With one week left in October and the broader indexes weakening the expectations for an end of October rebound are fading.
The first week of the best six-week period of Q4 was definitely lackluster although the major indexes did post a minor gain. However, the markets are being held up by a few big cap stocks and the broader indexes are fading. The Russell 3000, the 3,000 largest stocks in the equity market, posted a very weak rebound from the Oct 13th support test at 1,250. Another test of that level may not be successful.
However, this coming week is window dressing week as fund managers close out their fiscal year on October 31st. That could lift the markets temporarily but the longer-term outlook is fading because of election uncertainty.
The only economic report on Friday was the Regional and State Employment. The report showed that job growth was slowing, which is not surprising in the 7th year of an economic expansion. We have seen declines in the payroll reports but everyone continues to claim all is well.
In September, only 14 states saw employment increase but that was up from the 4 states in August. In June and July there were 15 and 18 states showing increases. Employment was flat in 33 states and declined in 3 states. The three largest gains came from Texas at +38,300, California +30,000 and Florida +23,000. The three biggest losers were Wisconsin -10,500, Alabama -6,600 and New Mexico -4,200. The report was ignored.
The calendar for next week is relatively uneventful except for the four Fed speakers on Monday and the GDP report on Friday. The GDP for Q3 has declined significantly from the +3.7% forecast by the Atlanta Fed GDPNow in early August. The forecast was for +2.0% as of Wednesday, up slightly from the +1.9% earlier in the week. If the Friday report shows GDP growth significantly less than 2% or significantly higher, the market could react sharply. Any further decline will put pressure on the Fed to skip a rate hike in December.
Currently the odds for a rate hike at the November meeting are around 9% and practically impossible unless the Fed produced a dramatic surge in hawkish Fedspeak and that is not expected.
The odds for a hike at the December meeting have risen to 69.9% and almost a certainty with some expecting the possibility of a 50-point increase.
The Richmond Fed Manufacturing Survey on Tuesday is relatively important but nobody is expecting a material change.
Friday was all about earnings and the reaction to specific reports. The biggest impact to the open was McDonalds (MCD). The company reported earnings of $1.62 that beat estimates for $1.48. Revenue of $6.42 billion, declined from $6.62 billion but still beat estimates for $6.28 billion. Same store sales rose +3.5% globally and +1.3% in the USA. In the year ago quarter they posted +3.1% rise globally. Currency issues removed 3 cents a share from earnings. Revenues at company-operated stores rose 7.3% to $3.97 billion. Revenue at franchised stores rose 5.1% to $2.45 billion. The company said the introduction of Chicken McNuggets with no artificial preservatives boosted sales. McDonalds shares spiked $3.50 at the open to add +25 points to the Dow.
General Electric (GE) had the opposite impact on the Dow. The company reported earnings of 32 cents that beat estimates by a penny. However, revenue of $29.27 billion missed estimates for $29.84 billion. GE lowered full year organic growth guidance to 2%, down from the 2-4% in the prior forecast from July. They maintained their full year earnings guidance but narrowed the range. They guided for $1.48-$1.52, down from $1.45-$1.55. The midpoint is the same. Analysts were expecting $1.49. GE said organic industrial orders fell -6% but digital and software orders rose 11%. Oil and gas revenues declined -25% but power unit revenue rose 37%. GE also raised its stock buyback program by $4 billion. As the biggest industrial manufacturer, the continued weakness in their sector suggests the U.S. economy is slowing. Shares dropped to $28.33 at the open but rebounded nearly to the flat line and closed at $28.98. GE shares do not normally move in a hurry.
Honeywell (HON) reported earnings of $1.67 compared to estimates for $1.60. Revenue of $9.80 billion beat estimates for $9.78 billion. The company said it was well positioned for double-digit earnings growth in Q4 and that would push them to 8-9% earnings growth for the full year. For Q4 they guided for $1.74-$1.78 in earnings and analysts were expecting $1.80. They guided for the full year to earnings of $6.60-$6.64 and revenue of $39.4 to $39.6 billion. Analysts were expecting $6.68 and $39.63 billion.
Shares rallied despite the lowered guidance because Honeywell had already warned two weeks ago and shares were crushed. The company focused on being upbeat about 2017 saying they expect double-digit earnings because of the restructuring they accomplished in 2016. The company laid off 3,017 positions in Q3 as they separated the automation and control solutions business into two new reporting segments. They took a charge of $202 million on the restructuring and layoffs. Because of the big drop in early October, the risk should be reduced for Honeywell shares.
Microsoft (MSFT) reported earnings after the bell on Thursday. They reported 76 cents compared to analyst estimates for 68 cents. Revenue of $22.3 billion beat estimates for $21.7 billion. The company said revenue growth in the Azure cloud rose 116%. Overall cloud growth which includes the server products and cloud services rose 8% to $6.4 billion. Shares spiked 4% to $59.66 and a historic 15-year high. Shares had been flat for the last three months along with the market. I would not buy MSFT shares on the breakout but I would buy a dip. Microsoft is in growth mode again and their future is bright.
Skechers (SKX) reported earnings of 42 cents that missed estimates for 48 cents. Revenue rose 10.1% to $942 million but also missed estimates for $954 million. For Q4 they guided to revenue of $710-$735 million and analysts were expecting $800 million. The domestic wholesale business, which accounts for 60% of their revenue declined -3.4%. The international wholesale business rose 18% but that was well below the 50% growth rate for Q3-2015. Shares fell -17% on the news.
According to FactSet 23% of the S&P 500 companies have reported earnings. Of those companies, 78% have beaten on earnings and 65% have beaten on revenue. The current blended earnings decline is now -0.3% and significantly better than the -2.7% forecast at the beginning of the quarter. That should be a significant boost for the market but nobody appears to be paying attention. The blended revenue forecast has risen to +2.6% and the first time since Q4-2014 there has been revenue growth.
However, these earnings beats have been against lowered expectations. Twenty-three of the Dow 30 stocks saw their estimates lowered over the quarter. For example, Apple (AAPL) reports earnings next week and their estimates have been lowered from $1.96 to $1.66 over the last quarter. This will be the third consecutive quarter of earnings declines for Apple.
The guidance for Q4 has also improved. Of the 17 S&P companies issuing guidance, only 10 have guided lower and 7 have guided higher. Q4 earnings growth is now expected to be +5.5% with revenue growth of +5.2%.
There are 178 S&P-500 companies reporting this week and 12 Dow components.
Tuesday is the big day for the Dow with 7 stocks reporting.
There was a series of major cyber attacks on the Internet infrastructure on Friday. Early in the morning, a distributed denial of service (DDOS) attack was localized to the northeast. That one faded as providers mitigated the damage and the internet slowly returned to normal.
Morning outage map
When the second attack came, it was stronger than the first and was followed later in the day by a third wave of attacks. Security analysts said it was especially hard to stop because there were "tens of millions of IPs" involved in the attack. Hackers take control of innocent PCs and hide software they can trigger at any time. These PCs can remain dormant for weeks, months or even a year before activated. Once the hackers decide to launch the attack, their governing program wakes up these PCs and gives them the coordinates to attack. The PCs immediately begin making web requests against the IPs provided as targets. It is the equivalent of you sitting at your PC and hitting "refresh" on your browser every second only there are no outward signs of the attack on your PC. Multiply this constant refresh request by a million PCs all attacking at once and the target servers are overloaded.
This particular attack was directed against Dyn DNS, a company that offers dynamic DNS (domain name service) addressing. Every website has an IP address. When you type in a website name, your computer uses that name to look up the actual IP address at a service provider like Dyn. Once your PC has that IP address it contacts the website and displays the web page you are requesting. With millions of these requests hitting Dyn every minute, the system became overloaded and no IP addresses were being returned. That meant that phones, tablets and PCs were unable to connect to thousands of websites around the world. Amazon, Netflix, Twitter and many other major companies "appeared" to be offline because individual PCs could not get a response to the request for IP.
DYN released a news update about 5:30 ET saying the majority of the attacking IPs belonged to Internet of Things (IoT) devices like printers, smart TVs, DVRs, WiFi devices, security cameras, routers and even kitchen appliances. I discussed this several weeks ago that there were millions of devices and growing every day, which were Internet capable but had no antivirus software to protect them from hackers. We can put virus software on our PCs but most IoT devices do not have that capability to host the programs. There are 3.4 billion internet users but there are 10-15 billion IoT devices already in use.
Late in the day, the impact of the attack had grown to include many areas of the U.S. and the impact was starting to be felt around the world. DYN issued another update at 6:30 saying the attack had been resolved but computer traffic continued to be slow until nearly 10:PM.
Afternoon Outage Map
Time Warner (TWX) shares spiked 8% after it was confirmed they were in talks with AT&T (T) about an acquisition. Shares were trading at $79 on Thursday before the news started to trickle out. On Friday, there were several confirmations and shares traded as high as $94 before fading into the close. The combination could create a media conglomerate with wireless and pay TV subscribers and extensive content from HBO, Warner Brothers and CNN to name a few. Analysts believed a stock deal for Time Warner would have to be over $100 a share given previously attempted deals. Time Warner refused an $85 bid from 21st Century Fox in 2014. Shares closed at $89.50 on Friday.
On Saturday, the companies announced an $85 billion deal where AT&T would but TWX for $107.50 per share in cash and stock. The deal will combine AT&T's 315 million wireless subscribers with Time Warner's vast movie and television content. There is likely to be some stiff regulatory opposition to put this much content control into one company. The Time Warner CEO will leave the firm after the transition period. There is a $500 million breakup fee, which is very small given the size of the deal.
Qualcomm (QCOM) has reportedly sealed a deal to acquire NXP Semiconductors (NXPI) for $110 per share in cash. The deal would value NXPI at $37 billion. NXPI shares closed at $101.71. The deal would allow Qualcomm to expand beyond chips for mobile phones and into automotive, industrial and Internet of Things devices. This would create the second largest chip company by revenue with Intel the largest. NXP's biggest customers are Apple, Ericsson, Bosch, Huawei, Hyundai, Nokia and Samsung. If this acquisition is completed it could set off a wave of consolidation because there are dozens of smaller players that would need to grow quickly or risk being shut out of the market.
British American Tobacco offered to buy Reynolds American (RAI) in a $47 billion cash and stock deal. BAT already owns 42.2% of RAI and offered $56.50 per share for the rest. That is a 20% premium over the $47.17 closing price on Thursday. RAI bought Lorillard last year for $25 billion.
Virgin America (VA) and Alaska Airlines (ALK) have a merger agreement where ALK will pay $2.6 billion for VA. However, regulators are balking at approving the deal and the deadline has been extended again from the October 17th date. Analysts believe it will eventually be approved since both are small airlines and do not occupy a large market share. However, a lawsuit was filed by 42 plaintiffs in San Francisco to stop the merger. Alaska said it would lay off 225 Virgin America management positions as redundant once the merger is completed. The suit had been on hold pending regulatory action. On Friday, the judge in the case ruled the suit could now continue. The suit was brought by travel agents and frequent fliers who claim the merger will lessen competition on many routes. The judge said he would begin a trial as soon as the Justice Dept approves the merger. He said there is no reason for a trial if the DOJ blocks the merger. He is sitting on a motion for an injunction to prevent completion of the deal, until the DOJ rules. Analysts believe there is still a 75% chance the deal will get done. VA shares have been volatile over the last five weeks as the DOJ and suit headlines call into question the deal.
Alkermes (ALKS) shares rose 27% after the company said its depression drug ALKS 5461 met its main goal in a final-stage study. The drug was found effective in rebalancing brain function in patients with major depressive disorder that have not responded to other treatments. More than 16 million U.S. patients suffer from this disorder.
Crude prices continue to hold over $50 thanks to a sharp decline of -5.2 million barrels in the weekly EIA inventory report. This is typically a period where inventories rise by that amount. Not only were inventories down but refinery inputs were at a six-month low at 15.37 million barrels per day. Imports were also at a multi-month low of 6.91 million bpd, down from 8-9 mbpd in August. Gasoline demand fell from 9.264 mbpd the prior week to 8.798 mbpd. U.S. oil production is at three-month lows at 8.45 mbpd.
All the demand factors are slowing sharply and inventories are still declining thanks to the one million bpd drop in imports. I continue to believe that the unseasonable inventory patterns are related to the hurricane in the Gulf and imports will catch up.
Active rigs rose by 14 after a gain of 15 the prior week. Oil rigs rose by 11 for the 16th weekly rise in the last 17 weeks. It appears producers believe oil prices will remain at $50 or higher and they are putting rigs back to work in order to increase production in 2017. Active gas rigs have risen 20% over the last four weeks and natural gas prices fell sharply on Friday with a -6% decline.
Friday was option expiration Friday and market volume normally rises. However, volume on Friday was only 6.0 billion shares. That compares to the very low average volume for the week of 5.76 billion per day and Thursday's volume of 6.1 billion, which was the highest day of the week.
Nobody is trading. The market remains locked in a range and that range is sinking. The chart is getting messy with increased volatility and a trend that is currently negative. The S&P has closed under the 100-day average on 8 of the last 9 days. The resistance at 2,145 has grown stronger with each failure to move back over that 100-day level.
The opening dip to 2,130 looked like it had legs but buyers unexpectedly appeared thanks to Microsoft and McDonalds.
The Dow is even worse with the support at 18,100 being tested on five out of the last 9 days. We have a pattern of lower highs and lower lows and it looks like the next test could be of 18,000. We came within 49 points on Friday.
There are 12 Dow components reporting next week with 7 on Tuesday alone. Typically, even when they beat on earnings and spike the next day, the trend for the rest of the week is down. It is called post earnings depression. The excitement prior to earnings evaporates as traders move on to find a new stock that has not yet reported.
The three biggest gainers, MCD, MSFT and DIS, added 50 points to the Dow and the index still closed with a 16-point loss. There is significant risk that a couple additional earnings misses could push the Dow under 18,000. Our best hope is that fund managers finally begin window dressing for the October 31st year-end next week.
The Nasdaq continues to show a slightly better chart pattern than the Dow and S&P. The big cap tech stocks are holding their own with Facebook, Google and Netflix leading the index higher.
I mentioned several times over the last couple weeks that fund managers might give up trying to decide what to buy given the political uncertainty and just throw money at big cap techs until the end of October. It appears that is what is happening.
The Nasdaq is only about 80 points below its historic high thanks to those big cap stocks. This week we will see earnings from Amazon, Amgen, Google, Tesla, Expedia and some other large tech stocks. If we get some big beats like we saw with Netflix and Microsoft we could see the index hit new highs.
The small cap Russell 2000 is really struggling. Support at 1,210 has been tested multiple times and a breakdown there targets 1205-1195. A failure at 1,195 would trigger a major market meltdown. We need a catalyst for the small caps to keep them from breaking through support but today I do not know what that would be. This is a market sentiment index on the verge of failure.
The first week of the best six weeks of Q4 is over and technically, it was positive. All the major indexes posted minor gains but only because of spike on Tue/Wed. Monday, Thursday and Friday were negative.
We are going to need more bullish conviction next week just to stay in positive territory. We need that end of October window dressing to begin or investors are going to start running to the sidelines in confusion.
I believe the political uncertainty is weighing on the market. Earnings are better than expected and guidance has been decent. The only material economic report will be the GDP on Friday. While there is no bullish catalyst on the horizon there are no negative events either. This will be an earnings focused week and hopefully it will cause investors to forget the election.
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Bullish and even neutral sentiment continued to decline with bullish sentiment now well below the average of 38.5%. This is the second consecutive week of sharp increases in bearish sentiment. Given the normally bullish six-week period that started last week, this is a definite warning sign.
The dollar closed at a 9-month high on expectations for a December rate hike. GE said they saw the impact of the dollar decline in Q3 but their problems are going to come right back. Since the beginning of October the dollar has surged despite weak economics and slowing employment. The solid expectations for a hike have trumped all the economic fundamentals.
It is surprising that oil has maintained the $50 level with the strong dollar because gold prices have collapsed. Commodities are cheaper when the dollar is stronger.
Sears (SHLD) is in trouble again. On Friday, Sears responded to news that Jakks Pacific has suspended shipments to Kmart stores ahead of the holiday season. Jakks is the fifth-largest U.S. toy company and they told investors on their earnings call on Thursday that is had halted shipments to "a major U.S. customer" which was presumed to be Kmart. They halted shipments of Star Wars and Disney products after discussing the situation with their bankers. The halt in shipments caused revenue to decline -10% to $302 million for the quarter. The company said based on what they were seeing in regards to this particular retailer, Jakks was best served to reduce its accounts receivable risk by holding back products.
At a recent toy fair in Dallas, a BMO analyst was asked by multiple vendors if they should continue shipping toys to Sears/Kmart. There is a lot of worry about payment from Sears. There is considerable concern that Kmart is headed for a system wide shutdown in January as parent Sears kills off the chain to stop the cash drain. They can then sell off the real estate to raise cash. Sears has already said they were closing 64 Kmart stores in mid December out of the 883 stores still operating. Sears has closed more than 400 Kmart stores in recent years.
CEO Eddie Lampert wrote, "Recent reports have suggested that Kmart will cease operations. I can tell you that there are no plans and there have never been any plans to close the Kmart format."
Obviously, it is incumbent on Lampert to maintain that stance until the day he announces otherwise. If he did not refute the rumor, all his suppliers would immediately cut off shipments.
Railroads running on empty. Shares of Union Pacific fell -7% on Thursday after reporting its sixth consecutive quarterly earnings decline. Older analysts have always claimed that slowing rail shipments were a leading indicator of economic decline. Union Pacific said volume declined along with total revenue by carload. Shipments of agricultural products declined in 5 of its 6 business segments. Coal shipments were down -19% and chemical shipments fell -1%. Justin Long, an analyst at Stephens, said we have been in a freight recession for two years. He blames the slow growth in the global economy and the strong dollar for the lack of exported consumer goods and commodities.
BK Asset Management said "from a global macro perspective we are starting to see some serious cracks in global growth." China's industrial production fell short of estimates and Australia's job growth fell off a cliff last month. A governor from the Bank of Canada warned there were serious "structural" issues with global trade.
Builders excavating for a building foundation in Romania in 1974 found a machined object that is 90% aluminum and is reportedly 250,000 years old. The geologic layer where it was found was about 11,000 years old. The object was found 33 feet underground along with two mastodon bones that were up to 10,000 to 80,000 years old. Since modern man did not begin producing aluminum until about 200 years ago in 1808, this archeological find has baffled scientists. Aluminum smelting requires temperatures of 1,000 degrees or more. The layer of surface oxidation suggests it had been buried for at least 300-400 years. The find was documented at the time but was not widely reported until recently.
The technology required to combine aluminum with the 12 metals that compose the other 10% of metals in the object does not exist on earth according to scientists. The clean cut hole on one of the ears was drilled to test the metal.
If you have ever watched the National Geographic series "Ancient Aliens" on TV, you know there are numerous unexplained relics from the past and this one is very puzzling.
Here is a link to a video of the item. Unexplained Metal
Link to news item. Source
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