The market lost its Monday gains after a flurry of earnings provided disappointments rather than excitement.

Market Statistics

The early cycle euphoria faded into disappointment after several big names reported slowing revenue and lowered guidance. The normal early reporter excitement from last week faded and the markets reversed lower after their resistance test on Monday.

The economic reports did not help. The Consumer Confidence for October fell was the previously reported 104.1 to 98.6 on the headline number. The 104.1 was a nine-year high and it was revised down to 103.5. The current conditions component declined from 127.9 to 120.6 and the expectations component fell from 87.2 to 83.9. There were several factors in play.

The rising gasoline prices and slowing employment were a factor as well as the election uncertainty. I have reported before that presidential elections tend to depress confidence because the candidates are telling everyone how bad things are and how they are going to fix the problems. The fix part of the conversation seems to be forgotten but learning that wages are at an 18-year low and health insurance is going up 25% in 2017, become memorable.

Those respondents planning on buying an auto increased slightly from 12.5% to 12.6% but apparently they have not been actively looking as of yet. A friend was telling me last week that a new 4-door truck was $70,000 and a loaded Suburban was $80,000. Even with 7-year loans, those payments would be higher than most consumers could pay.

Those planning on buying a home fell from 5.9% to 5.1% and those thinking of buying a TV/appliance fell from 51.9% to 46.3%.


Weighing on Consumer Confidence is the recent announcement that Obamacare rates will rise an average of 25% in 2017. Some states will see a lot bigger spikes. For instance, Tennessee will see a 63% increase and Arizona will get a 116% increase. There is no reduction in deductibles to go with those rate hikes and in most plans, they actually go up. The government is claiming enrollment will rise 1.1 million in 2017 to 13.8 million. That does not tell the real story since millions have been pushed into the Medicaid program because they cannot afford to pay anything. More than 85% of Obamacare enrollees receive subsidies to offset their premiums. With only 15% of insured actually paying the bill the program is going to collapse. Until then the cost of being insured will continue rising.

The Richmond Fed Manufacturing Survey for October improved only slightly from -8 to -4 but the major components remained firmly in negative territory. Manufacturing conditions have now declined in 5 of the last six months. New orders are falling and backorders are seriously negative. The gap between orders and inventories, a proxy for future activity, fell to -30 suggesting conditions are going to get worse before they get better.

The separate services survey fell from 13 to 7 indicating a retracement there as well. The average wage index fell from 33 to 19 suggesting employment is fading. The sub component for retail employment fell from -2 to -13 even as we head into the holiday shopping season. If retailers are not staffing up for the holidays then the outlook is bleak. The high was +28 back in June and it has gone steadily downhill. Even worse, the expected demand component for the retail sector fell from 58 to 13 and the lowest level since April. Excluding retail, expected demand fell from 30 to 25. If services demand is slowing that rapidly ahead of the holidays, it paints a dismal picture for Q4 consumption.



The only important report left on the calendar for this week is the GDP on Friday. There are a lot of whisper numbers below the 2.5% consensus for growth. If the number came in under 2%, I do not know if the market would celebrate because the Fed would definitely be on hold longer or react negatively because of the weak economic growth.

Fed speakers Bullard and Evans both indicated the Fed would probably refrain from hiking in November but would hike in December in order to save face. After that, they may not entertain another hike for a long time because of the slow growth and desire to increase inflation.


It was a busy day for earnings and the good news was hard to find. Under Armour (UA) reported earnings of 29 cents compared to estimates for 25 cents. Revenue of $1.47 billion barely beat estimates for $1.46 billion. Sales in the U.S. rose 15.6% but that was well below the 20% level that UA normally produces and the slowest sales growth in six years. Gross margins fell from 48.8% to 47.5%. The company cited a difficult retail environment in North America and its decision to prioritize long-term growth over short-term profits. Retailers Sports Chalet and Sports Authority both went bankrupt over the last year.

The key sentence in the report was, "While we expect to continue to significantly outpace the apparel industry, the growth rate going forward will be less than expected from our investor day in 2015." Their current guidance is for growth in the low 20% range compared to prior years in the upper 20% range or higher. They said they were still on track for $7.5 billion in revenue in 2018. Shares declined -13% at the close after being down even more intraday. This weighed on Nike, Finish Line and all of the associated retailers.


Sherwin Williams (SHW) reported adjusted earnings of $4.23 compared to estimates for $4.34. Revenue of $3.279 billion missed estimates for $3.295 billion. They lowered guidance to low single digit growth for Q4 compared to 4% in Q3. Earnings are now expected to be $1.45-$1.55 per share compared to $2.12 in the year ago quarter. Shares collapsed -10% on the news.


Appliance maker Whirlpool (WHR) reported earnings of $3.66 that missed estimates for $3.86. Revenue of $5.25 billion missed estimates for $5.32 billion. The full year guidance was lowered to $14.00 to $14.25 compared to analyst expectations for $14.61. They said Europe remains challenging and they are attempting to "right-size" their inventory, meaning sales slowed, manufacturing did not and now they have more inventory than they can sell. Shares fell -10% on the news.


The earnings misses by Whirlpool and Sherwin Williams suggested the never-ending home improvement cycle might be coming to a close. With home sales slowing, the need to constantly remodel may be fading. Home Depot (HD) and Lowe's (LOW) saw their shares fall sharply.


There were multiple Dow components reporting today. Caterpillar (CAT) reported earnings of 85 cents that beat estimates for 76 cents. However, revenue of $9.16 billion missed estimates of $9.92 billion and was well under the $10.96 billion posted in the year ago quarter. The company lowered guidance again to full year revenue of $39 billion and earnings of $3.25. That compared to analyst estimates for $40.1 billion and $3.53. The CEO said, "Economic weakness throughout much of the world persists and, as a result, most of our end markets remain challenged." Our sales guidance for 2017 will not be significantly different than 2016. That is the polite way to say sales will be flat. Shares fell -2% on the news.


3M (MMM) reported earnings of $2.15 compared to estimates for $2.14. Revenue of $7.71 billion was in line with estimates. For the full year the company cut earnings guidance from $8.15-$8.30 to $8.15-$8.20. Analysts were expecting $8.22. They said revenue for the year would be flat compared to prior guidance of 1%. 3M gets nearly two-thirds of its revenue from overseas and they were hurt by the strong dollar. Sales in Asia-Pacific fell -2.2%. This was the second time 3M has guided lower.


DuPont (DD) reported earnings of 34 cents compared estimates for 21 cents. Revenue of $4.92 billion beat estimates for $4.87 billion. The company raised full year guidance from $3.15-$3.20 to $3.25 per share. They warned that revenue from the agriculture business would fall into the mid single digit percentage range and said weakness in commodity prices will continue.


Merck (MRK) reported earnings of $1.07 compared to estimates for 98 cents. Revenue of $10.54 billion also beat estimates for $10.24 billion. They narrowed the full year outlook and raised the range. They are now expecting $3.71-$3.79 per share compared to prior guidance of $3.67-$3.77 per share. Revenue is now expected to be $39.7-$40.2 billion compared to prior guidance of $39.1-$40.1 billion. Analysts were expecting $3.74 and $39.65 billion. Shares rallied 2% on the news.


United Technologies (UTX) reported earnings of $1.76 that beat estimates for $1.66. Revenue of $14.4 billion beat estimates for $14.3 billion. The company raised the low end of full year guidance by 10 cents to $6.33 to $6.60 per share. They guided for revenue to be flat for the year. However, they said the aerospace business was strong.


Procter & Gamble (PG) was the big winner for the day with earnings of $1.03 compared to estimates for 98 cents. Revenue of $16.52 billion beat estimates for $16.48 billion. Organic sales rose 3%. They guided for 2017 for 2% sales growth and mid single digit EPS growth. P&G plans to give $22 billion back to shareholders in 2017 in the form of dividends and stock buybacks. Shares exploded higher because many analysts were expecting an earnings and revenue miss.


After the bell Apple (AAPL) reported earnings of $1.67 that declined -15% on a -9% decline in revenue to $46.85 billion. Analysts were expecting $1.66 and $46.94 billion. The company sold 45.5 million iPhones beating estimates for 45.0 million. They sold 4.9 million Mac computers, missing estimates for 5.0 million. They also sold 9.3 million iPads beating estimates for 9.0 million. Apple's gross margin fell from 39.9% to 38.0% for the quarter. Apple guided for sales in Q4 of $76-$78 billion, which was above estimates for $75.08 billion. Q3 was the third consecutive quarter of declining revenue. Analysts are also expecting earnings of $3.20 for Q4. Apple did not give an earnings estimate.

Services revenue rose to $6.33 billion and 13.5% of total sales. iPhone sales of $28.16 billion accounted for 60.1% of total sales. Tim Cook said he did not know how much the Samsung Note 7 disaster had helped iPhone sales but he appreciated every switcher from an Android product. Cash on hand rose to $237.6 billion. Shares initially spiked to $121.84 but eventually fell -$3.25 in afterhours trading to end just under $115.


Panera (PNRA) reported earnings of $1.37 that beat estimates for $1.34. Revenue of $684.2 million beat estimates for $682.2 million. The company guided for the current quarter to earnings of $1.96-$2.01. They guided for the full year to $6.67-$6.72 per share. Analysts were expecting $6.68. Same store sales rose 1.7%, which was under the 2.4% analysts were expecting. Shares spiked $11 in afterhours.


Pandora (P) fell sharply to a 3-month low after the bell when they reported a loss of 27 cents. Analysts were expecting a loss of 6 cents. Revenue rose 13% to $351.9 million but also missed estimates for $366 million. For Q4 the company guided to revenue of $362-$374 million with a loss of $39 to $51 million.


Chipotle Mexican Grill (CMG) reported adjusted earnings of 79 cents compared to analyst estimates for $1.58. Revenue of $1.04 billion missed estimates for $1.09 billion. Same store sales fell -21.9% and the number of transactions fell -15.2%. For Q4 the company expects same store sales to decline in the low single-digits. Shares only fell -$9 in afterhours and I am shocked they did not implode on that large of an earnings miss.


I just scratched the surface on the companies reporting on Tuesday. The next big day will be Thursday with AMGN, AMZN, GOOGL, TWTR, UPS and WYNN. More than 178 S&P companies are reporting this week.


Crude prices have fallen sharply from the $51.50 from last week to trade at $49.35 in the afterhours session. The weekly API inventory after the bell showed a 4.8 million barrel increase in crude inventories. Gasoline rose by 1.7 million barrels.

Adding to the inventory surge was a rebellion by Iraq saying it was not going to be part of the OPEC plan to limit production at the end of November. Russia also made some vague comments about whether they would be part of the deal, after Putin spiked prices a couple weeks ago by saying it was time to join OPEC. I have warned numerous times that talk is cheap and the closer we get to the November 30th meeting the less likely an actual deal will appear. They may try to save face with token deal announcement but it will have no teeth and nobody will follow it.


 


 

Markets

The major indexes rallied right to resistance on Monday with the Nasdaq 100 the exception, closing at a new high. Today's reversal pushed the Dow and the Russell 2000 back towards support but the S&P barely dipped below 2,145 and recent resistance.

The indexes are still in a downtrend until they overcome their recent resistance levels. If we get a couple more days of sloppy earnings we could be retesting the October lows very quickly. Fortunately, Wednesday is devoid of any major market moves in terms of earnings. That means the afterhours session on Thursday with AMZN and GOOGL is going to be the critical event for the rest of the week.

The S&P has resistance at 2,150 and support at 2,120. The 2,145 level is a speed bump in both directions. The S&P futures are down -6 as I write this so we could be off to a negative start on Wednesday.


Thank goodness for PG, UTX, BA and MRK. Those four Dow components added about 55 Dow points or the loss at the close would have been a lot higher. Tomorrow only two Dow components report and they are Coke and Boeing. Coke is not a market mover. However, Boeing could easily move 4-5 points and be responsible for a 30 point Dow swing. The challenge for Wednesday is Apple with their $3 drop after the close. If that holds it will be worth about -25 Dow points. Add in the post earnings depression on those Dow stocks that have already reported and we have anchors in place ready to drag the index lower if there is no headline to trigger a short squeeze.

Support at 18,100 and resistance at 18,250 are the critical levels to watch.



The Nasdaq Composite gave back -26 points but the Nasdaq 100 only lost -18. I still believe portfolio managers are going to use the big cap tech stocks for their end of year window dressing later this week. It is too dangerous to try and pick sectors based on whom you think will win the election. It is far easier to window dress for the October fiscal year end by just throwing money at stocks like Netflix and Facebook.

The NDX is well over support at 4,800 and Monday's historic high was 4,909. The NDX will be the sentiment index for the rest of the week.



The Russell 2000 gave back nearly 1% and was the biggest loss of the broad market indexes. The Biotech Index gave back -1.2% and helped to drag the Russell and Nasdaq Composite lower. The Russell has support at 1210, 1205 and 1195 so it would take a major market upset to crash through those levels. If that were to happen, it could be a long drop to 1,095.



The markets appear to be setting up for another retest of support. However, if the mutual fund window dressing appears in volume it could delay that retest until next week. There is a significant chance a support test will occur before the election. There is too much uncertainty and volume is very anemic. Volume is a tool used by the bulls and without volume the bears can increase their conviction with every tick lower.

I would continue to urge not to be overly long and maintain a shopping list of stocks you would like to buy at a lower level. We may never get that chance but if we do, we need to be ready.

As of next Sunday there will only be 62 days left in 2016. On the last weekend in October, we begin the Early Bird Special for the End of Year Renewal Special. For a one-week period, we offer the EOY Special for an additional $50 discount. Be prepared because the Early Bird Special only lasts one week. The regular EOY begins the weekend after Thanksgiving.

Enter passively, exit aggressively!

Jim Brown

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