Market volume averaged only 5.17 billion shares for the week with a low of 4.8 billion on Friday.
This was the lowest volume for a non-holiday week in recent memory. Traders were either on vacation, avoiding the Yellen/Draghi speeches or are simply waiting for the normal buying opportunity in September. The lack of volume suggests there is no conviction in either direction. These minimal market moves suggest investors are just passing time ahead of the September volatility. Investors are showing no interest in selling but they are not buying either.
The Dow gained +123 at the open but it was quickly erased. The minor buying in the afternoon was also erased at the close as weekend event risk caused positions to be sold.
The only economic report on Friday was the Durable Goods for July. After a 6.5% gain in June, orders fell -6.8% in July. Analysts were expecting a -5.6% decline. Excluding transportation, orders were up +0.5%. Excluding defense, orders declined -7.8%. The decline in orders came mostly from non-defense aircraft, autos and machinery. Non-defense capital goods orders declined -20.2%. The inventory to sales ratio remained flat at 1.7 as where it has been for the last 7 months.
Janet Yellen's speech on Friday was a non-event. She said nothing about monetary policy or tapering QE. She said the financial system was safer today than during the financial crisis although some regulations needed to be adjusted. She warned that future crises are inevitable but the recent crash taught regulators some important lessons.
She said, "A broader set of changes to the new financial regulatory framework may deserve consideration. Such changes include adjustments that may simplify regulations applying to small and medium-sized banks and enhance resolution planning." She suggested the Volcker rule, which limits the ability of banks to trade for their own account, may need some "simplifying." She cautioned against broad changes when it came to risk taking in the market.
After her speech, the Dollar Index fell nearly 1% to 92.74 and the lowest close since January 16th, 2015. Adding to the decline was comments from Draghi about the strengthening of European economy. Comments earlier in the week from President Trump about ending NAFTA and potentially shutting down the government in a budget battle in September, also contributed to the decline for the week.
The Euro had an opposite reaction to the Draghi speech with a 1.08% rise to a new 30-month high.
The economic calendar for next week is chock full of important events. It is payroll week with the ADP on Wednesday and the Nonfarm Payrolls on Friday. The revision of the Q2 GDP is on Wednesday. Analysts are expecting no change to the initial 2.6% reading but we could be surprised.
The Atlanta Fed real time GDPNow is still projecting a 3.4% rise in Q3.
The national ISM Manufacturing Index is on Friday and it is expected to decline slightly but not enough to be a market mover. There are lots of other reports but none are expected to cause a market hiccup.
Twitter (TWTR) shares were downgraded by Jefferies from buy to hold saying despite the companies broad engagement with users, the monetization is slipping. Jefferies warned having a "strong brand" was not enough and they cut the price target from $20 to $16. In the last earnings report, revenue declined -6% and they added zero monthly active users. Jefferies said the ROI on Twitter ads was falling and advertising revenue fell -6% despite a 15% increase across all social media sites. Shares fell slightly on the downgrade. There is no future in owning TWTR shares. It has become a trading stock rather than an investment. The only reason to hold TWTR shares would be if you were expecting a buyout. However, with declining metrics, that is not likely to happen at the recent price ranges.
Amazon (AMZN) announced on Thursday they were going to close the Whole Foods Market (WFM) acquisition on Monday. On Wednesday, the FTC cleared the $13.7 billion acquisition. Amazon said shoppers would immediately see cheaper prices on the best selling grocery and produce items including salmon, eggs, produce, meat, etc. The company also said they would begin implementing a Prime loyalty program in the stores. Survey's claim about 60% of Whole Foods shoppers are also Amazon Prime subscribers. This will be a match made in heaven for Prime members. In addition, the Whole Foods brands like 365, Whole Foods Market, Whole Paws and Whole Catch will be available on Amazon.com, AmazonFresh, Prime Pantry and Prime Now.
Here is the key point. Amazon has a history of selling below cost to capture market share. Once they have that share, they raise prices to just over breakeven and turn up the volume. It only makes sense that Amazon is going to use the first six months of the Whole Foods operation to sell products really cheap to capture market share from people who always thought Whole Foods was expensive. If Amazon can lure them back with low prices and specials, that would also bring them into the Amazon ecosystem. With just over three months until the holiday shopping season, you can bet Amazon will be making a full court press to capture those shoppers before the holidays.
Conditions are going to be tough in the coming months for Sprouts Farmers Market (SFM), Fresh Market (TFM) and Natural Grocers (NGVC). Kroger (KR) and Wal-Mart (WMT) will see the eventual impact but it will be farther down the road. Those stores have a lower dollar customer and far more saturation as a neighborhood store. Whole Foods only has 450 stores. Kroger has close to 3,000 stores. Wal-Mart has 17,000 stores. Whole Foods will have a local impact on Kroger but it will only be minimal. In neighborhoods where both stores exist, they each have their own demographic clientele. There will not be that much bleed over initially.
Costco will see no impact from the acquisition. Some 82% of Costco customers are already Prime subscribers. The Costco stores and merchandising methods are completely different than a Whole Foods. This sell off hysteria on Costco is ridiculous. This is a definite buying opportunity on COST. Claiming Amazon/Whole Foods is going to cause a significant impact is like saying a sale on Harley-Davidson motorcycles is going to impact Cadillac sales. The businesses are just not the same.
Big Lots (BIG) reported earnings of 67 cents that beat estimates for 62 cents. Revenue of $1.22 billion beat estimates for $1.21 billion. They guided for the current quarter to earnings of 1-5 cents and full year earnings of $4.15-$4.25. Same store sales rose 1.8%. The CEO said the closing of thousands of retail stores was giving Big Lots numerous opportunities to open new stores or relocate existing stores in better locations at favorable rates. The store closures are also redirecting consumer traffic to other stores in the area including the Big Lot stores. Shares dipped sharply at the open but recovered to lose only 48 cents.
Autodesk (ADSK) reported a loss of 11 cents that was a penny better than expected. Revenue of $501.8 million beat estimates for $494.8 million. They guided for the current quarter for a loss of 12-16 cents and revenue of $505-$515 million. Analysts were expecting $515.7 million. For the full year, they guided for a loss of 54-61 cents with revenue of $2.03-$2.05 billion. The losses are the result of shifting from a one-time software sale retail model to a cloud subscription model. For the first 24 months of a conversion, revenue declines but long term revenue rises and becomes more predictable. Shares spiked on the news.
Pure Storage (PSTG) reported a loss of 11 cents that beat estimates for a loss of 14 cents. Revenue of $224.5 million beat estimates for $218.8 million. They guided for the current quarter for revenue of $267-$275 million and $985 million to $1.02 billion for the full year. Shares spiked $19% on the guidance.
Ulta Beauty (ULTA) was suffering from an earnings hangover on Friday. The company reported earnings of $1.83 that beat estimates for $1.78. Revenue of $1.29 billion, rose 20.6% and beat estimates for $1.28 billion. Same store sales rose 11.7% but that was down from the 14.4% rise in the year ago quarter. They raised earnings guidance to grow in the "high 20% range" up from prior guidance of "mid 20% range." Same stores sales guidance was raised from 9% to 10%-11%. They opened 20 new stores in Q2 and plan to open 100 in 2017. Ecommerce revenue rose 72%.
Overall, this was an incredible earnings report. However, it may have been too good. BMO Capital downgraded them from outperform to market perform and cut the price target from $345 to $235. Telsey Advisory Group reiterated an outperform but cut the price target from $360 to $300. RBC warned continued high expectations may be ignoring the competition. One analyst said Ulta was a perfect target for Amazon because they have high margins and ship products in boxes. Another said the makeup business cannot continue to grow at the current rate because of the flood of copy cat cosmetics currently hitting the market. However, RBC pointed out that despite all the perceived negatives, Ulta's customer base rose 23% to 25.4 million. That is hardly a weak gain.
I believe this is simple profit taking in a weak market. ULTA had more than tripled over the last three years and there was a lot of profit to be captured. The slight slowing in same store sales was blamed but ULTA said it was because they were less promotional in Q2. So when is making a decision to expand margins a bad thing? They had a blowout quarter without giving away the store in promotions. If by chance the stock declined to $150, I think it would be a major buying opportunity. I am not expecting that but would love to see it.
Earnings for next week include Best Buy, Ctrip.com and Costco. The pace continues to slow with only 7 S&P companies reporting to bring the total to 498. Q2 earnings have risen 12.1% with 73.5% of companies beating estimates and 69% beating revenue estimates. For Q3 there have been 64 guidance warnings and 42 companies issuing positive guidance. The forward PE is now 17.6.
DuPont (DD) will be replaced in the Dow Industrial Average by a new company created when it mergers with Dow Chemical. The new company will be called DowDuPont with the ticker DWDP. The change will occur on Sept 1st.
In years past the appearance of a hurricane in the Gulf of Mexico would send oil prices higher and everyone would be panic stricken that some disaster would befall the production platforms. Since there has not been a major hurricane in the Gulf since Katrina in August 2005, that worry seems to have evaporated. I think the new crop of energy traders did not live through the major outages in the 1990s. With the current surplus of inventories we are not as susceptible to shortages if a storm did blow though the oil patch.
Corpus Christi has five refineries with capacity of about one million bpd or 4% of our total. The Houston area has 35 refineries with capacity of 9.0 million bpd or 46% of our capacity. Currently about 10% of Gulf production is offline. The hurricane's path took it up the Texas coast and it missed the majority of the oil patch south of Louisiana.
While there appears to be no imminent danger to the energy sector there will always be the unexpected. If Harvey rebounds back over the Gulf and makes landfall in the Houston area or farther east, the biggest damage potential is flooding. The refineries are built strong to be immune to storms. However, the 6-12 foot storm surge and forecasts for up to 36 inches of rain, could overpower the drain pumps and shutdown the facilities for weeks. With the driving season ending on Labor Day weekend, it would take a monster facility outage to cause any real problems.
Crude prices are reflecting this fact with no material movement and stuck in the $47-$48 range.
Active rigs declined by 6 to bring the total decline to 18 over the last 4 weeks. Producers are getting ready for what could be another drop in prices in Sep/Oct.
The S&P posted a big rebound on Tuesday that got everyone excited but it stalled right at 2,450 and that was resistance the rest of the week. The very low volume is going to be even lower next week and it is going to be harder to generate an upside move.
Bank of America said on Friday that equities have seen the biggest outflows since 2004. Since that period covers the financial crisis, that is a strong statement. Over the last 10 weeks, investors have pulled $30 billion from U.S. stock funds. With this lasting streak, it is even more amazing that the major averages are still only down about 2% from their highs from August 8th.
The bank said internal positioning showed investors were becoming more defensive in their equity allocations. Over the last week, $600 million fled technology stock funds, the largest outflow in 49 weeks. Financials lost $35 million for the second consecutive week. Consumer stocks lost $1.5 billion, the third largest weekly outflow ever. Utilities were the only sector to see inflows last week.
On Friday, the Transports were the best performers out of all 11 S&P sectors.
As we move into September, the potential for volatility increases. I will be very surprised if we do not retest the 2,400 level or lower. Even if we did test 2,400, that is only a 3.3% decline and definitely not a major market event. The S&P would have to dip below 2,380 to make investors nervous.
The Dow rallied 123 points at the open but gave back all but 30 by the close. The A/D breadth was still good for the Dow with only six stocks negative. The Dow's mix of different companies and sectors is helping keep it afloat.
The 21,900 level appeared as resistance on Tuesday's short squeeze and that level was still in play on Friday's early rally with a 21,906 high. The Dow chart is giving us no clue as to future direction but we are moving into a weaker period on the calendar so the odds of a continued rally are slim but not zero. The 22,000 level would be the next resistance point.
The Nasdaq has an uphill battle in the weeks ahead. I wrote last Tuesday that the big cap tech stocks were on the verge of a breakdown. That has not changed. Amazon has broken support. Netflix, Google, Priceline and Facebook are very close to critical support breaks. If one of the big cap stocks suffers a significant breakdown, it could poison sentiment for the rest and they could follow. It is highly unusual for all of them to be right on the edge of the cliff at the same time. The potential for a chain reaction decline is very high.
The Nasdaq is only down just over 2% from its highs but is in danger of a bigger decline. The 6,200 level was short-term support last week but the real target for this decline is 6,100. Unless the big cap stocks suddenly rebound out of danger, we could see that level soon.
The Russell posted some consecutive gains but they were minimal compared to the recent decline. The 1,350-1,340 levels need to hold or we could be in for a major change in sentiment. That is a lot of white space between 1,340 and 1,150.
The market was just passing time last week ahead of the Yellen and Draghi speeches. Next week we have the twin payroll reports and while they are not expected to move the market, any material surprise in either direction could upset the idea that the Fed is on hold.
With lawmakers still out on recess until after Labor Day, the political risk should be minimal, but given the current administrations fondness for random tweets, there is always some risk.
This is a holiday week and volume will be very low. That means the averages could be dormant or they could experience significant volatility on an unexpected headline.
Why buy? There is no reason to rush into the market this week. There will more than likely be a better buying opportunity in September. Be patient and keep some cash in your account.
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This survey ended on Wednesday the day after the big short squeeze. Bulls lost a lot of recent converts and they went all the way to bearish instead of just neutral. 72% still believe the market is not going higher.
When the iPhone 8 arrives, there will be some unhappy users. According to Sensor Tower, more than 187,000 apps will no longer work. Apple has been signaling they were dropping support for 32-bit apps for a long time. They first introduced a 64-bit processor in the iPhone 5s. The new Apple iOS 11 will no longer support these applications. Users are going to be getting messages like these that show the incompatibility.
Apple said it removed popular Iranian apps from the App Store on Friday. Apple cited new U.S. sanctions against Iran as the reason. "Under the U.S. sanctions regulations, the App Store cannot host, distribute or do business with apps or developers connected to certain U.S. embargoed countries." Apple has an 11% share of the smartphone market in Iran. Needless to say, Iranian users were not happy. The iPhone 8 may not sell well in Iran this year.
Everybody knows one of the main reasons for using Bitcoin is the lack of transparency. In theory you can buy and sell items and nobody knows who is conducting the transaction. Unfortunately, the IRS is preparing to crack down on Bitcoin users. With the astronomical price rise over the last several years, there are thousands of Bitcoin millionaires. There are also thousands of money launderers, drug deals and terror related transactions.
Using a customized software program from Chainalysis, the IRS is planning on tracking transactions and the inflation in the price of coins held for investment. Chainalysis says it is able to track more than 50% of the Bitcoin activity.
The problem is that nobody has ever legislated Bitcoin's description. Is it a currency, is it a derivative or is it a security? Depending on what regulation is passed to define it, the IRS will tax it accordingly.
The hermit kingdom is playing with fireworks again. North Korea launched 3 missiles on Saturday and went 0 for 3 on the tests. Two of the missiles reportedly blew up in flight after roughly 150 miles. The U.S. later revised their analysis of those two missiles, saying there was no confirmation they were a failure. I guess it is possible they could have been planned to blow up rather than fall into the sea. The third blew up almost immediately after it left the launch pad.
It was just last week that U.S. officials had praised Kim Jong-Un for showing restraint and not launching any new missiles since July. On Wednesday of last week, Kim ordered the production of more rocket engines and missile warheads during a visit to a missile research center. North Korean state media published some diagrams that suggested the DPRK was pressing ahead to develop even longer range ICBMs. Publishing the pictures of Kim and the diagrams were obviously intended to be an implied threat.
North Korea has been caught twice in the last six months shipping chemical weapons to Syria. Sanctions do not appear to be holding them back.
Did you ever notice that pictures of North Korean military officers always seem to show them very thin, almost skin and bones? Their uniforms are always baggy.
Germany's Bundesbank said it completed the shipping of 674 tonnes of gold bars ($27.9 billion) back to Germany from France and the US. They announced the plan to bring the gold home in 2013 and it was expected to take until 2020 to move it. The 53,780 bars, each weighing 27.5 pounds, have been moved to the basement under the headquarters of the Bundesbank. Now just over 50% of their reserves are stored in Germany with the remainder split between the USA and Britain. The Federal Reserve is holding 36.6% of Germany's gold and the Bank of England is holding 12.8%. If Germany were to encounter an economic emergency, those reserves could quickly be converted into dollars or euros by the two central banks.
Bank of England Gold Vault 4,600 tons
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