Analysts cannot make up their mind what the Fed is going to do.

Market Statistics

On the surface, the consensus estimates suggest a 90% chance the Fed will not hike rates on Wednesday. However, there is a wide range of analysts that believe the odds are much higher that the Fed will hike.

Bill Gross said this morning there was a 50:50 chance of a Fed hike. If that were to happen, the market would react very negatively. The majority of Fed heads have made hawkish comments in recent weeks but Yellen and a couple others still appear to be firmly dovish in their remarks.

There are multiple reasons the Fed could move in either direction and the Bank of Japan monetary policy statement early Wednesday could be a major deterrent. If the BoJ goes wild with a new stimulus statement, the Fed could be forced to wait until December even if they wanted to hike on Wednesday. It is commonly thought that the global central banks communicate their intentions to each other to avoid a conflict of policies. We will see on Wednesday if that is the case.

There is an 88% chance of a rate hike in December according to a survey this week. The Fed funds futures are only showing a 60% chance today but it is very likely to happen.

The Fed will probably issue a statement that is more hawkish than normal in order to set the tone for future commentary and the rate hike in December. This hawkish tone is expected by the market but there may still be a negative reaction.

The Fed cannot hike in November only three working days before the election. They go out of their way to avoid political confrontations. This means a pass in September is almost a guaranteed hike in December.

The chatter about the potential for a September hike lifted the futures slightly from Friday's 15% chance to suggest an 18% chance at today's close.


The only material economic report on Tuesday was the New Residential Construction numbers for August. The headline number declined from 1.211 million to 1.142 million and missed the consensus estimate for 1.191 million. This was the lowest number since the 1.113 million in March, which is typically low because of winter weather.

The -5.8% decline in housing starts was still +0.9% above the August 2015 numbers. Housing permits, a guide to future starts, fell slightly from 1.144 million to 1.139 million for a -0.4% decline.

The decline in housing starts was limited to the South with the other three regions showing slight increases. Starts in the South fell -14.8% and are now -13.1% below year ago levels. The West saw a 1.8% rise, Midwest +5.6% and Northeast +7.6% gain.


Wednesday is the make or break day for the market despite a flurry of economic reports on Thursday. The market direction should be dictated by Wednesday's events. The economics on Wednesday are not normally market-moving reports.


Homebuilder Lennar Corp (LEN) reported earnings of $1.01 that beat estimates for 88 cents. Revenue of $2.83 billion rose 13.7% and beat estimates for $2.66 billion. The company delivered 6,779 homes in the quarter, up 7% from a year ago. The average selling price rose 3% to $362,000. New orders rose +8% to 7,018 homes. The company said low interest rates and strong job growth were helping sales. Unfortunately, nothing helped lift the shares and they declined -3.5%. Shares declined because Lennar cut gross margin expectations from 23.5-24.0% to 23.25%. The average cost for building a home has risen 13.7% since 2007. Land costs, construction and financing costs have risen 2.9%. The labor costs have been the biggest driver in the price.


Homebuilder KB Homes (KBH) reported earnings of 42 cents that beat estimates for 39 cents. Revenue of $913.3 million missed estimates for $954.1 million. Deliveries rose 11% to 2,487 homes and the average selling price rose 2% to $365,900. The gross profit margin rose 20 basis points to 16.4%. The order backlog at the end of the quarter rose +17% to 5,226 home worth $1.85 billion. New orders for the quarter rose 16% to 2,508 homes. Shares declined -2.4% on the drop in the residential construction report.


After the bell, FedEx (FDX) reported earnings of $2.90 compared to estimates for $2.81. Revenue of $14.7 billion beat estimates for $14.6 billion. The company also raised guidance for the full year from $10.85 to $11.35. They said the integration of the TNT Express acquisition was going to be a plus. FedEx is raising rates an average of 3.9% for ground and FedEx Home Delivery and +4.9% on FedEx Freight on Jan 2nd. They also said they would switch to a weekly fuel adjustment charge starting on Feb 6th. Shares rallied $5 to $167 in afterhours trading.


Adobe Systems (ADBE) reported earnings of 75 cents that beat estimates for 72 cents. Revenue of $1.46 billion rose 20% and beat estimates for $1.45 billion. This was the tenth consecutive quarter of revenue gains. Annual subscription revenue was flat at $3.7 billion. They only account for those revenues in the quarter the service is provided. They guided for record Q3 revenue of $1.55 to $1.6 billion and earnings of 83 to 89 cents. Analysts were expecting $1.575 billion and 78 cents. Shares rose $5 in afterhours trading.


Microsoft (MSFT) said it raised its dividend 8% to 39 cents. The dividend will be paid on December 8th to holders on November 17th. They also announced a new $40 billion stock buyback plan that will follow the existing $40 billion program that is scheduled to be completed by December 31st. There was another $40 billion program before that one. Microsoft has $113.2 billion in cash and is spending $26 billion to acquire Linkedin (LNKD). That deal will be largely funded with debt because much of the company's cash is stranded overseas. Shares rose 50 cents in afterhours trading.


Allergan (AGN) reported its third acquisition in September with a $1.7 billion purchase of Tobria Therapeutics (TBRA). Investors went to bed with a $5 stock on Monday and woke up with a $40 stock on Tuesday. Their market cap was only $90 million before the announcement. Analysts speculate the high premium was due to competition from other potential acquirers. With Gilead Sciences on the prowl with $29 billion in cash, they may also have been a bidder.

Allergan is buying Tobria to get their drugs to fight fatty liver disease. The NASH disease affects more than 15 million Americans. Their livers accumulate fat that is not associated with alcohol consumption. Tobria's drug cenicriviroc has the potential for annual sales of $5 billion if later trials perform as expected.

Allergan bought privately held Akarna Therapeutics as well for $50 million. The company is also working on drugs to treat NASH.


NuSkin (NUS) reported a settlement with the SEC regarding a probe into a charitable contribution in China in 2013. The SEC said the accounting procedures were insufficient. The company settled for $765,688 or basically pocket change. The settlement ended the probe. The company also said Q3 revenue would come in at the high end of prior guidance of $560-$580 million. Shares were up 3% in afterhours.


Consumer audio manufacturer DTS Inc (DTSI) said it was being acquired by Tessera Technologies (TSRA) for $42.50 per share in cash or $850 million. This represents a 28% premium. Tessera said the acquisition would be immediately accretive and will generate considerable free cash flow.


Crude prices fell to $42.55 in early trading and rallied to close at $43.85. After the bell the API inventory report showed a monster -7.5 million barrel decline when analysts were expecting a +3.4 million barrel gain. There has not been any news that could account for the big decline. The EIA inventories on Wednesday will either confirm or discredit this number. After the report, crude prices spiked to $44.89. However, the current month contract expired at the close and that $44 number is the new contract that was already slightly higher. If I had to bet, I would expect the EIA numbers to not show that big decline. If they do, we need to start looking for a massive pipeline leak somewhere in the USA.


Markets

The markets will be volatile the rest of the week. That is about all I can tell you that I know will be true. The direction should be determined by the Fed and the BoJ on Wednesday. The Dow and S&P have been putting in lower highs and higher lows and compressing into a tight range ahead of the Fed news. They are likely to explode out of this consolidation but the direction is unknown.

The best guess would be a move higher because of the recent dip buying. Every dip is bought on strong initial volume but no conviction. Investors are willing to buy the dips but they are not willing to chase prices higher. Maybe after the Fed decision that problem will be resolved. Both those indexes are well above support and at the high of their recent range and that also suggests the move will be higher.

The S&P has resistance at 2,150 and it has been tested every day since Friday the 9th. Support at 2,120 has not been tested in four days. This should confirm the theory of an upside bias.


The Dow has a similar pattern. The resistance is 18,250 with support at 18,000. However, the last three days the Dow has found new interim support at 18,100 as the trading range compressed. There will be a directional move, only the direction is unknown.



The Nasdaq is holding closer to its historic high and I would expect the tech sector to lead if there is an upside move. Portfolio managers are likely to throw money at the FANG stocks as a way to get invested quickly if the Fed statement is market positive.

The biotech sector is behaving well thanks to the M&A activity. I am surprised it was not up more today but +1.4% when the other indexes were weak, is still a good day.


The Adobe earnings and the Microsoft buyback announcement could be positive for the tech sector in the morning. There may be an overriding gloom until after the Fed announcement.



The small cap S&P-600 continues to hold well above support and only 23 points from the historic high. When the big cap indexes were down on Monday the S&P-600 was up several points. They reversed roles today. I do expect the small caps to lead the market higher once the all clear signal arrives. We just do not know what or when that will be.


Everybody keeps warning about the Fed decision and the BoJ and the impact on the markets. That would appear to suggest that some news out of both events will power the market higher. While I believe there is a good chance of an upward move everyone should realize that it may not happen that way. Even if the Fed does not hike, there may be an immediate bout of volatility, probably in both directions, but there is no guarantee the market will go up.

With the election process in full swing and the lead changing almost daily there is a tremendous amount of uncertainty hovering over the market. It is entirely possible the market continues to chop around within 50 points of where the S&P closed today at 2,139 until after the election. I know that is painful to hear but it is a distinct possibility.

I would continue to caution not to be overly long until the market picks a direction. There is always another trade waiting as long as you have capital to invest when the volatility ends.

Enter passively, exit aggressively!

Jim Brown

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