President Trump is finding that promising is a lot easier than governing.
The American Health Care Act is dead, at least for the time being. The president found that despite having a republican majority in the House, that majority was highly fractured and getting them to all go in the same direction was harder than herding cats. If Ryan made a change in the plan to appease one group, it angered another. The bill was pulled on Friday afternoon and the president said it would not be back until democrats decided they wanted to work on a joint plan to provide a comprehensive health care overhaul.
The kiss of death came when GOP committee chair, Rodney Frelinghuysen, notified Paul Ryan he would not be voting for the bill as it is currently written. He said "the bill as it is currently written would place significant new costs and barriers to care on my constituents in New Jersey."
When the voting time was getting close and all the straw counts showed there were not enough votes to pass, the markets tanked. The Dow was down -120 at the 3:15 lows after being up +59 points at 11:AM. When the news broke that the vote had been cancelled, the Dow rebounded to only -3 points but sell on close orders knocked it back down to a 60-point loss.
The S&P declined -20 points from its intraday high to -10 at 3:15 but rebounded into positive territory until just before the close.
In theory, the death of the health care bill should be positive for the markets. If the bill had passed the House it would have spent another month or more being debated and amended in the Senate and then another month in the conference committee resolving the differences between the House and Senate versions, then another couple weeks each in the House and Senate trying to muster enough votes to get it approved. Nearly every analyst said the plan had no chance of approval after the amendment/conference procedure. That means the two bodies would have been tied up for 3 months with the same end result.
The market wants tax reform and deregulation. The House and Senate have been compared to a one-lane road. With the massive health care bill sucking up all the oxygen in the room and blocking the road, the movement on tax and deregulation would have been forced to wait until July/August to take center stage with passage unlikely before late in the year. If the republicans spent all their political capital fighting health care for three months, the remaining capital might not have been enough to get cooperation on tax reform, which will be a monster project.
With health care out of the way and President Trump telling Ryan to move on tax reform, that gives the House four months to come up with a bipartisan bill that has a chance of passing in the Senate. In essence, tax reform just took a giant step forward and that should be market positive.
While not all democrats will agree on massive tax cuts, there are plenty that will work with the republicans to craft a bipartisan bill. It will not be easy and there will be plenty of disagreements but most will want to go home on their August recess and brag they voted to cut taxes for their constituents. They problem with massive tax cuts is that it will impact spending and this is where the democratic party in the House/Senate will fracture like the republican party did on health care.
Regardless, the market should see the potential for faster action on a tax reform package and that should be positive. Three months from now if the House is deadlocked again it will be another market hurdle.
Nothing in the economic arena or in stock news had any impact on the market on Friday. All eyes were on the potential failure of the health care bill.
The Durable Goods report for February showed a 1.7% rise in orders compared to a 2.3% rise in January. The January number was revised higher from 1.8%. Excluding the transportation sector orders rose +0.4%. Shipments rose +0.3% and backorders were flat at zero change. Compared to February 2016 orders were up 5.0% for the year.
The calendar for next week is mostly Fed speeches with 12 currently scheduled. The Richmond Fed Manufacturing Survey is the most important report for the week. This is the second and final revision on the GDP and it rarely changes much on this version.
Finish Line (FINL) reported earnings of 50 cents and analysts were expecting 70 cents. That was a 41.2% earnings decline. Revenues of $557.5 million fell -0.4% but beat estimates for $549 million. Same store sales plunged -4.5% and the company blamed it on a challenging retail landscape and poor footwear performance.
The company repurchased 250,000 shares worth $4.4 million to raise its fiscal 2017 total to $52.8 million. They have 4.8 million shares left on the authorization. They guided for the full year to earnings of $1.12-$1.23 and same store sales growth in the low single digits. Analysts were expecting $1.46 so it was a big miss on guidance. Shares fell -20% on the earnings miss.
Ironically, Jefferies chose Friday to upgrade Under Armour from hold to buy. The analyst raised his price target from $19 to $27. He said the bottom has formed and the brand has grown stronger with demand for athletic apparel still hearty. That would be different from the Finish Line guidance claiming it was a challenging market. Shares rose 4% on the upgrade but that is from a historic low on Wednesday.
Keeping with the footwear thread, Cowen upgraded Skechers (SKX) from neutral to outperform. The analyst raised his price target from $26 to $35. He believes Skechers will show international margin expansion and accelerated growth in EPS and free cash flow. Shares rallied 5% on the news.
Micron (MU) reported earnings after the close on Thursday. The company reported a 17% rise in revenue to $4.65 billion with earnings of 90 cents. Analysts were expecting 86 cents. The company is seeing a tight market in DRAM and NAND memory chips with price gains of 21% and 18% respectively. Micron guided for $5.4 billion in sales and earnings of $1.50 in the current quarter. Analysts were expecting $4.72 billion and 90 cents. Shares spiked 7.5% on the report.
Gamestop (GME) reported earnings of $2.38 that beat estimates for $2.29. Revenue of $3.05 billion missed estimates for $3.12 billion. Same store sales fell -16.3%. Guidance for the full year was $3.10-$3.40 but below analyst estimates for $3.73. The company said sales in its core category were weak due to a lack of new console hardware releases. They plan on closing 2-3% of their stores in 2017. Shares were crushed with a 14% drop.
Air Products (APD) said it was dropping a bid to acquire China's largest producer of industrial gases, Yingde Gases Group for $1.5 billion. The company said it was no longer in the best interest of shareholders. There was a competing bid by PAG, a Hong Kong private equity firm. A day ago, Yingde said its financial position could be "materially adversely impacted" following a major management change.
Twitter (TWTR) is considering whether to build a premium version of the network aimed at professionals. This would be a subscription version and the first time they have charged for the service. They currently have 319 million users. After 11 years, the company is still having trouble making a profit and they need another source of revenue. They would modify the current "Tweetdeck" tool that helps users navigate the network. Linkedin already has a tiered subscription fee that offers extra features for an extra price. You can see a sample screenshot of the proposed Tweetdeck HERE.
The enhanced features include:
It remains to be seen if Twitter will follow through on the project or if enough customers will pay for these features and how much they will pay.
Crude oil lost $1.17 for the week to close just over $48. There are conflicting commentaries on what to expect next. Some analysts are expecting crude to fall back into the $30s. I am not in that camp. Global inventory levels are not dropping materially and U.S. inventories are at record highs. However, inventories are always high this time of year. Once the refiners begin producing summer blend fuels, the inventory levels will drop for three months straight. Prices will rise.
Secondly, OPEC has to extend the production cuts. There is an OPEC compliance meeting this weekend. Early comments from that meeting claim they are watching the market and will decide in May on extending the cuts but nothing definitive yet. Saudi Arabia needs oil prices higher, a lot higher. They are planning a $2 trillion IPO of Saudi Aramco and higher prices means they can claim more reserves plus those reserves will be worth billions more to the market cap. There are rumors Saudi Arabia will demand a production cut from Iran before they will agree to an extension of the current cuts. Iran was producing 4.35 mbpd in January and claim they will produce 5.0 mbpd by December. That increase is nearly half of the announced cuts by the other OPEC members.
Rig activations are exploding. Last week there were 21 new oil rigs activated to bring the total to 652 with gas rigs declining by -2 to 155. Since the beginning of October, we have added 300 oil rigs, up from only 404 at the end of May. U.S. production has risen 215,000 bpd in just the last 8 weeks and it is accelerating.
The market charts have turned bearish over the last week but that could be related to the pending health care headlines. All week the number one topic in the news was the impending vote and the potential for failure. We will not know if the removal of that cloud over the market and the sudden shift to tax cuts and deregulation will have any positive impact until next week. In theory, the market should be excited but even with the shift in focus and immediate start on a tax overhaul, the actual voting could be months away and there will be as much or more infighting as there was on health care. That will produce multiple opportunities for new market volatility.
Secondly, the border adjustment tax will be even more critical now since the failure of the health care initiative prevented all the taxes from being stripped out of Obamacare. That was estimated to be worth $1 trillion over 10 years. The border adjustment tax (BAT) is not going to be market friendly but politicians need it to offset any tax cuts. Any company that imports items to sell in the U.S. is going to find their costs rising and consumers are not likely to rush out to buy these higher priced goods. There is talk of phasing in the BAT over several years to reduce the sticker shock for consumers. If the tax is going to be 20%, a number that has been mentioned, they could phase it in at 5% per year and that would allow a gradual rise in consumer prices.
Another problem to consider is the typical market weakness over the next several weeks. The next couple weeks are normally erratic ahead of April 15th tax day but the last two weeks of April are typically bearish. If the shift to a focus on tax cuts can invigorate the market, that might offset some of the typical April volatility. However, the market rallied since the election on the prospect of tax cuts so some believe the expectations are already priced into the current levels.
The next Fed meeting is not until early May so that is one problem we can ignore for a while. Unfortunately, the government debt ceiling suspension has ended and the government will run out of money on April 28th. That means we have another debt ceiling fight just ahead. With both houses scheduled to be on recess from April 10th through April 21st, there could be some activity on the funding in early April but normally nothing gets done until the last minute so the heated activity and floor fights will run from April 22nd through April 28th. It also means the tax cut headlines will probably not start until after the 28th.
If you waded through that time line above, the potential should be clear. The next two weeks could be erratic while the last two weeks of April could be bearish.
I believe the markets were negative last week because of the impending health care vote but also because institutions were setting up for what could be a rocky month.
The Dow has declined -573 points from the March high and tested light support from February at 20,525 on Friday. Note that the Dow chart is showing significant weakness.
The biggest impact to the Dow is Goldman with another 24-point deduction on Friday. Unfortunately, Goldman's chart is also negative and Friday's close was a three-month closing low. Goldman has farther to fall with initial risk to about $210. That would be another -127 Dow points. This is just one of the potholes in the Dow's future.
The S&P posted another lower low on Friday at 2,335 and the prior support at 2,360 is now resistance. The uptrend support from December is light but it did stop the intraday declines twice last week. Should that level break the next real target is 2,250. A breakdown below Friday's low could trigger cascade selling since the uptrend sentiment would be damaged.
The Nasdaq indexes remain the most bullish but the Composite Index still lost 74 points for the week. The support at 5,800 is holding and should continue to hold until the FAANG stocks quit making new highs. Together those five stocks represent about 33% of the Nasdaq 100 weighting. They can keep the Nasdaq moving higher on their own or drop it like a rock. If you add Microsoft to the group, the weighting rises to more than 41%.
The Nasdaq Composite needs to hold that 5,800 support level or the broader market will be in serious trouble.
The small cap indexes closed flat on Friday with the Russell posting a slight gain. However, neither chart was exciting and the S&P-600 is right on the edge of a potential breakdown. If the small caps rally from here they could reinvigorate the market but a material break below 820 on the S&P-600 could cause some knee jerk selling and lead to a significantly lower low.
Despite the normal volatility in April, the month has averaged a 1.3% gain since 1928. The high in the month is normally in the second week with a late month fade into May, which is the second worst month of the year after September according to Yardeni Research. When you average 89 years, everything tends to blur since years with big gains can offset many years with small declines and vice a versa.
This year we have a lot of external political influences and four months of post election history to influence trading over the next few weeks. With the strong post election rally and no material retracement, we are still vulnerable. With the Volatility Index trading at three-year lows, except for the last couple days, there is extreme complacency in the market.
If the market is going to rally into the tax overhaul, why was there $2.4 billion in market on close sell orders on Friday? That is not retail traders. Somebody with size was heading for the exit or possibly several large institutional funds selling. What do they know that we do not?
The market declined last week and bearish sentiment also declined. That must be the buy the dip mentality at work. We saw a -1.5% decline on Tuesday and this survey ends on Wednesday. The change in sentiment was evenly split with 4.1% turning bullish and 4.1% turning neutral.
Last week results
Venezuelan's have something else to worry about now. Not only are entire neighborhoods arming up with baseball bats and 2x4s as they go on the prowl for any animal they can find to eat including cats, dogs, pigeons, rats, etc, now they have no gasoline to get to work.
Venezuela is struggling to supply gasoline to consumers and many stations are permanently out while others are open only a few hours a day after the fuel trucks make their rounds. The problem is a lack of money. The government is hoarding money to make foreign debt payments and cannot pay for imported gasoline. The Venezuelan refineries are old and broken down because of lack of maintenance. The government subsidizes gasoline prices and even with the recent price increase to 38 cents a gallon, that is just a fraction of what Venezuela has to pay at roughly $1.65 per gallon to import it. Previously because of the low cost of gasoline it was distributed for free to local stations. With inflation rampant and the government broke they are now charging the stations for the gas when it is available and many cannot afford to pay.
With consumers unable to get to work the economy is only going to get worse. Some wait for hours in gas lines only to get a few gallons then drive to another station and do it again and again until they get enough to fill their tank and get to work the next day.
Most analysts believe Venezuela will default on its debt in 2017. With their oil pledged to China to repay past loans, they cannot benefit from the slight hike in crude over the last several months.
A news crew tried to do a story on the plight of the people a couple weeks ago. They paid a lot of money to a "fixer" who would take them around and protect them from the roving mobs. After only a couple days the crew had been attacked multiple times, had all the equipment stolen and fled the country. The fixer was found murdered the next day. A person in the news crew who had been to Yemen, Iraq and Syria said the conditions were much worse and there was no rule of law and everything was controlled by local neighborhood mobs with open warfare for food and basic supplies.
The country is a failed state and very close to an outright revolution to expel Maduro from power.
People protesting the government
People in line at a government controlled market
Market on the inside with bare shelves
Enter passively and exit aggressively!
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The clock of life is wound but once,
And no man has the power
To tell just when the hands will stop
At late or early hour.
To lose one's wealth is sad indeed,
To lose one's health is more,
To lose one's soul is such a loss
That no man can restore.
The present only is our own,
So live, love, toil with a will,
Place no faith in "Tomorrow,"
For the Clock may then be still.
Robert H. Smith
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