Oil prices dipped under $43 intraday and the energy sector became a drag on the market.

Market Statistics

Crude prices dipped to $42.75 ahead of the July futures expiration at the close. That is a 7-month low and down from the $55 high in February. Besides the obvious problem of the futures expiration, news from Libya and Nigeria about rising production put additional pressure on excess global supplies. Production in Libya has risen from 260,000 bpd to nearly 900,000 bpd over the last few months after they worked out a revenue sharing agreement with militias holding and guarding the fields and ports. Libya has the capability of producing 1.6 million bpd once they repair the damage from the civil war.

Nigeria's production rose 50,000 bpd to 885,000 after Shell ended a force majeure on Bonny Light crude several weeks ago. The pipelines damaged by militants in the long running confrontation with the government, are being repaired and production is expected to continue rising.

U.S. production has rebounded from 8.428 million bpd in July of last year to 9.330 million bpd last week. The recent peak was 9.61 million bpd in June 2015. Current is only about 280,000 bpd below the peak and represents a whopping 902,000 bpd increase in just the last year. Analysts expect U.S. production to rise to 10.0 million bpd by the end of 2017.

If you add the increase in production from the US, Libya and Nigeria over the last year you get 1.792 million bpd and that almost exactly offsets the 1.8 million bpd that OPEC began cutting on January 1st to offset rising supplies. That means global inventories are declining slower than previously expected and prices may not rise as OPEC expected. The June/July/August period is peak oil demand in the US and Europe. Unfortunately, despite the low gasoline prices, oil demand has flat lined and not rising as in prior years.

This is due to the new ability to export ultra light shale oil to Europe. This was approved last year and exports are now up to more than one million bpd. Before we could export WTI, refiners used that oil here to refine into gasoline and diesel and that was exported to Europe. Gasoline exports are down significantly and therefore oil demand in the US is also weak. One million bpd is 7 million barrels a weak in reduced refinery demand.

On the positive side, analysts believe oil has either reached its low or that $40 will be the bottom. Since many shale drillers cannot make a profit under $45 per share, this means fewer rigs will be activated and the pace of the production increases will slow.

After the bell, the API Inventory report showed a -2.7 million-barrel decline for the week ended on Friday. Inventories at Cushing declined -1.27 million barrels and that is the 11th consecutive weekly decline. If the EIA inventories on Wednesday morning also show a significant decline, we could see an oil rebound begin and energy equities should follow.


There were no economic reports worth discussing today. For tomorrow, the existing home sales will garner attention followed by the new home sales on Friday. The Kansas Manufacturing Index on Thursday is normally ignored.

The big event for the week is the Russell rebalance on Friday. The volume will be extreme and could be well over 10 billion shares when normal is about 6.5 billion. The Russell is likely to be under pressure the next three days as some fund managers pre sell the deleted stocks to beat the Friday rush. Fortunately, the Russell typically rises the week after the rebalance as managers adjust their positions and continue adding the new stocks added to the index.


After the bell, Adobe (ADBE) reported earnings of $1.02 that beat estimates for 94 cents. Revenue of $1.77 billion also beat estimates for $1.73 billion. They guided for the current quarter to earnings of $1.00, up 33%, compared to estimates for 97 cents. Revenue guidance was for a 24% rise to $1.815 billion and analysts were expecting $1.8 billion. Annualized recurring revenue rose $312 million to $4.56 billion. Digital media revenue rose to $1.21 billion and 68% of total revenue. Shares rose $5 to $146 in afterhours. I have been waiting for weeks for Adobe to report so we can add them to the portfolio on any post earnings depression.


FedEx (FDX) reported earnings of $4.25 compared to estimates for $3.87. Revenue rose from $13.0 billion to $15.7 billion and narrowly beat estimates for $15.6 billion. The company said higher rates and higher volumes powered the gains.

The company said it was considering "peak pricing" after competitor UPS said it would hike rates and impose surcharges during the peak end of year shopping period. FDX also said it was considering charging more for oversize items. FDX said they wanted to make sure they were compensated fairly for the investments they made to deliver outstanding performance during the holiday shipping period.

The company guided to earnings of $13.20 to $14.00 for the full year and analysts were expecting $13.61. In 2016, the company reported $12.30 in earnings. They said they were in discussions with Boeing on some "opportunities" but would not say which planes they were considering. Boeing said last week they were going to convert some 767s to a freight configuration because of higher demand for that size and configuration.

FDX is probably looking over their shoulder at the 40 freighters Amazon Prime is currently operating to move packages around the country. Prime Air is likely to grow as Amazon expands. During the last holiday shopping season the USPS became the delivery agent to customer homes on packages under the USPS size and weight limit. Where I live, USPS had to add capacity to handle the Amazon deliveries. UPS and FDX only delivered to me a couple times each in Nov/Dec. USPS still managed to lose money. Government run businesses never prosper even with record volume.


La-Z-Boy Incorporated (LZB) reported earnings of 57 cents that easily beat estimates for 46 cents. Revenue of $12.7 million beat estimates for $401.1 million. Same store sales rose 2.4%. The CEO was upbeat about all segments with margins rising along with sales. The company saw a shift to premium, higher priced products, which is surprising given the weakness in retail in general. I guess if you build it they will come. Shares rose 11% in afterhours.


Red Hat Inc (RHT) reported earnings of 56 cents compared to estimates for 52 cents. Revenue of $676.8 million beat estimates for $646.7 million. They guided for the current quarter to earnings of 67 cents and revenue of $694-$702 million. Analysts were expecting 65 cents and $676.9 million. For the full year, they guided for earnings of $2.66-$2.70 and revenue of $2.79-$2.83 billion. The company said they were seeing "robust global demand for our products and increased commitments from our largest customers." Shares spiked $9 in afterhours.


Cowen & Co upgraded McDonalds (MCD) from market perform to outperform and raised the price target from $142 to $180. The analyst said McDonalds had done an outstanding job launching popular innovations on its menu and increasing value initiatives. They raised estimates for same store sales in 2017 and 2018 from 2.2% and 2.0% to 3.4% and 3.0% respectively. The current analyst consensus is 2.7% and 2.5%. Shares gained 93 cents to a new high.


Shares of Sprint (S) rose slightly after news broke that T-Mobile's (TMUS) parent company, Deutsche Telekom AG, is preparing a merger offer. Germany's Handelsblatt is reporting Deutsche would present an all-stock offer. This would be beneficial for T-Mobile because they could benefit from the broader network without spending billions building it. Moody's said it would cost T-Mobile up to $3 billion to expand their network. Moody's said a merger would result in a "dramatic increase in scale" and the combined companies could compete aggressively on price. Sprint is majority owned by Softbank.


Nvidia (NVDA) was upgraded by Pacific Crest to sector weight. The analyst said he missed the big rally because he was not a believer in the strength of the graphic card cycle. After meeting with some graphic card producers last week he realized there was a long path ahead. They said inventories had been depleted because of strong demand. Bitcoin miners need the top of the line video cards and GPU processors made by Nvidia because of the thousand of cores that can run individually. These cards and GPUs are in some cases hundreds of times faster than the chips in a normal computer. With "crypto currencies" surging to new highs there is a race to build mining computers to create these various currencies. The analyst said customers are double ordering components for these cards to make sure they have extras on hand. There is a real fear they will run out of inventory completely and have nothing to sell. This is a boom for Nvidia.

Lightspeed's Jeremy Liew said Bitcoin could rise to $500,000 because the maximum number of Bitcoins ever will be 21 million. As demand rises, so will the price. Demand is rising sharply as investors move to a nontraceable currency in order to avoid governments, taxes, confiscation, etc. Millionaires in China and elsewhere are turning to Bitcoin as a way to hide cash where it can be untraceable and used universally all around the planet.



 

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Markets

The Dow Transports could be telegraphing market weakness ahead. The index has come to a dead stop at resistance at 9,500 multiple times over the last 9 months. In theory, they should have been up today because of the sharp drop in crude prices. According to Dow Theory, they are the counterbalance to the Dow. Any Dow rally should be accompanied with a rally in the transports. Any decline in the transports suggests the Dow will follow.

We have some a long way since Dow Theory was developed decades ago and the transport sector is not as big a factor as it once was. However, proponents of Dow Theory will see this decline as a warnings nonetheless.


The S&P gave back 16 points to close below prior resistance at 2,440. The index did not erase the gains from Monday but it came close. The resistance at 2,450 was broken at the close on Monday by 3 points but the selling was immediate today and worsened as the day progressed. The index closed at its lows. Arthur Cashin said there was $500 million in sell on close orders on the NYSE.

Support remains 2,420 and it is entirely possible we could see a retest of that level.

The market is like a 2-year-old child. It cannot be left alone or it will find some trouble. There were no material headlines for the market to worry about this week and no wall of worry to climb. When there is no target and no catalysts, the market tends to wander rather than rise.

Volume was elevated at 7.1 billion shares. Decliners far outweighed advancers 5,216 to 1,933. That is the most decliners since the May 17th market crash when the ratio was 5,885 to 1,389. The selling was broad but it was not harsh. Individual stock declines were minimal. Because of the Russell rebalance, Monday's volume of 6.2 billion shares could be the low for the week.


The Dow gave back 62 points compared to the 144-point gain on Monday. The gap up on short covering on Monday will have to be filled. That target will be 21,384 and about 80 points lower than today's close. The faster the gap is filled the more painless it will be.

Support is back at 21,300 and assuming there are no disasters in the headlines, it should hold through the July 4th holiday. Once past the holiday the market tends to weaken. August and September are the worst months of the year and portfolio managers will begin raising cash in July to take advantage of any buying opportunities in Q3.

The 21,525 high from the last two days will be resistance for future rallies. I was surprised the round number resistance at 21,500 was so easily broken but Monday's gains were driven by short covering rather than an urge to buy stocks.

The only Dow stocks that moved more than $1 were GS, HD, AAPL and DIS and all were to the downside. They accounted for 34 points of the Dow's 62 point loss.



The Nasdaq rebounded to resistance at 6,245 on Monday and came to a dead stop. That level was not even touched today with selling starting at the open. The big cap tech stocks were mostly lower but bot by large amounts. As I said earlier, the selling was broad but it was not harsh.

Support is well below at 6,100 and that better be a hard stop on any decline. Any move below that level could trigger another wave of selling like we saw on the 9th.




The Russell gave back 15 points to close just over prior support at 1,400. The Russell is likely to be under pressure for the rest of the week but positive the next week. I do not think the Russell movement is going to be relative to the market until after the rebalance. Investors know why it is going to be weak.


S&P futures are weak tonight at -3.50 with no apparent reason. The market does not need a reason to decline but humans try to assign an excuse to every market blip. Other than the Russell there is nothing else on the calendar this week to provide direction. Beware a calm market with no headlines.

Enter passively, exit aggressively!

Jim Brown

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