Late Friday polls on the French election showed a nearly impossible to overcome lead by Macron and weekend event risk evaporated.
With a the Fed meeting and jobs report in the rear view mirror and the pro EU candidate well ahead in France, there was suddenly no reason not to hold longs over the weekend. In the polls, Macron had 63% and Le Pen 37%. With French and German markets at their highs and expected to surge Monday on a Macron victory, big caps stocks were suddenly in demand for the last 30 minutes of trading.
Apple (AAPL) rescued the Dow from the IBM disaster and kept the index close to zero or slightly positive most of the day. IBM fell $4 after Warren Buffett said he sold 30% of his shares. Berkshire was the largest shareholder in IBM at 9% and 81 million shares. He said when the stock hit $180 in Q1 he sold about 25 million shares. His comments suggested he would have sold the rest if the price had not dropped so sharply in early March. Buffett began buying IBM in 2011 in the $160-$170 range. Over the last 6 years, he collected more than $20 per share in dividends. When asked if he made a bad decision buying IBM he said he could have made a lot more money just buying the S&P. Shares fell from the $216 high in 2013 to $117 in early 2016. You can see why he wanted to bail when shares returned to $180 and a minor profit in Q1. IBM shares subtracted 27 points from the Dow on Friday.
Buffett was also saying positive things about Apple. He said the weak iPhone sales in Q1 did not matter. "I don't own Apple because of what I think the earnings are going to be in the next three months or six months." He said he understood why sales are soft and used a car analogy. "If you knew a new car was coming out tomorrow and you had to pay roughly the same, for the year older model, you are probably going to wait." Berkshire owns 2.5% of Apple's stock. Apple just added $35 billion to their stock buyback program and raised the dividend.
Apple was also rising on a note from Citigroup giving a 40% chance they would buy Netflix. Analyst Jim Suva assigned percentages to several other companies as well saying a repatriation tax cut could give Apple a window of opportunity to make a big purchase. Suva said Disney was a 25% chance, Tesla, Activision Blizzard, Electronic Arts and Take-Two Interactive were at 10% or less. On Tuesday, CEO Tim Cook said he wants Apple to be a major player in online video. Buying Netflix would be a way to spring to the front of the pack. With Apple's cash, they could accelerate the production of original content.
There was also a new article suggesting Apple and Amazon were getting together in an Apple TV deal where the Amazon Prime Video app would run on Apple TV by Q3. Apple is also increasing funding for its own original content that will be on the Apple Music service.
With all the various headlines on Apple, the stock shot up $2.43 to add roughly 17 points to the Dow and offset IBM's drag.
The Nonfarm Payrolls for April showed a gain of 211,000 jobs after a sharp drop to 79,000 jobs in March. February showed a revised gain of 232,000 jobs. The unemployment rate fell from 4.5% to 4.4% and the lowest level since 2006. The unemployment rate fell because the percentage of population not in the labor force rose by 162,000. The participation rate slipped slightly from 63.0% to 62.9%. Average hourly earnings rose +0.3%.
Goods producing jobs rose by 21,000 and service jobs gained 190,000. Analysts were expecting a gain of 180,000 after the ADP report on Wednesday showed a gain of 177,000. Mining and energy jobs rose 10,000 as oil well workers go back to work. Manufacturing added 6,000, motor vehicles and parts added 9,000. Retail employment rose 6,000, professional and business +39,000, temporary help +6,000, leisure and hospitality (waiters and waitresses) +55,000. Government employment rose 17,000 despite a decline of 6,000 in the federal government.
The separate household survey showed a gain of 156,000 jobs but significantly less than the 472,000 in March. The broader U6 unemployment rate fell from 8.9% to 8.6% and a post crisis low. The drop was due to a 281,000 person decline in those working part time for economic reasons.
Eventually there will be a hit to job growth once Obamacare is replaced and the 30-hour mandate for healthcare is eliminated. Millions of people currently prevented from working 40 hours on their primary job are working a second job to make ends meet. Once they are able to go back to 40 hours on their primary, they will drop the second job. Employers will also lower the number of jobs. For example, employers with 40 people working 30 hours a week (1,200 hours) will move back to 30 people working 40 hours a week (1,200 hours) but that means 10 people will be laid off. There are always unintended consequences to every government intervention. Obamacare increased part time employment and reduced full time employment. "If" it is replaced, that situation will reverse.
The strong jobs number suggests the Fed is free to hike rates in June and again in September. Analysts believe there will be 2 hikes this year and 3 hikes in 2018. Some are starting to move towards 4 hikes in 2018 but that is still the minority opinion.
There is currently a 78.5% chance of a rate hike in June according to the Fed Fund Futures.
The economic calendar for next week is lackluster with the Producer and Consumer Price Indexes and Retail Sales for April, the most important reports. You can tell the Fed quiet period surrounding the meeting is over because they are out in force hitting the speaking circuit. There is nothing on the economic calendar to move the market unless there is a dramatic disappointment in a specific number.
The earnings calendar is headlined by Nvidia, Priceline, TripAdvisor and Valeant on Tuesday. The retailers close the week with Nordstrom, Kohl's, Macy's and JC Penny.
The current earnings cycle is getting better every week. Of the 412 S&P-500 companies that have reported, earnings growth has risen to 14.7%. More than 75% of companies have beaten on earnings and 63.4% have beaten on revenue. The averages over the last four quarters are 71% and 53% respectively. There have been 50 earnings warnings for Q2 and 27 guidance raises. For next week, 42 S&P companies and one Dow company (DIS) will report. The current PE for the S&P-500 is 17.7. S&P earnings for 2017 are now expected to total $131.44 and grow to $147.40 in 2018 and $161.22 in 2019. If the PE remained constant that would mean the S&P would rise to 2,853 by the end of 2019. Obviously, that is the equivalent of a thousand years in market time.
Companies expected to beat earnings are PCLN, NVDA, EOG, KSS.
Companies expected to miss estimates are VMC, DISCA, TRIP.
Friday's earnings were sparse. Cigna (CI) reported earnings of $2.77 and analysts were expecting $2.44. Revenue of $10.3 billion beat estimates for $9.94 billion. Cigna guided for 2017 to earnings of $9.25-$9.75. Anthem asked the Supreme Court to review last week's decision by an appeals court to block the $48 billion takeover bid for Cigna. The appeals court said the merger would further reduce competition in an already concentrated insurance market. Cigna has sued Anthem seeking billions in damages for not completing the deal on schedule. The original bid was in 2015 and it lingered until the courts finally blocked it. They also blocked the $34 billion acquisition of Humana by Aetna. Shares rallied $3.50 to a new 52-week high.
Ruth's Hospitality Group (RUTH) reported earnings of 35 cents that beat estimates for 33 cents. The restaurant chain posted revenue of $105.5 million that just missed estimates for $105.9 million. They opened two Ruth Chris Steak House restaurants in the quarter plus another store in a partnership. They had 70 company owned steak houses open at the end of the quarter and 81 franchised stores. Same store sales rose 0.7% and the average check rose 2.4%. The calendar shift of Easter into Q2 impacted Q1 results by 70 basis points. The shift of Valentine's Day from Sunday to Tuesday cost them 50 basis points. Apparently, fewer people want to go out for a big meal on Tuesday after work.
Restoration Hardware (RH) announced a buyback program for $700 million. The company said it completed the prior $300 million program in Q1 for 7.85 million shares. This is a material announcement since the market cap for RH is only $1.7 billion. They are proposing to buy back 40% of their shares. The catch is that there is no expiration date on the program. They could take 5 years to complete it and there is no guarantee they will ever complete it. Companies announce buyback programs all the time and then buyback only a fraction of the announced total. Shares rose $5 to $57.
Facebook (FB) said it was launching about two-dozen TV shows in June. The content will be in two forms. Some will be 5-10 min in length and others will be traditional TV format shows. Facebook said it was planning on creating an "ecosystem" of professionally produced video content to augment user-generated videos that currently run on Facebook pages. The idea is to attract viewers so they can sell more ads. Facebook is now interviewing for new positions for film producers, creative producers, film engineers and several other producer type roles. Some will be deeply involved with producing original content and some will "oversee" content generation by others, as in Facebook users, companies and aspiring writers/producers. Facebook is well behind Amazon, YouTube and others in this endeavor but they have plenty of cash and they are not afraid to spend it.
Exact Sciences Corp (EXAS) rocketed another 10% higher on Friday to gain $10 for the week. EXAS makes the new colon cancer screening test Cologuard. This is a simple do it at home and mail it in test that costs $435 per copy. It just became accepted by insurance companies in the last several quarters. Cowen & Co surveyed 50 primary care providers and based on the survey those providers expect to use it on 55% of their patients. With roughly 80 million potential patients of screening age this translates into a $5 to $6 billion a year opportunity.
In Q1 EXAS said 10,000 providers ordered initial Cologuard tests, bringing the number of prescribers to 70,000. Since its launch two years ago, the company has completed 450,000 tests. More than 100,000 were in Q1. That shows you how fast the acceptance is ramping. Revenue rose 226% over the year ago quarter. The company said it hopes to have 2% of the market by the end of the year but said it could be processing 8 million tests annually within a couple years. This is a monster market and the Cologuard is much cheaper, safer, less time consuming and far less trouble than a colonoscopy. Shares have exploded since their earnings and guidance on the 27th.
On Thursday after the close Zillow (Z) reported earnings of 11 cents compared to estimates for 5 cents. Revenue of $245.8 million also beat estimates for $236.2 million. They guided for Q1 revenue in the range of $257 to $262 million and full year revenue of $1.05 to $1.07 billion. RBC Capital raised the price target from $40 to $48. Canaccord raised from $42 to $46, Cowen from $37 to $40. Shares exploded higher on the news to close at $44. We exited our long position at the open on Thursday to avoid a potential post earnings drop. Can I have a do over on that please?
The energy sector had a bad week. Oil prices dipped to $43.76 Thursday night to cap a decline that started around $54 about three weeks ago. Inventory declines have been slow to appear with only a 900,000 barrel decline for the last week. Refiners have been slow to restart production from their spring maintenance season. These events will eventually occur. Consumers drive like crazy over the summer and gasoline consumption soars starting around Memorial Day.
Recent comments from random analysts read like the end of the world for oil prices. With current U.S. production at 9.29 million bpd, one analyst was forecasting 10 million bpd by the end of August. The prior peak in 2015 was 9.61 million bpd. If that increase were to occur it would negate half of the OPEC production cuts and that is just until the end of August. If production continued to increase at that rate the U.S. would add another 1.0 million bpd by next April and inventories would be bursting at the seams.
This has little or no chance of happening. Even if we did increase at the recent average rate of 18,000 bpd per week, that is only about 80,000 bpd per month. There is also the law of decreasing returns. Production is surging today because of all the previously drilled but uncompleted (DUC) wells now being completed. That is far easier than drilling from scratch. Once all those DUC wells are completed the pace of new production will slow significantly.
Meanwhile, oil prices tanked on no news while we wait for the summer driving season to begin and inventories to drop. I went to buy gas yesterday in Colorado and it was $2.36 a gallon. They are already hiking the prices for the summer driving season. Based on $45 oil it should be closer to $2 a gallon. I checked GasBuddy.com and it was $3.09 in NYC, $2.75 in San Francisco and $2.04 in Houston.
There was a slowdown in rig activations last week, which was probably related to the decline in oil prices. Oil at $45 is not going to support as many rigs as $55 for obvious reasons. Only 7 new rigs were added.
With the late surge on Friday afternoon and the new closing high on the S&P with the Dow slightly over 21,000 it would appear we are poised for a breakout move on Monday assuming Le Pen does not win in the French election.
For two weeks, the markets moved sideways and refused to decline. We had all kinds of potentially negative events but no real selling. Despite going nowhere, volume was high on Tue/Wed/Thr. Thursday was the highest volume since March 21st and all the indexes ended in single digit gains except the Dow, which had a single digit loss. The market action has had all the earmarks of a distribution cycle but it looks like the buyers are about to win the battle.
Volume was moderate at 6.5 billion shares on Friday with advancers 5:2 over decliners. That is the first day in the last four that advancers beat decliners. This is a really crazy market but after two weeks we may be about to pick a direction.
The S&P closed 3 points over the prior closing high from March 1st of 2,395.96 and only fractionally below round number resistance at 2,400. At this point, ANY further gains could trigger significant short covering and price chasing. Everyone not in the market will be racing to buy something before it runs away from them.
The Dow closed at 21,006 and ever so slightly over critical resistance at 21,000. Like the S&P, ANY further gains could lead to significant price chasing. Numerous Dow components closed at new highs and they are overshadowing those laggards still in a slump. If the Dow breaks out, the laggards could find buyers as well on the theory they are not overbought like many Dow stocks seem to be.
The historic closing high is 21,115 on March 1st. That will be the last line of resistance for the bears but they seem to have lost their conviction.
The Nasdaq Composite closed fractionally over resistance at 6,100 and appears ready to move higher. The prior two days of post high selling were minimal despite the sector being very overbought. Nobody wants to sell techs and the FAANG stocks continue to make new highs.
Current support is just over 6,050 and then again at 6,025. There are no sellers and like the other indexes, ANY additional move over 6,100 could cause significant price chasing.
The small cap indexes are lagging big caps again. The Russell was leading the market for the prior two weeks when big caps were stumbling. It appeared to be a rotation from big to small, which would have been bullish for market sentiment. Now that rotation has reversed again and while the market may move higher, a big cap rally has less staying power. Portfolio managers buy big caps because they are liquid and they can get some short-term gains in a positive market. They buy small caps for the long term when they feel the market is going to remain bullish for a longer period.
As of late Saturday, the polls still have Macron ahead of Le Pen 60% to 40% despite Macron's emails being hacked and posted online on Friday. France has a 44-hour blackout of electioneering before the runoff to allow voters to reflect on their choices. While a 20% margin seems unbeatable, it would only take a 10.1% swing to put Le Pen in the lead. She is very strong in the country and Macron is strong in the more liberal cities like Paris. While it would appear Macron will win and the markets are prepared to run if he does, there is no guarantee. Populism is growing in Europe and Le Pen still has a remote chance of pulling off a victory.
The U.S. markets would like to see Macron win because he represents the least amount of change. We will know Sunday evening what Monday will look like once the S&P futures open for trading.
We have had a great earnings cycle with very strong earnings but that cycle is fading. After this week, there will only be about 46 S&P stocks left to report. We will also be heading towards the Memorial Day weekend that kicks off the summer doldrums.
I recommended last week for readers to be cautious with long positions until the Dow moved over 21,000 and the S&P over 2,400. Monday could be the day that happens and the odds are good it will be a repeat of the short squeeze on Monday after the French primary election. That means if you were not long at the close on Friday, you should consider passing on new entries where the stocks gap up significantly on Monday.
The bulls held on to their lead at 38.1% and a few more bears joined the fence sitters in the neutral camp. This survey ended on Wednesday so Friday's new highs are not yet in the calculation. If we have another giant short squeeze on Monday, it will be interesting to see the sentiment shift for next week.
Last week results
Major U.S. companies are paying summer interns a fortune in salaries. For example, Facebook is paying $8,000 a month with perks including free food, housing and free weekend events. Others include Microsoft at $7,100 a month in a rotational program that focuses on software engineering. Exxon pays $6,500 a month and teaches engineering, economics and management. Salesforce.com pays $6,450 and provides job shadowing, mentoring and classes. Amazon pays $6,450 and interns are encouraged to have ideas, innovate and try new things. Apple pays $6,400 and the program is run like a series of small start-ups instead of a global company. Others include Bank of America $4,750, Bloomberg $6,400, Yelp $6,400, Yahoo $6,080, VMware $6,080, Google $6,000, Nvidia $5,770, Intuit $5,440, Juniper $5,440. All the numbers come from Glassdoor.com. Top 25 Internships
You paid how much? This quaint 80-year old 908 square foot house with hardwood floors, wood burning fireplace and exposed beam vaulted ceiling in Palo Alto California recently sold for $2,555,000 and $623,000 over list price after a bidding war developed. The house will be bulldozed. Developers wanted only the 7,500 square foot lot. That is $341 a square foot just for the land. Sky High Prices
There have been stories recently about Silicon Valley employees making $160,000 a year and just barely scraping by. Facebook engineers making up to $700,000 a year asked Zuckerberg to subsidize their housing because of the absurdly high prices. This housing mania on the West Coast is eventually going to end very badly.
I was going to use the phrase "light this candle" in a section of commentary but that paragraph did not make the final edit. For those investors who have been in the market a long time here is a flashback to the award winning Ameritrade commercial with Stewart telling Mr B "Let's light this candle." Has the market changed since then? Classic Commercial
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