The markets crashed again at the open but a rebound in the biotech sector rescued the Russell and Nasdaq from big losses.

Market Statistics

The biotech sector rebounded from the opening dip after a meeting at the White House with pharma CEOs turned out to be a love fest rather than a cage match. The president convinced them he was going to lower taxes and speed up drug approvals at the FDA. Investors must have believed them because the Biotech Index ($BTK) spiked 3.72% and the S&P Biotech SPDR (XBI) surged 4.13%. This lifted the Nasdaq and the Russell 2000 off their lows and powered the Russell to a 9 point gain. I suspect short covering was a big factor since many traders expected Trump to give the CEOs a hard time about drug prices.



There was a flurry of economic reports today but none were market movers. The employment cost index for Q4 rose +0.5% compared to +0.6% in Q3. Private wages were up +2.3% on a year-ago basis. Government wages rose +2.1% and benefit costs rose 2.0% over the same period.

Consumer confidence for January declined slightly from 113.3 to 111.8. The three-month moving average is 111.5 and the highest level since 2001. The present conditions component rose from 123.5 to 129.7 but the expectations component fell from 106.4 to 99.8. Potential auto buyers fell from 13.9% to 12.0%, homebuyers fell from 6.7% to 5.2% and appliance buyers declined from 52.6% to 51.1%. With the president now in office the thrill of victory may be fading into voter remorse for some citizens regardless of their voting preference.


The Texas service sector outlook survey for January fell from 20.6 to 16.2. The revenue component declined from 21.3 to 16.2 and employment from 6.9 to 4.8. Components for selling prices and capex spending plans were flat but input prices fell from 29.9 to 23.4. The future business outlook fell from 40.3 to 33. The report was ignored.

The calendar for Wednesday is packed. The Fed decision at 2:PM will be the most important but nobody expects them to change interest rates. There is only a 4% chance of a rate hike according to the CME FedWatch Tool.


The estimates for the ADP Employment report for January declined slightly to 165,000 but that is still 12,000 jobs over the December number. The Nonfarm Payrolls on Friday saw the estimates rise slightly from 165,000 to 171,000 over the last several days.

The ISM Manufacturing Index is expected to decline only slightly and should not be a market mover as long as it is in that range.


Today was all about earnings and Exxon (XOM) started the parade before the open. Exxon reported the smallest quarterly profit in 17 years because of low prices in oil and gas. Profits fell -40% to the lowest since 1998. Adjusted earnings were 89 cents and beat estimates for 72 cents. Revenue of $61.016 billion beat estimates for $60.606 billion. Production averages 4.121 million Boepd, a 3% decline from 2015. The company took a $2 billion write down on reserves. Exxon said it would pay $5.6 billion in stock to fund acquisitions in the Permian Basin. Exxon's capex spending declined 35% in Q4.

The reserves write down has been expected. The SEC inquired into their accounting practices several months ago when they had not taken any charges while everyone else in the sector was slashing previously booked reserves. If a company makes a discovery of 10 million barrels with oil at $75 and it costs $50 to produce it, those reserves must go away if oil prices fall to $40. If it costs significantly more to produce than it is worth then the company takes a charge to those booked reserves. This does not mean the oil went away. It is still there in the ground and they still own it. If prices returned to $75, the reserves could then be produced at a profit and they would go back on the books at the correct price.


United Parcel Service (UPS) shares were crushed after the company reported business was too good. The company said a rapid shift to home deliveries exposed how much further the company has to go to keep up with the volume. They vowed to spend an additional $1 billion to further automate warehouses and delivery systems. That pushed their 2017 capex to $4 billion. The company said they deliver an average of 1.1 packages at residential addresses but commercial addresses average multiple packages and that lowers costs. Delivering more residential packages means more residences and that adds to costs. One online transaction tracker said transactions rose 13% in November but the dollar volume only rose 4%. During the quarter, UPS delivered 1.4 billion packages, a 7.1% increase. Average daily shipments rose 5% to 19.6 million.

Earnings came in at $1.63 with analysts expecting $1.69. Revenue rose 5.5% to $16.9 billion and just below estimates for $17 billion. UPS guided for full year 2017 for earnings of $5.80 to $6.10 and analysts were already expecting $6.17. They blamed the strong dollar for reducing 2017 earnings estimates by 30 cents per share. UPS had hedged against the dollar but those hedges are not enough to prevent the losses. The current hedges expire in 2017 and the program is being replaced. Shares fell -$8 on the earnings news.


Harley-Davidson (HOG) reported earnings of 27 cents that missed estimates for 32 cents. Revenue of $933 million also missed estimates for $986 million. The misses were due to lower shipments. Revenue on Harley-Davidson branded bikes fell -8.8% to $685.5 million. They shipped 42,414 motorcycles compared to 48,149 in 2015-Q4.


Under Armour (UA) reported earnings of 23 cents that missed estimates for 25 cents and was below the 24 cents earning in the year ago quarter. Revenues of $1.308 billion rose 11.7% but missed estimates for $1.412 billion. Wholesale sales rose 5% and online sales rose 23%. For all of 2017 revenues are expected to rise 12-13% on a currency neutral basis to $5.4 billion but that was well below analyst expectations for $6.06 billion. They said slower customer traffic in Q4 and lower demand for footwear and apparel plus international challenges were to blame. The lower traffic caused significant promotional activities, which reduced average selling prices. They also said a shift in the product mix was to blame for lower revenue. The cheaper shoes were selling and high prices shoes were being heavily discounted.

Analysts blasted the conference call saying the lowered guidance was strange since they are rolling out in all the Kohls stores in the near future. That is a lower dollar retailer and will probably sell the low end of the Under Armour line, therefore further dragging the average selling price lower.

They also reported that their newly hired CFO would be leaving the company for personal reasons effective immediately. That is never good news. Analysts were piling on the downgrades on the belief the athleisure fad could be slowing along with the high priced shoe phenomenon.


MasterCard (MA) shares fell -$3 after reporting earnings of 86 cents on revenue of $2.756 billion, up +9.5%. That beat earnings estimates by a penny but missed revenue estimates for $2.9 billion. They guided for low double-digit revenue growth in 2017 and earnings growth in the mid teens. However, they said first half revenue growth would be lower than the second half because of higher incentive promotions. MasterCard process an average of 65,000 transactions per minute.


The big dog in the earnings parade reported after the close. Apple (AAPL) reported earnings of $3.36 per share compares to estimates for $3.21. Revenue rose 3% to $78.35 billion against expectations for $77.25 billion. This was the first quarter of growth after three quarters of declining sales. They guided for Q1 for revenue of $52.5 billion and did not give EPS guidance. Analysts were expecting $2.08 on revenue of $53.79 billion making that guidance slightly weak but Apple normally does that.

The revenue for Q4 was a record for Apple and they sold a record number of iPhones, iPhone services, Mac and the Apple Watch. Services revenue rose 18% to $7.2 billion. To put that in perspective that service revenue is about the same as Facebook will report in total revenue. The company sold 78.29 million iPhones and estimates were for 75.1 million. However, Q4 had an extra week in 2016. If you subtract out for that week you get 72.7 million and that still beat estimates. In Q3 they sold 76.5 million units. They also launched the iPhone 7 earlier than normal but offsetting that was a big hit from foreign currency issues.

iPad sales of 13.1 million missed estimates for 15 million units. Mac sales rose 7% to $7.24 billion. The Apple Watch, Air Pods, Beats headphones and wifi routers were lumped into the other category with $4 billion in sales, a decline of about 8%. The Apple app store and services generated $7.2 billion, up 18%. The game Super Mario Run was downloaded 80 million times in the quarter.

Apple's cash hoard rose to $246.1 billion, up $8.49 billion from Q3. Apple's cash alone would be ranked as the 13th largest public company in the world. Apple shares rallied $4 in afterhours. That would be equivalent to about 28 Dow points at the open on Wednesday.


Arconic (ARNC), formerly Alcoa, reported adjusted earnings of 12 cents compared to estimates for 13 cents. Alcoa spun off the commodity business into a new entity called Alcoa and renamed the core business as Arconic. The company makes engineered metal parts for the aerospace, automotive and other industries. The Alcoa CEO, Klaus Kleinfield, remained with Arconic. There has been a lot of activist chatter about getting rid of the CEO because of his pattern of lackluster results. After the earnings tonight, activist investor Elliott Management, which owns 10.5%, launched a proxy fight to replace the CEO and has nominated five independent candidates for the board. Elliott claims it can increase the share price to between $33 and $54 a share. After the earnings, the share price trade in a $1 range but ended where it started at $22.45.


Match.com (MTCH) shares fell -8% after reporting earnings of 29 cents compared to expectations for 24 cents. Revenue of $320 million missed estimates slightly. They issued weak guidance for Q1. They also said they were selling their Princeton Review unit to ST Unitas. Shares fell sharply to $15.90.


The big earnings report for Wednesday is Facebook after the close. On Thursday, it is AMGN, AMZN and CMG.



Markets

The markets opened with another big decline but the happy smiles coming out of the White House meeting with the big pharma CEOs turned the Nasdaq and Russell 2000 around quickly. The S&P was not impressed. The S&P did not rebound from the support at 2,268 until 2:30 and then it added 10 points in just a few minutes. From the velocity, this appeared to be either short covering or a buy program. There were $500 million in market on close orders to buy on the NYSE.

The 2,268 level was the low on Monday so that appears to be a new support level. The S&P almost got back to positive territory but ended with a loss of 2 points. The 2,300 level has replaced the Dow 20,000 target as the critical level for the market.


The Dow was down -186 points at the low and recovered nearly 80 of those points in the closing rebound. The index was still severely handicapped by Goldman Sachs, Boeing, JP Morgan, IBM and Caterpillar. Those were the stocks that rallied significantly after the election and they are paying the price this week.

The unlikely group of winners at the top simply could not generate enough gains to offset the many losers. This scenario could continue for additional days. The Dow dipped below 19,800 at 1:30 and came very close to closing under that level, which would have been a sell signal. Support is actually 19,750 and the low was 19,784 so there was a little cushion on the bottom of the dip. Resistance remains 20,100.



The Nasdaq Composite did manage to break back into positive territory by a point thanks to the biotechs. The Nasdaq 100 big cap index lost 12 points for the day. There are no big cap stocks in the winners list except for Apple and that was because of the afterhours gain. Note the majority of the winners are biotech stocks.

The biotech sector was experiencing a major short squeeze and that may not carry over into Wednesday. The Nasdaq futures are up 13.50 in afterhours and we should open higher in the morning thanks to Apple.



The Russell 2000 made a miraculous recovery from being down -7 at the open to closing with a 9-point gain. Again, that is all due to the biotech recovery. We should not expect this rebound to continue.


Wednesday's market is a tossup but we should begin in positive territory thanks to Apple. With jobs, manufacturing and the FOMC decision, the morning would be lackluster with volatility appearing after the Fed decision. With those Dow big caps giving back their post election gains, that could be the anchor dragging the market lower if there are no headlines to offset the declines.

Enter passively, exit aggressively!

Jim Brown

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