitter.
It seemed like a normal trading day despite the lack of any volatility. Once the ISM dip was over the markets slowly drifted higher. Volume was very decent at 6.6 billion shares considering it was the day after a three-day weekend. The normal holiday hangover was minimal.
The Nasdaq Composite closed at a new high thanks to the FANG stocks. Every one of them posted strong gains on no news. It was as if portfolio managers sitting on a lot of cash decided to through a lot of money at the highly liquid stocks as an easy way to get invested quickly now that we are in the countdown period for their fiscal year end on October 1st.
The prior Nasdaq high was 5,262 and the index closed at 5,275.91 for a new record. It was also a new intraday high since the index closed at the high of the day. The biotech sector came roaring back to with a +93 point gain to provide support.
The Nasdaq is poised for a new leg higher but those fund managers will need to keep feeding the rally with their accumulated cash.
The S&P only added 6 points to 2,186 with the prior closing high at 2,190. It is very close but we saw twice in the last two weeks where the S&P spiked to 2,193 intraday only to fall back sharply. The S&P did not get the same lift from the FANG stocks as the Nasdaq but they did help. Support remains 2,175 and 2,150.
The Dow had a mediocre gain with the oil stocks helping after Saudi Arabia and Russia agreeing on Monday to form a joint venture to stabilize oil prices and possibly freeze production. Crude oil was up $1 on Monday and another 44 cents today. That lifted Chevron and Exxon into the top 5 list on the Dow. McDonalds and Boeing were the other two winners.
The Dow remains stuck below multiple levels of converging resistance at 18,625 and today's +46 points was lackluster. If Apple declines after the iPhone announcement, it will be a drag on the Dow on Wednesday afternoon.
Support remains 18,350 and 18,300.
The Russell 2000 only gained 1 point and the S&P-400 and S&P-600 were negative for the day. The small cap stocks were leaders late last week but it was a big cap tech day today. The Russell 2000 is still progressing higher but very slowly. As the market sentiment index, it is not showing any bullish conviction today.
While today's Nasdaq rally was nice, one day does not make a trend. Just because the portfolio managers threw some money at the FANG stocks today and lifted the Nasdaq, it does not mean they are going to do the same thing on Wednesday.
The Apple announcement could turn into a negative for the Dow if Apple shares sink. The Fed Beige Book could be bad news, but that may actually be another buy signal suggesting the Fed is on hold at least until December.
I would continue to refrain from being overly long just in case Tuesday's rally was a head fake. There is plenty of time to make new trades. There is always another trade waiting as long as you have capital to invest.
Enter passively, exit aggressively!
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