The Trump election caused a major market rally but the Trump presidency is causing significant political uncertainty.
Another day, another potential disaster. President Trump was only an hour into his overseas flight when two different papers broke different stories that could have consequences. The New York Times said during the Trump meeting with the Russian ambassador in the oval office he trash talked Comey as "crazy" and a "nut job" saying the Russian investigation was a great pressure on him but he had fired the FBI director leading the investigation so the pressure would be removed. That comment seems to suggest that he fired Comey to impede the investigation and that would be obstruction of justice and also imply there might be something to the Russian collusion story. Press secretary spicer did not deny the comment but said the investigation was pulling focus from national security areas.
Secondly, the Washington Post reported that the FBI investigation had identified a senior White House adviser as a "significant person of interest." Prior persons of interest were written off by the administration as campaign associates and all past tense. The identification of a current "senior White House" adviser reduces the field significantly and would include family. If one of them were found to have colluded, it would be very bad for the president. Speculation late Saturday suggests it is Jared Kushner, Trump's son in law. Kushner was also responsible for negotiating the $109 billion arms deal with Saudi Arabia that President Trump signed this weekend.
Lastly, after but not related to the "nut job" comments, Comey agreed to testify publicly before the Senate Intelligence Committee after Memorial Day. You can bet that he will be asked all the hard questions about his meetings with the president and the answers could be damaging to the president. Comey has more credibility than the president. I would almost bet you Comey has agreed to testify against the will of his attorneys in order to set the record straight about their interactions. Since he was fired, he has been slandered almost every day by the administration. This is not going to be pretty even if Comey tries to remain professional. The senators are going to ask every hard question they can come up with over the next week. Recollection notes made by FBI officials have long been seen as credible evidence in trials.
For investors who thought President Trump's problems had been put on hold for several months until the special prosecutor finished the private investigation, they may be reconsidering it now. The press is not going to let this die and I am sure it was no coincidence all three stories broke one hour after his plane left for the overseas trip.
The market was in rally mode with the Dow at the highs of the day at 20,857 at 2:45 when the headlines began to appear. The Dow fell 55 points from that high to close at 20,802.
The dramatic decline in the dollar is further evidence investors are worried about the growing number of problems impacting the Trump presidency. The dollar soared after the election on expectations for tax reform, deregulation and better trade policies. If the president is under siege over the coming months, he will not be able to get anything passed. The democrats are already blocking all the major stuff and republicans are starting to peel away from the core support group. While Trump could remain in office, traders are starting to worry the agenda is dying.
Bank of America said more than $8 billion flowed into bonds for the week ended on Wednesday. Yields on the ten-year treasury fell to 2.19% on Thursday as the president's troubles deepened and the equity market was barely recovering from the Wednesday crash.
The market did not have any material economic reports on Friday to distract investors from planning their rebound purchases. Next week will be almost the same except for the FOMC minutes on Wednesday. The home sales reports will be of interest but both are expected to show declines. If there was an unexpected rise in sales that could be market positive.
The Richmond surveys on Tuesday are rarely market movers. The GDP on Friday is the first revision so it is not going to create any market excitement.
This is a holiday week even though the holiday is next Monday. This is the first official weekend of summer and traders will be leaving early for the week once the FOMC minutes are released. Volume will slow to a trickle.
Earnings are still taking center stage with some big movers on Friday. Deere (DE) reported blowout earnings of $2.49 compared to estimates for $1.68. Revenue of $8.29 billion easily beat estimates for $7.27 billion. The company said "We are seeing modestly higher overall demand for our products, with farm machinery sales in South America experiencing a strong recovery." After warning about a global recession for several quarters, the company said the worst of that recession may now be over. Deere said full year revenue should rise about 9%, up from the prior forecast of 4%. Net income is expected to be $2 billion, up from prior forecasts for $1.5 billion. Shares exploded higher on the earnings beat and raise.
Foot Locker's (FL) earnings stunk like a sweaty tennis shoe. The company reported earnings of $1.36 compared to estimates for $1.38 and less than the $1.39 posted in the year ago quarter. Revenue of $2.0 billion missed estimates for $2.02 billion. Same store sales rose only 0.5% and below estimates for 1.4%. The CEO said the weak results were due to late tax refunds in February. Gross margins also fell as the company struggled to unload excess inventory at discount prices. The CEO warned that Foot Locker may struggle to hit management's target of mid-single digit same store sales growth in 2017. Shares were hammered for a 17% loss.
Autodesk (ADSK) shares spiked $14 after the company reported a smaller than expected loss of 16 cents. Analysts were expecting a loss of 23 cents. Revenue of $486 million beat estimates for $470 million. They guided for a Q2 loss of 60-66 cents on revenue to $488-$500 million.
Shares rallied because the company is transitioning from a software sales model to software subscription model. Subscribers to the "new model" subscription plan rose 233,000 to end the quarter at 1.32 million. Maintenance plan subscriptions declined 47,000 to 1.97 million as customers moved to the new model. In total, they added 186,000 net subscribers to reach 3.29 million at the end of the quarter.
Whenever a company switches to a subscription model there is a couple years of declining revenue before the rising subscription base exceeds the prior metrics. Over the full year, they expect to add between 600,000 and 650,000 subscribers and begin generating positive net income for the first time in three years since they began the transition. Annualized recurring revenue (ARR) rose 103% to $692 million. Total ARR rose 18% to $1.74 billion. Deferred revenue rose 18% to $1.8 billion.
RBC Capital upgraded ADSK from sector perform to outperform with a $125 price target. Bank of America upgraded from underperform to neutral.
Campbell Soup (CPB) reported earnings of 59 cents that declined -4.8% and missed estimates for 64 cents. Revenue of $1.85 million missed estimates for $1.87 billion. The company revised guidance saying sales would fall up to 1% compared to prior guidance for a rise of up to 1%. Packaged foods companies have been struggling to adapt to the new healthier food demands of today's consumer. Campbell has created its own fresh-food unit in 2015 to sell various items and the unit is struggling. Sales equate to 14% of total volume and fell -6% in the quarter. "We have experienced significantly lower consumption across almost all our categories and felt it most acutely in February." Sales in the Americas fell by 2% with weak demand in V8 juices, condensed soups and broths. The company did raise earnings guidance for the year from $3.00-$3.09 to $3.04-$3.09. Shares fell -2% on the earnings.
Over 470 S&P 500 companies have reported earnings for Q1. Earnings have risen 15.2% over Q1-2016. For Q1, 75.2% of companies have beaten estimates. This is above the long-term average of 64% and the past four quarters of 71%. 62.8% have beaten revenue estimates and this is above the long-term average of 59% and the four-quarter average of 53%. For Q2 there have been 71 negative warnings and 33 positive preannouncements. There are 19 S&P-500 companies reporting this week and zero Dow components. The next Dow component is Nike in late June.
Hewlett Packard and Costco are the highlights for the coming week. Lowes and Best Buy would also be worth watching.
Lumber Liquidators (LL) rallied 11% after Oppenheimer upgraded the stock from perform to outperform with a $34 price target. This is the second upgrade this month with Wedbush upgrading from neutral to perform and a $27 price target. Shares closed Friday at $29 so that target has been hit. Both analysts said LL was succeeding in a post litigation recovery with an improved product lineup, procurement and improved store experience. The company now offers professional installation, which has proven to be very successful. Previously they just sold the flooring. With a strong housing sector there are more customers looking to upgrade their homes. The company still has not concluded the settlement on the bad Chinese flooring from a couple years ago but they took a charge for $15 million to cover any expected settlement.
Nvidia (NVDA) shook off the market crash and hit another intraday high on Friday after a Bernstein note. The analyst initiated coverage of Nvidia with an outperform saying the company has barely tapped into some massive growth markets. "Our analysis suggests their datacenter total addressable market (TAM) is likely somewhere between 'big' and 'huge,' driven by the mainstreaming of AI and the rise of accelerated computing; we forecast 63% annual growth through CY2019, reaching $3.6B in revenue." The analyst said Nvidia's multiyear head start in investing in artificial intelligence and deep learning puts the company well ahead of competitors in those two high-growth fields.
In addition, their automotive business is just getting started and could eventually be a multibillion-dollar business. Also, double-digit gaming growth should be sustainable in the long term. The analyst said even after their recent gains the stock remains reasonably valued compared to other high growth tech stocks and the market may not be fully appreciating Nvidia's long-term value. Currently the stock trades a 9 times sales and a PE of 40. Considering the explosive growth and technological lead on competitors that is probably conservative. Bernstein has a $165 price target.
UBS said Nvidia's new Volta chip has a 20% performance advantage over the yet to be released Vega chip from AMD and requires less power with better efficiency. They expect gross margin upside as sales of the Volta and Pascal chips increase. UBS has a $145 price target. Canaccord Genuity upgraded their price target to $155.
Boeing (BA) was the strongest performer on the Dow with President Trump headed to Saudi Arabia to discuss a closer relationship in combating ISIS and IRAN. They agreed on a new $100 billion arms sale agreement that could grow into $350 billion over the next ten years. There is already about $100 billion of arms sales in progress in multiple agreements. These agreements include missile defense systems, tanks, planes, helicopters, boats, radar systems, etc. Saudi Arabia is the archenemy of Iran and having a strong military capability along with a strong missile defense should keep Iran from becoming overly aggressive towards Saudi Arabia or any of their neighbors. BA, LMT, GD, ROK and HII were just some of the military contractors up on expectations for future deals.
Oil prices finally eased back over $50 on rumors OPEC could enact deeper and longer production cuts to end the inventory glut. Saudi Arabia and Russia have already announced an agreement to extend existing cuts through March 2018. Saudi's oil minister hinted there could be deeper cuts in the planning stages. OPEC meets on Thursday to discuss production and hopefully make an official announcement.
Some analysts claim OPEC cannot make deeper cuts because they are financially unable to take any less for their oil. I disagree. I am going to use Saudi Arabia as an example. In February, they exported 7.65 million bpd. At $45 a barrel that is worth $344 million a day. If they cut 250,000 bpd and everyone else did an equivalent amount and oil rose to $50, they would receive $370 million. That is more money for less oil. OPEC is totally in control of the price of oil. If they cut their production from the current 31.73 million bpd to 30.0 mbpd, they could push prices to $65 or even higher in the months ahead. It would not happen immediately but once inventories really began to decline, the prices would rise. They could easily lift prices to $75 if they wanted to. However, most OPEC nations are short sighted and they always cheat on the quotas so they cannot manipulate the price until they all stick together.
The recent production cut has had close to 100% compliance but that was only because Saudi Arabia, Kuwait and the UAE cut more than promised to make up for the other slackers. If they could reduce production more than the 1.8 million bpd that started in January and continue it into 2018 they could get back into control of prices.
Total crude inventories in OECD nations were 3.013 billion barrels as of May 1st. That is 276 million barrels over the five-year average range. That represents 64.8 days of supply. In a long term view, 64 days is nothing. Just think how quickly OPEC could be back in control with triple digit prices if they were willing to suffer some short-term pain for longer-term gain.
I think we could see some surprises out of the meeting this week.
Another reason oil prices rose on Friday was the Iranian elections. The current moderate president Hassan Rouhani was running against the hard line Ebrahin Raisi. If Raisi had won and adopted his hard line stance, Iran's oil output would have been at risk. Currently they are producing at full capacity and rapidly trying to increase that capacity. A hard line Iran would dramatically increase geopolitical tensions and risk of eventual outside military intervention. Rouhani won reelection by a decent margin. That could weigh on crude prices on Monday.
Active rigs surged higher with a gain of 16 land rigs with 8 oil rigs and 8 gas rigs. There was also a gain of 2 offshore rigs. If oil remains over $50 we could see these weekly numbers rise even higher.
Ironically, US production actually declined 9,000 bpd last week to 9.305 million bpd. That was the first decline in months but it is only temporary and likely caused by some minor pipeline outage in a gathering system.
The biotech sector has been very volatile with a series of 1% or greater advances and declines but remaining in a relatively narrow 200-point range for the last three months. On Friday, the index lost nearly 1% despite the rest of the indexes closing higher. There is a lot of indecision in the sector and the ASCO (American Society of Clinical Oncology) meeting starts on June 2nd. More than 5,000 abstracts have already been uploaded for that meeting. Typically, we see biotech stocks with a cancer focus, rise into this event.
If you just looked at the market stats graphic at the beginning of this commentary it looked like a boring week with only a minor decline. The Dow lost 92 points, Nasdaq 17 and S&P -9. Obviously, there was a big deal on Wednesday when the Dow lost nearly 400 points and the Nasdaq 158. While the recovery was lackluster on Thursday and choppy on Friday, traders did buy the dip. They did not rush in but approached it in a cautious manner on selected stocks.
Volume on Mon/Tue was 6.3 billion shares each. That spiked to 8.4 billion on Wednesday's crash and 8.1 billion on Thursday's battle to recover. Obviously, there were still a lot of sellers in the market on Thursday. Friday's volume shrank to 7.0 billion despite the slightly more bullish outcome. The conviction was still weak. The late day headlines scared traders back out of the market.
Watching the news shows on Saturday, the uproar appears to be fading. I am sure the Sunday shows will rekindle some worries but they should be offset by the positive news coming from Trump's visit to Saudi Arabia. Unless we get a new headline, the impact to the market on Monday should be minimal.
The S&P gained 16 points but closed 8 points off its intraday high. The prior support at 2,380 has returned as resistance over the last two days. Support is well below at 2,350.
The Dow benefitted from the arms deals in Saudi Arabia with Boeing leading the charge. Caterpillar benefitted from the positive earnings guidance from Deere. United Technology was also a defense related winner. Chevron was up because oil prices moved over $50 and Walmart reported earnings Thursday evening that powered it higher.
The Dow has failed to return to the prior support at 20,900 after bouncing off 20,600 on Thursday. The Dow finished 53 points below its intraday highs and remains the weakest index overall but it was the strongest on Friday. The support at 20,600 needs to hold or the damage to sentiment could be dramatic.
The Nasdaq was weaker than the Dow and S&P on Friday with only a 0.47% rise compares to the 0.68% rise on the Dow. The big cap techs faded sharply on Friday afternoon after decent rebounds from Wednesday's lows. I am not sure we are out of the woods yet because profit taking on the Nasdaq may not be over. Support is now 6,000 and resistance 6,160.
The small caps were very weak on Friday compared to the magnitude of their decline. The minor 6-point gain on the Russell was 7 points below its intraday high. If the markets are going to rally, the Russell is going to have to find some buyers. Continued weak performance will eventually drag the broader market lower.
While nobody can predict market action on Monday or the direction for next week, it would be very tough to bet against the market. Every dip is bought and there have been multiple reasons the market should have sold off over the last several weeks and with the exception of the Wednesday decline, it has held solid. This rebound has been lackluster and we are in the sell in May and go away period. However, 15% earnings growth is a strong stimulant for equities.
Unless the president develops a bad case of foot in mouth disease over the weekend, the market should shake off the Friday headlines and continue trying to regain its highs. However, another day of material declines could punish the dip buyers and poison sentiment. I would continue to buy the rebound as long as it remains intact. If we see the market begin to roll over again, I would move to the sidelines.
The MACD sell signal has been triggered on the sell in May and go away strategy. That could influence direction in the week ahead.
Amazing what a nearly 400-point drop in the Dow can do to market sentiment. The bullish contingent took a real hit with nearly a 9% drop. Those fleeing were equally divided between neutral and bearish. Since this survey ends on Wednesday, it has 4 days where the market was positive before the crash. The survey for this coming week will be interesting to see if investors rushed back into the bullish camp or remained on the fence.
Last week results
Last week the WannaCry ransomware attacks began. After several pauses, they are still going strong. At Option Investor, we have had more than 1,000 intrusion attempts by just the WannaCry worm in the last week. Fortunately, we have good firewalls and up to date software and none have succeeded. This is on servers that do not have email. These are indirect attacks. Once the malware imbeds itself on a system, it tries to spread by randomly attacking other IP addresses in the network. Having one system breached in a data center puts the thousands of other systems in that center at risk.
Cisco's Naveen Menon said last week that Cisco is tracking more than 20 billion cyber attacks a day. To put that in context there are only 3.3 billion Google searches a day. Naveen said a study by Cisco found that 2 out of every 5 companies that are attacked withdraw from implementing new mission critical technology and spend all their time building firewalls, protecting data and shrinking infrastructure to make it easier to manage. He said the financial impact from cyber attacks is incalculable but it is not from the actual losses but from the lost opportunity and the loss of technology development. He said without the security threat we could see 8 to 9 times the current technology growth rate.
Cyber security is going to be a key growth area forever. As long as the opportunity exists for unscrupulous people to use technology to steal from others or cause damage just for fun, the cyber security sector is going to benefit. The sector is currently fractured because of the thousands of ways to perpetrate an attack and the hundreds of ways to protect against those attacks. Every company has a different method. The various companies are going to be forced to consolidate in order for any one company to cover all the bases. SYMC, FEYE, PANW, CHKP, CSCO, PFPT, SCWX, TMICY and even IBM and Intel are all chipping away at the problem. The trick for us is to decide which companies will be acquired and which will be the acquirers.
There were 7,457 individually listed stocks in 1995. That number has fallen 42% to just over 4,000 today. There are currently more ETFs at 5,000+ than stocks and more than 26,000 mutual funds.
In 1984, an untitled piece of art by Hatian-American painter Jean-Michel Basquiat sold for $19,000. It is one of his pieces representing injustice for black men. The artist eventually went into a drug fueled death spiral with more and more critics talking down his work. He died on August 12th 1987 of a drug overdose. His unusual works began to rise in price as demand increased. David Bowie began collecting them and that stimulated others to pay attention whenever a Basquiat came up for sale. Last week a Japanese billionaire paid $110.5 million for the same painting. That is a great return for just over 30 years.
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