The strong buy the dip rebound in the markets was very positive for the near term outlook.
I was worried yesterday evening that a knee jerk reaction to the North Korean missile launch would push the markets below recent support levels and trigger another round of selling from stop losses and investor frustration. I wrote last night that it would test the conviction of those still buying dips. Apparently, their conviction is in good shape given the strong rebound in the markets.
This was one more opportunity for sellers to take control of market direction and they were unable to do it. The strong rebound suggests a lack of sellers as we close out August and move into the normally more volatile September.
While political events and geopolitical headlines may still cause volatility in September, it would probably take a government shutdown to cause any real market damage. Strong earnings, a Fed on hold and the constant chatter about potential tax reform, appear to be the right mix for holding stocks near their recent highs.
The Dow fell -132 points at the open to break just below 21,700 before rebounding to nearly 21,900 before end of day profit taking slowed the gains. The Dow traded in a 206-point range and closed near the highs. That 21,900 level has been decent resistance for the last week.
The S&P Case Shiller Home Price Indexes for June showed a 5.7% rise year over year and flat with May. The Black Knight Home Price Index showed a rise of 6.2% over the same period and a 0.1% increase from May. Both reports were ignored.
Consumer Confidence for August rose from 120.0 to 122.9 and the second highest level since 2000. The highest was 124.9 in March. The present conditions component rose from 145.4 to 151.2 and the highest level since 2001. The expectations component rose from 103.0 to 104.0.
Those respondents planning on buying a car declined from 13.6% to 12.6%. That may change dramatically in a couple months after 500,000 cars were destroyed in Hurricane Harvey. Prospective homebuyers declined from 6.7% to 6.4%. Potential appliance buyers rose from 47.7% to 50.2%.
Confidence could also decline in September because of the hurricane. That is going to be very costly and result in thousands of job losses from destroyed businesses. Eventually, the rebuilding boom will hire thousands of workers but that will take months to get started because the insurance checks will have to arrive first. Analysts believe up to 80% of the people in Houston did not have flood insurance and that means no checks to repair the tens of thousands of dollars in damage to each home.
After the bell, the API crude inventory report showed a decline of 5.78 million barrels of oil compared to estimates for a 1.75 million barrel decline. Gasoline inventories rose 476,000 barrels for the week ended August 25th.
More than 26% of U.S. refining capacity is now offline in the Houston area. That is roughly 5 million barrels per day. That means crude inventories are going to rocket higher over the next several weeks until those refineries can restart operations.
WTI prices have declined sharply over the last couple days because of the potential for inventories to rise. WTI briefly traded under $46 today but the decline is probably not over.
More than 11% of Gulf production was offline in advance of Harvey. Most of that production is being restarted now that Harvey is fading. Several producers in the Eagle Ford halted operations as Harvey made landfall and they will be restarting as soon as water levels decline.
This is a map of the road closures in the Houston area as of this afternoon. Galveston Island was still being pounded by torrential rains but they are expected to dissipate by Wednesday morning. It could take a couple weeks to reopen all the roads in Houston because once the water drains, the stalled cars will have to be towed and all the debris removed from the hurricane winds. If you live in the Houston area, you are probably not going to be driving a lot in the near future. KHOU real time road closure map.
This is payroll week but unless there is a major miss in either direction, the market should not care. The Fed is on cruise control and is not expected to hike rates again until the August 2018 meeting based on the Fed Funds Futures. According to the futures, there is a zero chance of a rate hike at the September meeting.
The ISM Manufacturing Index on Friday is the next most important report compared to the payroll reports. It is expected to decline slightly and it would take a major drop to get anybody excited.
The few earnings reports we have left will generate more interest than the economic reports. The biggest one to watch would be the Costco earnings on Thursday. I am very tempted to place a long trade before that report even though we do not normally hold over earnings reports. All of the furor over the Amazon/Whole Foods deal is vastly overdone. The two stores are not even in the same category and Whole Foods is not going to impact Costco.
Ciena, Palo Alto Networks and Lululemon should also attract some investor interest. After this week, 498 S&P 500 companies will have reported and the Q2 cycle is over for all practical purposes.
The dollar fell at the open to a low of 91.62 on the Dollar Index. This is the lowest level since January 2015. The index rebounded with the market but it is still at 31-month lows.
The yield on the ten-year note fell to 2.091% at the open and rebounded to 2.136% at the close. That is a ten-month closing low on a flight to safety trade. The problem with North Korea is not over and it will only get worse in the months ahead until somebody finally responds with military force. North Korea is the most heavily sanctioned country in the world and they are still ignoring all the UN resolutions against them. As current UN ambassador Nikki Haley said today, "enough is enough." The UN Security Council held a meeting this evening to consider what to do about North Korea. The toothless Security Council ended the meeting with only a strongly worded statement demanding North Korea cease all missile and weapons research and development. I am sure Kim Jong-Un is feeling appropriately censured and will give the orders immediately.
United Technology (UTX) is reportedly in a deal to buy Rockwell Collins (COL) for more than $20 billion. The two companies have discussed a share price for COL around $140. That would be about $9 over today's close. Rockwell just closed its acquisition of B/E Aerospace this year. Rockwell makes cockpit and communication systems and UTX makes Pratt & Whitney jet engines, among other things. Investors clearly like the combination because UTX shares rose 3% on the news.
Apple shares are well on their way to their pre-announcement ramp. Cleveland Research upgraded them today to buy with a $197 price target. The iPhone 8 leaks are breaking out everywhere complete with pictures. This means production has begun and people are taking phones and parts to leak on the internet. The general disappointment has been over the wireless charging feature. Apple has reportedly gone with a 7.5-watt base unit rather than the global standard for a 15-watt unit. Researchers claim the iPhone will not work with the chargers already in the market. That means users will have to buy Apple licensed chargers if they want one in multiple locations. That insures another revenue stream for Apple.
CEO Tim Cook collected $89.6 million in stock as part of a ten-year deal he signed when he became CEO in 2011. He was able to sell 560,000 of his restricted shares, which he did last week. Half of the shares vested because of his length of time on the job and the other half because Apple delivered returns in the top one-third of the S&P 500 index over the last three years. Apple sold another 291,000 shares for $46.4 million to pay Cook's taxes on his sales. He still has options on 2.94 million shares worth $479 million at today's price. He will receive 560,000 shares of stock annually from August 2018 through August 2020. His final payment under his ten-year contract will be 1.26 million shares in August 2021. It is a good gig if you can get it.
The disaster for the day was Best Buy (BBY). The company reported adjusted earnings of 69 cents that beat estimates for 63 cents. Revenue of $8.94 billion also beat estimates for $8.66 billion. Same store sales of 5.4% beat estimates for 2.2%. They guided for the current quarter to earnings of 75-80 cents and revenue of $9.3-$9.4 billion. Analysts were expecting 65 cents and $8.99 billion. Shares fell 12% on the news.
The problem came when the CEO developed foot in mouth disease. Hubert Joly cautioned analysts on the conference call saying the company may not be able to sustain the mid single digit same store sales. He said, "We do not believe that mid-single-digit comps are a new normal" but positive comps are achievable. Even after giving the positive comps warning, he guided for 5% same store sales in Q3. They are expecting stronger phone sales because of the new Samsung Note 8 and the iPhone 7, 7s and 8.
"Positive" comps are a long way from the 5.4% reported in these earnings. The company guided to full year revenue growth of 4%, up from prior guidance of 2.5%. Analysts said they were picking up business from the closing of Sears and Kmart stores along with the bankruptcy of HH Gregg.
Multiple analysts suggested the decline was a buying opportunity since the actual earnings and guidance were strong. Best Buy is known for being cautious and analysts expect them to beat in Q3. Support is $53 and I would be a buyer of a rebound from that level.
Finish Line (FINL) warned that Q2 sales declined -3.3% to $469.4 million thanks to a -4.6% drop in same store sales. That should equate to earnings of 8-12 cents and analysts were expecting 38 cents on revenue of $477.2 million. The CEO said, "The marketplace for athletic footwear became much more promotional as our second quarter progressed resulting in challenging sales and gross margin trends." The company guided to full year comps of -3% to -5%, down from prior guidance of "low single digit growth." The new outlook suggests full year earnings of 50-60 cents compared to prior guidance for $1.12-$1.23.
The company also said the board adopted a poison pill to prevent the "likelihood that any person or group would gain control of Finish Line through open market accumulation or coercive takeover tactics that the board determines are not in the best interest of the company and shareholders." Analysts said the pill was put in place to prevent a takeover attempt by UK based Sports Direct, which currently owns 8% of Finish Line and has wanted to expand in the USA.
Drug technology company Catalent (CTLT) reported adjusted net income of $185 million that rose 21.1%. EBITDA of $450 million rose 12.1%. Revenue for the full year rose 12% to $2.07 billion. They guided for 2018 for revenue of $2.16-$2.24 billion, with 6% to 10% EBITDA growth and net income growth of up to 14.6%. Shares spiked 14% on the news.
After the bell, Berkshire Hathaway (BRK.B) announced it was exercising warrants to acquire 700 million shares of Bank of America at a steep discount. Six years ago as the bank was recovering from the financial crisis, Berkshire made a large investment to shore up confidence in the bank. The execution price on the warrants of $7.14 and BAC shares closed today at $23.58. That roughly triples the investment he made in 2011 and makes Berkshire the largest shareholder at 6.6%. To pay for the shares Berkshire traded $5 billion in Bank of America preferred shares purchased in 2011. The new shares are worth about $16.5 billion. Berkshire was collecting $300 million a year in the preferred dividends and will now earn $336 million a year in dividends on the common stock. That is like winning Powerball every year.
The strong rebound in the markets is a very positive event despite the major indexes closing at resistance once again. The opening drop could have triggered an even larger sell off and it did not happen. That is short term bullish. Even with the 206 point Dow rebound, the volume remained lethargic at only 5.3 billion shares. There was no panic selling on the decline and no rush to buy on the way back up.
The broad market advance decline line was almost dead even with 3,489 advancers to 3,568 decliners. Given the market volatility, it was good to finish nearly even.
While the rebound was encouraging, resistance at 2,450 remained rock solid. That could change at any time since market sentiment probably improved on today's rebound. The morning dip did not even come close to initial support at 2,420 so traders are likely to assume there is little risk in the near term market. That could be a bad assumption once we get into September but at least it should work for this week. The 11 S&P sectors were split between positive and negative.
The Dow did not reach resistance at 21,900 but came within 21 points before stalling. It was still a good effort. United and Boeing were the biggest gainers and added nearly 40 points to the Dow. Nike was the biggest loser on the Finish Line guidance warning.
The Dow is well above support levels at 21,600, 21,500 and 21,300. We could dip to the lowest one and it still would not be a major market drop. The Dow is holding within 2% of its recent high despite all the headline volatility.
I was most worried about the big cap tech stocks breaking critical support levels but my worries were misplaced at least for today. The opening drop did break support but traders rushed into the gap and they all rebounded back into safe territory with the exception of Nvidia, which closed fractionally negative.
If today's support break did not create the cascade selling, then traders are now going to see those support levels as buying opportunities rather than threat levels.
The Nasdaq is still in danger is retesting support at 6,100 in September. Resistance at 6,300 remains solid and now we need to see if investors can tack on another day of gains and move above that resistance. That would be very bullish given our point on the calendar.
The Russell managed to add to its recent rebound gains but it is finally reaching resistance at 1388-1400. This will be the real test of investor sentiment.
I was impressed with the market rebound. I did not expect a material gain after the sharp drop in the futures on Monday night. However, North Korea is a paper tiger and as long as nobody takes military action against him the situation is not likely to flare up into a real event. Kim is predictable. He wants attention and he is not embarrassed by constantly launching rockets that fail. He wants to protect himself against being removed from power by using his nuclear bluff until it turns into a reality. Standing up to the rest of the world endears him to the misled citizens in his country. There will be future headlines but the world is powerless to stop him short of blockading the entire country, which will never happen.
When President Trump did not respond to the missile over Japan with a couple cruise missiles aimed at his missile facilities, the event became just another throw away headline on North Korea.
The strong earnings and weak expectations for Fed action have set the stage for another rally once the budget battle and debt ceiling issues are resolved in late September. The best six months of the year begin on November 1st and many investors are hoping for a normal buying opportunity in September or early October. After today's rebound, they may be disappointed unless there is an actual government shutdown. The odds of a material correction are declining with every day that passes.
Enter passively, exit aggressively!
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